The Impact of Product Intervention Measures imposed by ESMA

The complexity of MiFID II resulted in radical changes for investment firms, with firms now employing various strategies to survive from the product intervention measures. The year 2018 created new interpretations as to how the EU firms shall operate. This new regulation had a big impact on the internal practices, procedures and processes of the European investment firms, possibly the most severe being the creation of a very demanding onboarding process for new clients. While the industry was still trying to digest what appeared to be too much, the European Commission and Parliament approval of the MiFID II framework empowered ESMA to intervene and introduce additional measures to ‘protect investors’ – when ESMA considers it appropriate. In this article, we examine the allowance of this power with the following question;

Is ESMA successful in protecting investors through these product intervention measures or is it simply directing the industry to employ different kinds of survival strategies that may even lead to lower investor protection?

We will attempt to answer this question and discuss the new ways investment firms conduct business.

Since August 2018 and after the product intervention measures came into force, we have seen many EU regulated firms categorizing their retail clients as professional clients. Why they do so is simple – ESMA left the professional clients out of scope and the intervention measures not applicable to them. Therefore, those who meet the criteria of being professional clients still enjoy higher leverage, and do so with lower investor protection.

Another tactic employed by many EU entities is discreetly driving their EU retail clients to consent to being onboarded to a non-EU subsidiary. This resulted in a wave where many firms onboard EU clients to non-regulated entities, with no investor protection. The challenge for most firms taking this road is in struggling to find payment processors and banks willing to do business with them. A subset of brokers are able to onboard their EU clients in a non-EU but regulated entity in a jurisdiction such as Australia.

We are still standing by to see how all of these changes in the online retail trading  industry will play out along with future events such as the end result (?) of the Brexit saga, the post-Brexit FCA measures, whether ESMA will extend the intervention measures for another quarter and for which European countries the restrictions will become permanent by their respective national authorities.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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