- Collection of retrocessions by trading companies is prohibited when they only give independent advice
- The sale of structured deposits must meet good governance and suitability assessment standards, among others
The Council of Ministers has approved the Preliminary Draft Law (APL) on the Securities Market and Financial Instruments in adaptation of the European Directive known as Mifid II and other regulations. The objective is to ensure high levels of investor protection in financial products, especially retail, and to increase the security and efficiency, smooth operation and stability of the securities markets in Europe. The norm has already passed the procedures of consultation and public hearing, in which 50 documents were received with more than 450 observations, from 38 people or entities. It will now be sent to the Council of State to receive an opinion, will return to the Council of Ministers and will be forwarded to Parliament for approval and entry into force as soon as possible.
The most notable aspect of the APL is everything related to the protection of the small investor in aspects such as the commissions that the entities demand for the so-called retrocessions. The most typical example is that of an entity, usually a bank, that markets or recommends an investment fund to a client. The bank collects an incentive from the fund manager, which in some cases may adulterate the advisory work. The Mifid II directive allows or prohibits the collection of these commissions or other incentives depending on the services they provide.
Specifically, the collection of commissions, retrocessions or other types of incentives is strictly prohibited when providing independent financial advisory services or portfolio management. If other investment services are provided, it is necessary to increase the quality of the advice and ensure that it is acted honestly, fairly and professionally in accordance with the best interest of the client. These conditions are considered to be met when, for example, the product offering includes products from competing third parties. The regulatory development of the law will determine that at least 25% of the total products in the same category from third parties must be offered to consider that there is an increase in the quality of the service.
The Directive and the APL approved by the Government also address the problem of structured deposits. These are those whose profitability depends on the evolution of an index or the price of a financial asset. Mifid II establishes that credit institutions when they market or provide advice on structured deposits must comply with the rules related to the good governance of the entity, certain internal organization measures, measures to avoid conflicts of interest, obligations regarding recording records and standards of conduct, such as customer classification, product governance, evaluation of suitability and suitability, remuneration and order management; that is, they receive a treatment that until now they did not have, that of any other financial instrument.
So-called product governance is also regulated within the scope of investor protection. Investment services companies that design financial instruments for marketing to clients must implement a prior approval process for each instrument, to identify a market of final clients to whom the instrument will be directed. The objective is that the characteristics of the products are the most appropriate for each type of customer market identified. The board of directors is responsible for the operation of this process.
Investment services companies must also keep a record of the actions they carry out with clients and in the markets in which they operate. The objective is to be able to attend to the possible requirements of the CNMV in its supervisory work, or to give an adequate response to possible customer complaints. Mifid II obliges to include in the registry of all the services, activities and operations that they carry out, telephone conversations or electronic communications related, at least, to operations on their own account and those related to the reception, transmission and execution of customer orders. .
Regarding the improvement of the functioning of the markets, the APL addresses specific aspects of the so-called high-frequency algorithmic trading. In this type of negotiation, a computer algorithm automatically determines the different parameters of the orders: if the order is going to be executed or not; the moment; the price; the amount; how it will be managed after its presentation … with limited or no human intervention. Entities that carry out high-frequency algorithmic trading must establish risk controls and communicate to their supervisor the algorithm used and the market in which it will be used. All this with the aim of controlling the operational risks of this practice, which is very widespread in the markets.
The SME financing markets also improve their operating rules in order to make them more agile in terms of requirements and obligations. The managers of a multilateral trading system may apply for registration as an "expanding SME" market if at least 50% of the issuers of financial instruments that are admitted to trading in the multilateral trading system are SMEs. The expanding SMEs market label is relevant because all the community regulations on the stock market will take this label into account in order to promote its operation with a lightened demand on the part of its requirements and obligations.
A new category of recruitment center is also established, the so-called organized recruitment system. It is a multilateral system, which is not a regulated market or a multilateral trading system, in which the various interests of buying and selling bonds and obligations, securitizations, emission rights or derivatives of multiple third parties interact to give rise to contracts. . This new category is created in order to allow the channeling of operations of these assets that are made today over the counter (without an organized market, only with two counterparties that contact and close an operation) towards an organized market, something that is considered desirable from the point of view of financial stability.