MIFID II: ESMA compliance evaluation with the disclosure requirements
The European Securities and Markets Authority (ESMA), known as the financial markets regulator and supervisor within the EU, recently issued a statement regarding its 2022 Common Supervisory Action (CSA) and a "mystery shopping" exercise. This exercise was designed to evaluate compliance with the disclosure requirements for costs and charges under MIFID II. The findings suggest that while most firms comply with the majority of the ex-post cost and charges requirements under MIFID II, there are still areas that need improvement. These include the format and content of ex-post disclosures, the disclosure of information on inducements, the disclosure of implicit costs to clients, and the consistency in illustrating the cumulative impact of costs and charges on investment returns. ESMA plans to use these insights to focus its convergence efforts on the development of new Q&As and possibly a standardized EU format for providing information about costs and charges to clients.
MIFID II: ESMA Highlights Areas of Improvement in Cost and Charges Disclosure
The European Securities and Markets Authority (ESMA) has recently conducted a comprehensive review of compliance with the disclosure requirements for costs and charges under the Markets in Financial Instruments Directive II (MIFID II). The findings of this review shed light on areas where financial institutions operating within the European Union (EU) need to improve their protocols to ensure comprehensive and consistent compliance. In this article, we delve into the key insights from ESMA's review, their implications for financial institutions, and the potential benefits for clients and the overall financial market.
- Identifying Areas of Non-Compliance: ESMA's review revealed that while most firms demonstrate compliance with the majority of ex-post cost and charges requirements under MIFID II, there are notable areas that require improvement. These areas include the format and content of ex-post disclosures, information on inducements, disclosure of implicit costs to clients, and consistency in illustrating the cumulative impact of costs and charges on investment returns.
- Implications for Financial Institutions: The findings serve as a clear signal to financial institutions operating under MIFID II that non-compliance and inconsistencies must be addressed promptly. Firms need to enhance their disclosure protocols to meet regulatory requirements comprehensively and consistently. This may involve investing in better systems and providing adequate training to staff to ensure full compliance.
- Enhanced Transparency and Clarity for Clients: Addressing the identified areas of improvement will lead to greater transparency and clarity for clients. They will gain a more comprehensive understanding of costs, charges, and the overall impact on their investments. The potential introduction of a standardized EU format for costs and charges information will simplify comparisons between different service providers. Consequently, increased competition may arise, fostering better service quality and pricing options for clients.
- Regulatory Authorities' Response: ESMA's review outcomes may prompt regulatory authorities to enhance their supervisory activities, ensuring compliance with the MIFID II disclosure requirements. Financial institutions may face more frequent audits and potential penalties for non-compliance. Therefore, it becomes increasingly vital for firms to prioritize regulatory compliance to ensure fair and transparent financial markets.
ESMA intends to utilize the insights gained from the review to guide its convergence efforts. This includes developing new Q&As to address the identified areas of improvement and potentially introducing a standardized EU format for costs and charges information. The timeline for these changes will depend on ESMA's action plan, and financial institutions should stay vigilant and adapt their practices accordingly.
ESMA's recent review highlights the importance of compliance with MIFID II's disclosure requirements for costs and charges. Financial institutions must address inconsistencies and areas of non-compliance promptly to ensure comprehensive and consistent compliance. Enhancing transparency benefits clients, leading to better-informed investment decisions and potential improvements in service quality and competition. Regulatory authorities are likely to increase their supervisory activities, underscoring the significance of regulatory compliance in maintaining fair and transparent financial markets. By staying updated on ESMA's convergence efforts, financial institutions can proactively adapt to forthcoming changes and maintain regulatory compliance.
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