On 22 December 2015, ESMA published 10 guidelines on cross-selling practices under MiFID II. However, as noted in our previous article, these guidelines were not released as initially intended by the three European Supervisory Authorities (ESAs) – EBA, EIOPA and ESMA.
Alongside the guidelines, ESMA put out a press release stating that “in light of legal concerns, the ESAs decided not to issue joint guidelines on cross-selling practices but agreed that ESMA should issue ESMA-only guidelines under MiFID II in order to meet its 3 January 2016 deadline”.
Whilst our previous article provides detail specifically on the 10 guidelines, this article explores the legislative inconsistences highlighted in a letter on cross-selling of financial products sent by chairpersons of the three ESAs to Jonathan Hill, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, on 26 January 2016.
So, what is cross-selling?
Cross-selling is a common strategy used by retail financial service providers throughout the EU, and MiFID II defines this practice 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 ESAs were explicitly mandated to cooperate in the development of “guidelines for the supervision and assessment of cross-selling practices” by 3 January 2016. Given that cross-selling is often cross-sectoral, the ESAs agreed that the joint guidelines should not be “limited to cross-selling practices under MiFID II” alone and, therefore, the scope should be as broad as possible to “cover cross-selling between banking and insurance products”.
But in light of the legal inconsistencies, it was agreed that the ESAs would not issue joint guidelines but that ESMA would take sole responsibility for the publication in order to meet its MiFID II Technical Standards deadline of 3 January 2016.
What are the legal inconsistencies?
In order to develop these joint guidelines, the ESAs used article 9.2 of their respective founding regulations (general consumer protection mandates) together with the requirements from internal control and corporate governance regulations covering banking and insurance sectors, i.e., Capital Requirements Directive (CRDIV), Solvency II Directive, Payment Services Directive (PSD), Electronic Money Directive (EMD) and Insurance Mediation Directive (IMD).
Following the publication of the ESAs consultation paper in December 2014, it became apparent that there were two legal concerns regarding the underlying sectoral Union legislation.
- Diverse nature of the legal bases on which the joint draft guidelines has been based
The joint guidelines use an explicit MiFID II mandate governing consumer protection for the investment sector and link these to provisions related to internal control and corporate governance in other directives concerning the banking and insurance sector.
Comments on the consultation paper suggested that differences may obstruct the desired objective of protecting the consumer and ensuring market confidence in all three sectors. A highly preferable solution would be for the guidelines to be able to “build on a coherent legal basis as Level 1 in all three sectors”.
- Differences in formal wording, scope, level of granularity and date of application across directives
As previously mentioned, MiFID II required ESMA to work with the EBA and EIOPA to produce guidelines on cross-selling practices. The intention of this was to include an investment service in conjunction with an insurance or banking product.
However, as separate Directives governing insurance or banking products (Mortgage Credit Directive (MCD), Payment Accounts Directive (PAD) and IMD) also contain provisions on cross-selling, or related concepts such as ‘packaging’ or ‘bundling’, concerns were raised about the differences in formal wording, scope, level of granularity and date of application across the Directives.
As a result of these issues based on the Level 1 provisions, it was decided that the ESAs would not publish joint guidelines. Instead, guidelines would be produced governing the investment sector only (in order for ESMA to fulfil its obligation). Even so, this is not ideal as the guidelines can only apply ESMA’s regulatory scope and, by not addressing cross-selling between banks and insurance products, expose consumers to “undesirable risk or detriment”.
Overall, this can be used as an example to highlight the need for greater alignment between legislative provisions at a much earlier stage, and between different Regulations and Directives falling within the remit of ESAs.