On 22 December 2015, ESMA published a final report outlining guidelines on cross-selling practices under MiFID II. This follows the publication of a consultation paper in December 2014 by the European Supervisory Authorities which requested feedback from stakeholders and this final report represents such feedback. While the guidelines were initially intended to be produced by a joint committee of the EBA, EIOPA and ESMA, it was agreed that ESMA would take sole responsibility for the publication in order to meet its MiFID II Technical Standards deadline of 3 January 2016.
So, what was the outcome?
ESMA has defined cross-selling, in accordance with MiFID II, as the offering of an investment service together with another service or product as part of a package or as a condition for the same agreement or package. The scope of the guidelines will specifically affect investment firms, credit institutions when providing investment services, management companies and certain external alternative investment fund managers.
The main aim of the guidelines has been to ensure that investors are treated fairly when an investment firm offers two or more financial products or services as part of a package. More specifically, they set out to improve the disclosure of price, costs and other non-price features of cross-sold products, ensure full and timely communication of all relevant information, improve client understanding, enhance training and remuneration practices and clarify the position of post-sale cancellation rights.
As a result of the feedback received from the consultation paper, the guidelines have primarily clarified the following elements in relation to cross-selling:
- The references to banking and insurance law have been removed, so as to ensure that the guidelines are solely under ESMA’s remit. It is also stipulated that cross-sold packages are to include at least the provision of an investment service
- It has been specified that, where costs cannot be accurately calculated, firms should provide an estimation based on reasonable assumptions.
- Pre-ticked ‘yes’ or ‘no’ sales boxes are not to be used by firms to facilitate the sale of one product with another
- It has been clarified that firms are not being forced to disclose the price and non-price information of competitor firms’ component products.
So, what do the ten guidelines specifically set out to do?
1. The first concerns full disclosure of price and cost information. In this way, firms need to ensure that clients who are buying a tied or bundled package are provided with information on the price of the package, as well as its individual component products. This disclosure should include a list of associated costs, such as administration fees, transaction costs and exit or pre-payment penalty charges. If specific amounts cannot be predicted, then the competent authority should provide an estimation based on reasonable assumptions
2-4. The second, third and fourth guidelines set out to ensure that the disclosure of price and cost information is prominent, made in good time before an agreement is finalised, accurate and set out in simple language. Also, there must be an equal emphasis on the price and costs of both products
5.The next guideline states that key information relating to the non-price features and risks of each component of the package must be disclosed. This includes the information on how risks are altered as a result of purchasing a bundled package, as opposed to separate purchases
6. The sixth guideline outlines that non-price factors and relevant risks should be given equal prominence to the price and costs of the component products. Such information should be written in simple language and should be presented in good time to the client
7. The next requirement concerns ‘optionality of purchase’. This means that clients should be made aware about any potential opportunities to buy the component products separately. It is further stipulated that clients must make an autonomous decision as to their purchasing preference. In this way, pre-ticked boxes must not be used to cross-sell one product or service with another
8. The eight guideline covers adequate training for relevant staff. Staff that distribute tied or bundled packages need to be trained about the risks of the products or package and must be able to communicate these to clients in plain language
9. The next requirement looks at conflicts of interest in the remuneration structures of sales staff. Remuneration models and sales incentives for staff should be suitable and should encourage responsible business conduct, fair treatment of clients and avoidance of conflicts of interest for staff selling the tied or bundled package
10. Finally, the last guideline is about post-sale cancellation rights. This stipulates that, when a ‘cooling-off period’ applies to an individual product, this right to cancel should continue to apply even if the product is sold as part of a package. The continuation of this right means that a client should be entitled to split the grouped products in a cross-selling offer without disproportionate penalties
These guidelines from ESMA represent important clarification in relation to cross-selling practices under MiFID II and firms that regularly distribute tied or bundled financial products or services should expect to get to grips with the specifications as early as possible.