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Ensuring appropriate conduct and culture in the financial services industry - New trends in the financial sector

Improving Business content in securities markets

By Merlin Martin - Director, Financial Markets, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission


Consumers invest in capital markets only if they trust these markets and financial intermediaries operating there. One way to win back investor confidence after the crisis is to promote ethical behaviour of financial institutions. EU policy is a necessary and effective tool to set higher standards across Europe.

In this context, MiFID 2 is a key piece of legislation which aims at improving business conduct of market operators. The strengthened EU market abuse rules further aim at enforcing integrity and transparency of financial markets, and thus contribute to regaining the confidence of consumers. It is then the task of supervisors to ensure that these rules are effectively applied and enforced.

MiFID 2 adopted a holistic approach to tackling past issues of business conduct, laying down the foundations for the development of an improved business culture in the area of securities markets. It reinforced the rules requiring investment firms to act in the best interest of their clients and curtailed the risk of distorting investment decisions over inducements paid or received by investment firms.
First, MiFID 2 imposed limitations on inducements paid by issuers to investment firms distributing securities to clients, thus creating the potential for conflicts of interest for investment firms. The new rules require independent investment advisers and portfolio managers to transfer all fees paid by a third party to the client who should be informed about all such payments. In order to improve best execution and to improve the efficiency of market for research, the new framework also requires portfolio managers to put in place strict controls on research costs.
Secondly, MiFID 2 forbid investment firms from remunerating employees in a way that conflicts with clients’ best interests. For example, investment firms are not allowed to provide incentives for recommending or selling a financial instrument when another product may be better suited for this client.
Furthermore, in order to further reduce the risk of mis-selling, MiFID 2 required investment firms manufacturing securities to ensure that those products meet the needs of and are only distributed to the appropriately identified target market.

Finally, MiFID 2 strengthened the role of senior management in determining a firm’s policies on how products may be sold to clients, as well as in the adoption of adequate internal controls. The new framework harmonises sanctions regime to ensure effective enforcement of compliance with the new rules.

Consistent application and enforcement of these rules will be key to improving conduct of business and eliminating regulatory and supervisory arbitrage. In this regard, new MiFID 2 rules granted the European Supervisory Authority (ESMA) EU-wide product intervention powers to prohibit or restrict the marketing and distribution of investment products which pose serious threat to investor protection or market stability.

The strengthened rules for market abuse and sanctions should ensure that the national regulators and the European Supervisory Authorities have sufficient supervisory powers to facilitate investigations of possible cases of market abuse, in particular in a cross-border context. The investigatory powers have been complemented by a more stringent and effective set of sanctions that regulators could impose for the breaches of market integrity rules.

Against this backdrop, the new EU rules should clearly raise the bar for business conduct for securities market operators and enable investors to make well-informed investment decisions to the benefits of the EU economy.