SECTION 1: Market outlook
1.1 Please clarify which products or markets your jurisdiction hosts that are affected by Mifid II.
As preliminary comment and at the time of writing (early September 2017), Mifid II was still in process of implementation in Spain. Only drafts of the law and its regulations were published on August 4 2017, subject to public hearing until September 18, along with a Q&A on certain topics posed by the Spanish Fund Association (Inverco). It is therefore expected that the approval of the Mifid II package will not take place before the year end at the earliest, implying a breach of the obligation to implement the Directive by July 3 2017. Consequently, any analysis of the implications of Mifid II in the Spanish market are subject to any further amendments to the mentioned drafts.
In general, Mifid II will have an impact in the investment services market and therefore on investment firms and, particularly, banks (due to the strong banking market in Spain). However, the fund management sector (mainly in relation to open-ended funds) will be also affected by Mifid II, as the restrictions to the payment of inducements will seemingly alter the current business model of management companies and distributors (based on fee rebates); considering that the scope of Mifid is somehow extended to fund managers.
New requirements for third-country firms will also affect the business strategies of non-EU firms which were willing to operate in Spain without permanent establishment. Under Mifid II, the establishment of branches will be required in order to provide services to retail investors (or elective professional clients).
Other firms affected will be those dealing on own account in commodity derivatives, emission allowances or derivatives thereof, which will have to analyse whether they will be covered by any of the exemptions provided.
SECTION 2 (a) – EU member states: Implementation
2.1 Outline the possible key differences in (a) gold-plating; and (b) exercise of national discretion, where provided for in Mifid II in your jurisdiction.
Considering the drafts of the law and regulations for the implementation of Mifid II, it does not seem that the Directive has been gold-plated by the Spanish Government; but this is subject to further changes the Government may make to the final version.
The exercise of national discretion in the mentioned drafts would not have significant impact either, apart from the requirement that third-country firms intending to provide services to retail or elective professional clients must establish a branch.
2.2 What is the biggest concern in respect of these variations and possible types of divergences?
Considering the drafts of the law and regulations, the most relevant concern is the lack of variation with respect to the Directive in relation to the scenarios in which the payment of inducements is allowed.
The drafts only provide the scenarios as set out in the Directive, despite the proposal by certain sectors of the Spanish financial industry to include an additional scenario (the so-called fourth scenario). This additional scenario can be described as "advised selling", and refers to cases in which no investment advice is carried out but there is a guided selling (with a sort of added value) of investment products (mainly funds). The inclusion of this scenario would allow Spanish firms to keep receiving rebates as remuneration for fund distribution, as they currently do.
Although the draft law has followed a restrictive approach by not providing this additional scenario, it might be inserted during the approval procedure. Until this issue is finally clarified, most of Spanish firms are following a wait-and-see approach until more light is shed on how the final landscape will look like. In any case, the provision of independent advice will not be seemingly the major trend in the Spanish market, as clients are not used to paying fees for advice and the paying-back of rebates to clients has adverse tax implications.
2.3 What are the most important extraterritorial issues regarding Mifid II in your jurisdiction?
Apart from the direct impact of extraterritorial issues (for example, trading obligations for certain OTC derivatives), other aspects will have a significant indirect impact. For instance, product governance requirements will foreseeably lead Spanish distributors to require some information from non-EU manufacturers about the products they distribute. Unbundling obligations on research may also have an indirect impact with respect to non-EU firms providing both execution and research services to Spanish firms.
SECTION 2 (b) – Non-EU countries
2.1 How prepared is your market for Mifid II?
Changes on how non-EU firms may operate imply a challenge for those firms that were assessing the possibility of launching activities in Spain. In particular, certain firms were recently analysing the possibility of providing services without permanent establishment. However, new requirements to establish a branch when providing investment services to retail or elective professional clients will lead these third-country firms to postpone launching projects in Spain and to assess the feasibility of establishing a branch.
2.2 In which areas are market participants most in need of guidance/certainty over the rules?
In line with the preceding question, firms which were assessing the possibility of operating in Spain need guidance on which conditions they will have to meet in order to operate in Spain under the Mifid II landscape, particularly if they intend to provide services to retail or elective professional clients.
SECTION 3: Research
3.1 Please summarise the challenges Mifid II will pose in your jurisdiction with regards to research.
Regarding research, Mifid II will not pose particular challenges other than those existing in other EU markets. Spanish firms are aware that the new Mifid II landscape will require participants to pay separate fees for research analysis, instead of one single fee covering both order execution and research.
Particular reference should be made to the application of the unbundling obligation to fund management. Unlike other countries (such as the UK), it seems that Spain will not extend this requirement to fund management. However, Spanish management companies will keep complying with the current regulation under which unbundling is not required if, among other conditions, the fund prospectus details the possibility of paying fees covering both execution and research, and if research reflects original analysis (not merely of public domain) and improves the decision-making process on investments. This is slightly amended in the draft law, which will acknowledge that the cost of research may not be linked to the volume of executed transactions.
3.2 Is pricing research compatible with market practices and existing legal frameworks?
Market practice in Spain is not to pay separate fees for research. Therefore, Mifid II will have a relevant impact in this regard, ultimately meaning a change of mind in firms on how they really assess research and the price they would pay for it.
3.3 Is there clarity on how to resolve challenges in unbundling research and complying with Mifid II in this respect?
As with other EU countries, there is no clarity on this. The Spanish sector has not taken a definite decision on how to handle the new unbundling requirement.
Therefore, it is not currently clear whether the common practice in the Spanish market will be to ultimately pass on the cost to the clients, or to directly assume such costs (if this is finally the case, it is expected that the payment of research will be only limited in practice to the research that really adds value).
SECTION 4: Trading/market structure
4.1 Which areas of trading / type of instruments will be most impacted by Mifid II in your jurisdiction and how might they be impacted?
From a general perspective, the derivatives market will be the most impacted by Mifid II. In particular, the obligation to trade in regulated markets, multilateral trading facilities (MTFs) or organised trading facilities (OTFs) will presumably lead to a reduction in OTC derivatives trading. Only those outside the clearing obligation under the European Market Infrastructure Regulation on derivatives, central counterparties and trade repositories (Emir) will be exempt from the trading obligation, which would seemingly increase the customisation of derivatives to the extent possible to fall outside the scope of the obligation.
4.2 What will be the key challenges with regards to transaction reporting and pre-trade transparency?
At this moment, no major concerns are referred to transaction reporting other than the burdensome nature of this obligation and the interconnectivity issues which may appear from an operational perspective. Spanish firms will have to handle with this obligation by implementing the most efficient internal procedures and systems as possible. The Spanish regulator (the CNMV) already published a Guide on June 27 helping firms on the operational issues.
Regarding pre-trade transparency, this will have a positive impact for markets in general, despite the relevant increase in the volume of information that all the participants in the market will have to handle. An aspect which will have to be closely analysed is the impact (with regards to trading, best execution, etc.) that the disclosure of such a volume of information may have on those Spanish markets that are less liquid.
4.3 What are the main considerations that trading venues and exchanges will have to make?
There are no particular considerations for the Spanish trading venues and exchanges, apart from completing all the operational implementation required by Mifid II and Mifir.
The requirement of having a legal entity identifier (LEI) does not seem to be a relevant concern. Many firms are already communicating with their clients about this obligation. LEIs may be easily obtained by way of telematic means through the Spanish Commercial Registry in a matter of days.
SECTION 5: Investor protection
5.1 Explain the impact of heightened investor protection obligations in your jurisdiction.
In Spain, investor protection is a sensitive matter, particularly since the numerous cases of mis-selling of complex products to retail investors (preferred shares, interest rate swaps, floor clauses in mortgage loans, etc.). The current regulation already provides significant investor protection, which has been reinforced by the pro-consumer approach followed by case-law in recent years.
Indeed, some of the new requirements in Mifid II already exist in Spanish regulation. For example, the new obligation to provide retail clients with a report describing how the recommendation is suitable for them has been applicable in Spain since 2013 under the CNMV Circular 3/2013.
There are, however, new obligations, such as carrying out a cost/benefit analysis when providing investment advice or portfolio management involving switching investments, which will certainly help to bolster current investor protection.
5.2 Which area of focus within investor protection is of most concern/importance to your jurisdiction?
There are two main topics in relation to investor protection in Spain.
First, appropriateness/suitability issues or, in other words, the requirement that a particular investment product must not be commercialised to (retail) investors who do not understand its characteristics and risks. This has been particularly relevant in recent years due to certain malpractice in the distribution of complex instruments (such as preferred shares, interest rate swaps, etc.) to retail investors. As reflected in the resolutions of the Spanish courts in those cases, the mere fact of distributing those instruments to retail investors without (or with low) experience and knowledge in financial markets is a breach of the investor protection regulations; the volume of pre-contractual information provided to the investors in most of the cases is irrelevant. In this regard, new Mifid II provisions on product governance may have an important preventive effect to reduce those malpractice cases in the future.
Second, new provisions on inducements are another major concern, considering that remuneration for fund distribution is mainly channelled through rebates from management companies. The CNMV has been particularly concerned on this topic and has required that: distributors only offer fund share classes that, being accessible to the relevant client, are the most beneficial to them from an economic standpoint (i.e., cheapest, or clean, classes); and when providing discretionary portfolio management or investment advice services, firms must choose those cheapest/clean available classes if they are suitable for the client. Considering these regulatory criteria and the draft law implementing Mifid II, it seems that the payment of rebates might be limited in practice.
SECTION 6: Outlook 2017
6.1 What are the overall risks or opportunities that Mifid II might bring to your market? Will Mifid II impact the competitiveness of your market?
New restrictions and conditions on the payment of inducements (particularly, rebates for the fund distribution) imply a big challenge in the business plan of Spanish firms. If rebates, as the traditional form of remuneration of fund distribution, are prohibited, or subject to restrictive conditions, then distributors might be somehow remunerated by its clients. This would have a significant impact in the Spanish market, where it is not common that clients pay for advice services. As with other EU countries which prohibited the payment of rebates in the past, these new restrictions may result in low-net-worth clients being unable to access to investment advice services.
This would lead them to look for cheaper alternatives, or at least those less dependent on rebates, such as fintech firms providing robo-advisory or automated portfolio management. These new players may develop a relevant role in the future by providing services to clients that may not have access to traditional firms, i.e. with a higher cost structure.
6.2 What are the next steps – what should market participants be doing now to best prepare themselves?
The adoption to Mifid II may not be carried out overnight. However, there are some sensitive topics (for example the payment of rebates) in which it is not possible to take definitive decisions due the lack of clarity on what the final landscape will look like.
Due to the delay in approving the implementing regulation, Spanish firms may only adapt its internal procedures and systems to those aspects which are clear and not subject to national discretion, and to pay attention to further changes to the drafts of the law and regulations until their final approval in order to anticipate the final challenges of Mifid II.
|About the author|
Jorge Canta (partner) is specialist in financial regulation with a broad experience as legal counsel to financial entities. He is also a specialist in investment vehicles and financial products, in particular in the alternative assets field (hedge funds, real estate and private equity). Canta actively participates in creating management companies for open and closed-end collective investment institutions and investment services institutions; and advises them regularly.
He is bachelor of laws (Universidad de Deusto, 1996) and holds a master's in tax (Instituto de Empresa, Madrid 1998). Canta is recommended by several directories including Chambers Global, Chambers Europe, Legal 500, Best Lawyers, Who´s Who Legal and Expert Guides in banking and finance, financial institutions and investment funds.
|About the author|
Miguel Sánchez Monjo
Miguel Sánchez (senior associate) specialises in financial regulation with broad experience as legal counsel to national and international financial institutions, including banks, credit institutions, investment firms, fintech companies, fund management companies, private equity firms and payment institutions.
His expertise includes fund formation of national and international open and closed-ended investment vehicles: Undertakings for collective investment in transferable securities (Ucits), hedge funds, private equity, venture capital, real estate, and master-feeder structures. He also advises on corporate transactions of a sectorial nature in which financial regulation plays an important role.
He is bachelor of laws and business administration (Universidad Carlos III de Madrid, 2007).