MiFID II
Reply by the Commission services to Comments by ECON Member M. Ferber, in relation to the
Commission Delegated Directive of 7 April 2016 supplementing Directive 2014/65/EU of the
European Parliament and of the Council with regard to safeguarding of financial instruments and
funds belonging to clients, product governance obligations and the rules applicable to the
provision or reception of fees, commissions or any monetary or non-monetary benefits
13 May 2016
Mr Markus FERBER (Rapporteur, EPP)
With regards to the comments made by the European Parliament in the letter on delegated acts on
25 June 2015:
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It is good that Commission has followed the advice to implement the investor protection
provisions in the format of a delegated directive and not a delegated regulation.
Quality enhancement test: it is good that the Commission improved the wording to make it
more comprehensible. However, the Commission failed to incorporate key advice of the
European Parliament such as:
o to expand the list of examples for what constitutes a quality enhancement
o to introduce the criterion of having a wide branch network as an example for a quality
enhancement
Reply by the Commission services
Quality enhancements: the Delegated Directive (DD) establishes a non-exhaustive list of quality
enhancements that will justify receiving third party inducements. Monetary and non-monetary
benefits which are not explicitly mentioned can be considered a quality enhancement of the
relevant service to the client, if the conditions enumerated in Article 11(2) points (a) –(c) are met.
This implies that the investment firms will be able to justify inducements if these are linked to
maintaining or increasing the level of service provided to a client in a network of branches. The
rationale for this approach is that inducements should result in a tangible benefit for clients that
make use of the firm's network. In order to accommodate concerns that quality enhancements
should not be confined to particular channels of distribution, ESMA's advice that an enhancement
must be linked to making available advisory tools online was removed.

Minor non-monetary benefits: The Commission has improved the wording and narrowed down
the notion of “other minor non-monetary benefits”, which is an improvement. However, the
Commission failed to incorporate the notion of a genuinely exhaustive list as asked by the EP.
Reply by the Commission services
Minor non-monetary benefits (MNMB): Taking into account that the delegated act on investor
protection now takes the form of a directive, the DD now contains a rather substantial indicative list
of what constitutes a MNMB while also allowing Member States to circumscribe acceptable minor
non-monetary benefits. In light of the substantial list and the tight criteria that are set out in Article
12(2) - in order to be 'acceptable' minor non-monetary benefits must be reasonable and
proportionate, at both individual and group level, and must remain within a scale that makes it
unlikely to influence the investment firm’s behaviour in a way detrimental to the relevant client –
the latitude for additional categories of MNMB is appropriately circumscribed.

Investment research: the Commission still needs to clarify how Commission Sharing Agreements
are treated under the new regime.
Reply by the Commission services
Commission sharing arrangements: The DD makes no explicit reference to the term 'Commission
sharing arrangements' or CSAs. The arrangements grouped under the CSA heading comprise a range
of different arrangements and practices in this area vary among investment firms in different
Member States. In line with the choice to adopt investor protection rules in the form of a directive,
preference was given to a generic requirement that operational arrangements for the collection of a
research payment are allowed as long as they comply with the conditions for the operation of the
research payment account in Article 13(3) of the DD. This means that the competent national
regulator has the opportunity to vet existing arrangements for the collection of research payments
against the benchmark criteria established in Article 13(3) of the DD. A provision along the lines of
Article 13(3) was not part of ESMA's advice and was added precisely to address the EP concerns on
the variety of arrangements that govern the collection of research payments.
Other points:
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Product governance: Level I is quite clear that the issuer of a product defines the target market
and the distributor takes it into consideration. The delegated directive however goes beyond
that implying an additional target market definition made by the distributor. The Commission
should clarify if this is really meant by the delegated directive and if so what would be the
justification for such a 2nd target market analysis.
Reply by the Commission services
Target markets: By necessity, 'product manufacturer' will define a relevant target market based on a
typology of potential investors, as the manufacturer will lack knowledge about the financial needs,
knowledge and past financial experience of individual clients. Product distributors are then
expected to refine the manufacturer’s general assessment when addressing individual clients. This
will lead to a more granular circumscription of the relevant 'target market'. Unlike manufacturers
who need to establish and publicly communicate the relevant target markets they have identified,
distributors need to be mindful of the relevant target market when assessing whether a particular
product is aligned to an individual client's financial needs – this obligation arises by virtue of Art
24(2), second subparagraph, and Art 9(3)(b) or Directive 2014/65/EU.
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Safeguarding of clients assets: The Commission should check carefully if the provisions laid down
in Art. 5 and Art. 6 on the treatment of SFTs when dealing with non-retail clients are necessary in
light of the provisions already defined in Art. 15 (1) of the SFT regulation (2015/2365/EU).
Reply by the Commission services
DD and SFTR: Both the DD and the Securities Financing Transaction Regulation (SFTR) enumerate
conditions when financial instruments are used in the context of securities financing transactions.
According to Article 15(3) SFTR requirements set out in this provision are without prejudice to
sector-specific legislation that aims to ensure a higher level of protection for counterparties.