The new act on markets in financial instruments (the “MiFID Act”), transposing Directive 2014/65/EU on markets in financial instruments (“MiFID II”) and implementing Regulation (EU) No 600/2014 on markets in financial instruments (“MiFIR”), was voted into law on 15 May 2018 and published on 30 May 2018. The MiFID Act will enter into force on 4 June 2018. Most issues related to markets in financial instruments are covered by the first part of the MiFID Act, while the provision of investment services will continue to be governed by the Financial Sector Act of 5 April 1993 (the “LFS”), as amended by the second part of the MiFID Act.
1. Market infrastructure (Articles 1 to 65 MiFID Act)
The MiFID Act implements in Luxembourg law the market infrastructure rules of MiFID II and MiFIR in order to ensure more transparent, safer and sounder markets. Amongst others changes, Organised Trading Facilities (“OTF”) are introduced into Luxembourg law.
2. Third-country rules (Article 90 MiFID Act, amending Article 32-1 LFS)
The MiFID Act applies the opt-in provided for by Article 39 MiFID II. Thus, a third-country firm that wishes to provide investment services or perform investment activities for retail clients or professionals on demand in Luxembourg will be required to establish a branch in Luxembourg. The branch should be established in accordance with the MiFID II conditions, as transposed into Luxembourg law by the MiFID Act.
In addition, the MiFID Act provides that, in the absence of an equivalence decision by the European Commission, investment firms targeting professionals per se or eligible counterparties must benefit from an EU passport or meet the three conditions set out in the MiFID Act.
3. New types of status for financial sector professionals (Article 87 MiFID Act, introducing new Articles 29-7 to 29-15 LFS)
The MiFID Act introduces three new types of status for financial sector professionals (“FSP”) in order to implement the new market structure rules under MiFIR:
- Approved publication arrangement (APA)
- Consolidated tape provider (CTP)
- Approved reporting mechanism (ARM)
4. Independent advice (Article 100 MiFID Act, inserting new paragraph 3ter in Article 37-3 LFS)
The MiFID Act also introduces into Luxembourg law the concept of independent advice. Investment firms that provide investment advice may choose to market themselves as providing independent investment advice. In order to do so, the firm must comply with a set of rules to ensure independence.
5. Inducements (receipt of fees, commissions and other benefits) (Articles 99, 100 and 102 MiFID Act, amending Articles 37-2, 37-3 and 37-5 LFS)
Investment firms cannot pay or receive any fee or commission or provide or be provided with any monetary benefit in connection with the provision of investment services or ancillary services, to or by any party except their clients or persons acting on behalf of their clients, other than where the relevant payment or benefit fulfils two criteria.
First, the payment or benefit must be designed to enhance the quality of the relevant service to the client. This criterion is met when the quality of the relevant service to the client (i) is justified by the provision of an additional or higher level of service to the client, proportionate to the level of inducements received, (ii) does not directly benefit the recipient investment firm or its shareholders or employees without tangible benefit for the client, and (iii) is justified by the provision of an ongoing benefit to the client in relation to an ongoing inducement.
Second, the payment or benefit must not impair the investment firm’s duty to act honestly, fairly and professionally in accordance with the best interests of its clients. This shall not be the case when the receipt of a payment or benefit creates a distortion or bias in the provision of services to the client.
Fees that by their nature do not conflict with the investment firm’s duty to act honestly, fairly and professionally in accordance with the client’s best interests are thus allowed.
When providing discretionary portfolio management services and independent investment advice to clients, investment firms cannot receive any benefit or commission that may be considered an inducement. If they do so nonetheless, the benefit or commission must be returned to the client.
In any case, the investment firm must disclose to the client in advance the existence, nature and amount of any inducements.
6. Information to clients (Article 100 MiFID Act, amending Article 37-3 LFS)
Certain information must be provided to the client before the provision of any investment services, such as:
- the target marke
- information on the financial instruments in question and the associated risks
- information on costs and charges
- information relating to the provision of investment advice
- cross-selling practices.
7. Organisational requirements (Article 100 MiFID Act, inserting new paragraphs 3sexies and 3octies in Article 37-3 LFS)
Investment firms shall not remunerate their employees in a way that is contrary to their duty to act in the client’s best interest.
Investment firms must also be able to demonstrate to the CSSF that their employees have the necessary knowledge and skill to provide investment advice and information on financial instruments. The CSSF will publish on its website the criteria used to assess such knowledge and skill. In addition, the CSSF has already set out the Luxembourg knowledge and skill criteria in Circulars 17/665 and 17/670 and a MiFID II Training Programme, specifically designed to meet these criteria, has received CSSF accreditation.
8. Product governance (Article 98 MiFID Act, amending Article 37-1 LFS)
Manufacturers must identify a potential target market for each financial instrument they design. Financial instruments are designed through a product approval process. All relevant information must be made available to the distributor.
In addition, distributors shall have in place adequate product governance arrangements to ensure that financial instrument are sold according to the needs, characteristics and objectives of the identified target market. They must also have adequate procedures in place to ensure the sufficient exchange of information with the manufacturer.
The application of certain provisions of the MiFID Act has already been detailed in CSSF circulars and FAQs. Further circulars and FAQs are expected to follow.
The MiFID Act provides clarity on the Luxembourg third-country rules to foreign investment firms that wish to provide investment services to professional clients and eligible counterparties in Luxembourg. In the absence of an equivalence decision by the European Commission, foreign investment firms must refer to national law. Article 32-1 LFS sets out the applicable criteria for the provision by such firms of investment services in Luxembourg.
Finally, it should be noted that the MiFID Act's inducement rules are no more stringent than MiFID II. However, as in the directive, clarity is still lacking on certain points and the CSSFs position is awaited.