This particular guidance note helps explain the MiFID II obligations of inducements, for example, it speaks of the necessary quality enhancement test and defines acceptable minor non-monetary benefits, just to mention a couple of the numerous topics discussed.
In addition, the MIG has taken the key issues of inducements and identified the impacts and risks that come with them to complete the guidance note so that members can better understand and comply with MiFID II implementation.
Inducements domain model
To produce each JWG guidance note, MIG members agree on a common view of how to interpret each obligation. The domain model below outlines the capabilities required for inducements: definition, policy, disclosure and prove.
While there are 29 key issues listed in the model, we will focus on just three of these within the guidance note.
Define the term ‘inducement’
The obligation for investment firms is that they should not accept any third-party payments or benefits unless these payments/benefits comply with the inducement requirements already in place.
- What falls under the scope of the term ‘inducement’?
- Is there a delta between the MiFID I and MiFID II requirements?
- How will the requirements on inducements impact technology?
Quality enhancement ‘test’
A fee, commission or non-monetary benefit is designed to enhance the quality of the service to the client if a few conditions are met. These conditions include whether it is justified by the provision of an ongoing benefit in relation to an ongoing inducement and if it does not directly benefit the recipient firm, its shareholders or employees without tangible benefit to the relevant client.
- What will the quality enhancement test look like?
- The criteria of the quality enhancement test, given in the regulatory texts, is subjective and, therefore, firms will have to agree on group-level definitions.
Define acceptable minor non-monetary benefits
Acceptable minor non-monetary benefits should be reasonable and unlikely to influence the investment firm’s behaviour in any way that could be detrimental to the interest of clients. Some examples of these benefits include participation in conferences or seminars or hospitality such as food and drink during a business meeting.
- What is the scope of the term ‘acceptable minor non-monetary benefit’?
- How will systems be able to identify minor non-monetary benefits?
In this article, we have provided insight on three out of the 29 key considerations, showing just how much information is out there and needs to be interpreted and understood by industry professionals.
Through the examples above and in parts 1 and 2 of this article, it is clear that these guidance notes are incredibly beneficial in helping to decipher the complicated MiFID II regulation. Members of the MIG are able to give their understanding and work together to gain consensus on key questions arising under each topic and highlight any further key issues.
JWG is currently working on completing four more guidance notes by the end of the year on algorithmic and high frequency trading, costs and charges, product governance and transaction reporting and reference data.