S.I. No. 375/2017 - European Union (Markets in Financial Instruments) Regulations 2017

• (a) financial instrument’s costs and charges are compatible with the needs, objectives and characteristics of the target market;

• (b) charges do not undermine the financial instrument’s return expectations, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a financial instrument;

• (c) the charging structure of the financial instrument is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand.

• (15) Investment firms shall ensure that the provision of information about a financial instrument to distributers includes information about the appropriate channels for distribution of the financial instrument, the product approval process and the target market assessment and is of an adequate standard to enable distributors to understand and recommend or sell the financial instrument properly.

• (16) Investment firms shall review the financial instruments they devise or otherwise create on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market. Investment firms shall consider if the financial instrument remains consistent with the needs, characteristics and objectives of the target market and if it is being distributed to the target market, or is reaching clients for whose needs, characteristics and objectives the financial instrument is not compatible.

• (17) Investment firms shall review financial instruments prior to any further issue or re-launch, if they are aware of any event that could materially affect the potential risk to investors and at regular intervals to assess whether the financial instruments function as intended. Investment firms shall determine how regularly to review their financial instruments based on relevant factors, including factors linked to the complexity or the innovative nature of the investment strategies pursued. Firms shall also identify crucial events that would affect the potential risk or return expectations of the financial instrument, such as:

• (a) the crossing of a threshold that will affect the return profile of the financial instrument; or

• (b) the solvency of certain issuers whose securities or guarantees may impact the performance of the financial instrument.

• (18) When such events occur, investment firms shall take appropriate action which may consist of:

• (a) the provision of any relevant information on the event and its consequences on the financial instrument to the clients or the distributors of the financial instrument if the investment firm does not offer or sell the financial instrument directly to the clients;

• (b) changing the product approval process;

• (c) stopping further issuance of the financial instrument;

• (d) changing the financial instrument to avoid unfair contract terms;

• (e) considering whether the sales channels through which the financial instruments are sold are appropriate where firms become aware that the financial instrument is not being sold as envisaged;

• (f) contacting the distributor to discuss a modification of the distribution process;

• (g) terminating the relationship with the distributor; or

• (h) informing the relevant competent authority.

Product governance obligations for distributors

• (2) Investment firms shall also comply with the requirements of these Regulations when offering or recommending financial instruments devised or otherwise created by entities that are not subject to these Regulations. As part of that process, such investment firms shall have in place effective arrangements to ensure that they obtain sufficient information about these financial instruments from these entities.

• (3) Investment firms shall determine the target market for the respective financial instrument, even if the target market was not defined by the person who devised or otherwise created the instrument.

• (4) Investment firms shall have in place adequate product governance arrangements to ensure that products and services they intend to offer or recommend are compatible with the needs, characteristics, and objectives of an identified target market and that the intended distribution strategy is consistent with the identified target market. Investment firms shall appropriately identify and assess the circumstances and needs of the clients they intend to focus on, so as to ensure that clients’ interests are not compromised as a result of commercial or funding pressures. As part of that process, firms shall identify any groups of clients for whose needs, characteristics and objectives the product or service is not compatible.

• (5) Investment firms shall obtain from persons who devise or otherwise create financial instruments and who are subject to these Regulations information to gain the necessary understanding and knowledge of the products they intend to recommend or sell in order to ensure that these products will be distributed in accordance with the needs, characteristics and objectives of the identified target market.

• (6) Investment firms shall take all reasonable steps to ensure they also obtain adequate and reliable information from persons who devise or otherwise create financial instruments and who are not subject to these Regulations so as to ensure that products will be distributed in accordance with the characteristics, objectives and needs of the target market. Where relevant information is not publicly available, the distributor shall take all reasonable steps to obtain such relevant information from the foregoing person or its agent. For that purpose, acceptable publicly available information is information which is clear, reliable and produced to meet regulatory requirements, such as disclosure requirements under Statutory Instrument No. 324 of 2005 or Statutory Instrument No. 277 of 2007. That obligation is relevant for products sold on primary and secondary markets and shall apply in a proportionate manner, depending on the degree to which publicly available information is obtainable and the complexity of the product.

• (7) Investment firms shall use the information obtained from persons who devise or otherwise create financial instruments and information on their own clients to identify the target market and distribution strategy. When an investment firm acts both as a person who devises or otherwise creates a financial instrument and as a distributor, only one target market assessment shall be required.

• (8) Investment firms shall, when deciding the range of financial instruments and services that they offer or recommend and the respective target markets, maintain procedures and measures to ensure compliance with all applicable requirements under these Regulations including those relating to disclosure, assessment of suitability or appropriateness, inducements and proper management of conflicts of interest. In that context, particular care shall be taken when distributors intend to offer or recommend new products or there are variations to the services they provide.

• (9) Investment firms shall periodically review and update their product governance arrangements in order to ensure that they remain robust and fit for their purpose, and take appropriate actions where necessary.

• (10) Investment firms shall review the investment products they offer or recommend and the services they provide on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market. Firms shall assess at least whether the product or service remains consistent with the needs, characteristics and objectives of the identified target market and whether the intended distribution strategy remains appropriate. Firms shall reconsider the target market or update the product governance arrangements (or do both) if they become aware that they have wrongly identified the target market for a specific product or service or that the product or service no longer meets the circumstances of the identified target market, such as where the product becomes illiquid or very volatile due to market changes.

• (11) Investment firms shall ensure their compliance function oversees the development and periodic review of product governance arrangements in order to detect any risk of failure to comply with the obligations of this paragraph.

• (12) Investment firms shall ensure that relevant staff possess the necessary expertise to understand the characteristics and risks of the products that the firm intends to offer or recommend and the services provided as well as the needs, characteristics and objectives of the identified target market.

• (13) Investment firms shall ensure that the management body has effective control over the firm’s product governance process to determine the range of investment products that they offer or recommend and the services provided to the respective target markets. Investment firms shall ensure that the compliance reports to the management body systematically include information about the products they offer or recommend and the services provided. The compliance reports shall be made available to the competent authorities on request.

• (14) Distributers shall provide persons who devise or otherwise create financial instruments with information on sales and, where appropriate, information on the reviews referred to in the preceding subparagraphs to support product reviews carried out by such persons.

• (15) Where different firms work together in the distribution of a product or service, the investment firm with the direct client relationship has ultimate responsibility to meet the product governance obligations of this Schedule. However, intermediary investment firms shall—

• (a) ensure that relevant product information is passed from the person who devises or otherwise creates financial instruments to the final distributor in the chain,

• (b) if the first-mentioned person in clause (a) requires information on product sales in order to comply with his or her own product governance obligations, enable that person to obtain it, and

• (c) apply the product governance obligations for persons who devise or otherwise create financial instruments, as relevant, in relation to the service they provide.

SCHEDULE 5 INDUCEMENTS

Regulation 32

Inducements

• (2) A fee, commission or non-monetary benefit shall be considered to be designed to enhance the quality of the relevant service to the client if all of the following conditions are met:

• (a) it is justified by the provision of an additional or higher level service to the relevant client, proportional to the level of inducements received, such as:

• (i) the provision of non-independent investment advice on and access to a wide range of suitable financial instruments including an appropriate number of instruments from third party product providers having no close links with the investment firm;

• (ii) the provision of non-independent investment advice combined with either: an offer to the client, at least on an annual basis, to assess the continuing suitability of the financial instruments in which the client has invested; or with another on-going service that is likely to be of value to the client such as advice about the suggested optimal asset allocation of the client; or

• (iii) the provision of access, at a competitive price, to a wide range of financial instruments that are likely to meet the needs of the client, including an appropriate number of instruments from third party product providers having no close links with the investment firm, together with either the provision of added-value tools, such as objective information tools helping the relevant client to take investment decisions or enabling the relevant client to monitor, model and adjust the range of financial instruments in which they have invested, or providing periodic reports of the performance and costs and charges associated with the financial instruments.

• (b) it does not directly benefit the recipient firm, its shareholders or employees without tangible benefit to the relevant client;

• (c) it is justified by the provision of an on-going benefit to the relevant client in relation to an on-going inducement,

and a fee, commission, or non-monetary benefit shall not be considered acceptable if the provision of relevant services to the client is biased or distorted as a result of the fee, commission or non-monetary benefit.

• (3) Investment firms shall fulfil the requirements of paragraph 2 on an ongoing basis as long as they continue to pay or receive the fee, commission or non-monetary benefit.

• (4) Investment firms shall hold evidence that any fees, commissions or non-monetary benefits paid or received by the firm are designed to enhance the quality of the relevant service to the client:

• (a) by keeping an internal list of all fees, commissions and non-monetary benefits paid or received by the firm from a third party in relation to the provision of investment or ancillary services, and

• (b) by recording how the fees, commissions and non-monetary benefits paid or received by the firm, or that it intends to use, enhance the quality of the services provided to the relevant clients and the steps taken in order not to impair the firm’s duty to act honestly, fairly and professionally in accordance with the best interests of the client.

• (5) Investment firms shall disclose to the client the following information in relation to any payment or benefit received from or paid to third parties—

• (a) prior to the provision of the relevant investment or ancillary service, the investment firm shall disclose to the client information on the payment or benefit concerned in accordance with the second paragraph of Regulation 32(17) of these Regulations. Minor non-monetary benefits may be described in a generic way. Other non-monetary benefits received or paid by the investment firm in connection with the investment service provided to a client shall be priced and disclosed separately,

• (b) where an investment firm was unable to ascertain on an ex-ante basis the amount of any payment or benefit to be received or paid, and instead disclosed to the client the method of calculating that amount, the firm shall also provide its clients with information of the exact amount of the payment or benefit received or paid on an ex-post basis, and

• (c) at least once a year, as long as (on-going) inducements are received by the investment firm in relation to the investment services provided to the relevant clients, the investment firm shall inform its clients on an individual basis about the actual amount of payments or benefits received or paid. Minor non-monetary benefits may be described in a generic way.

• (6) In implementing those requirements, investment firms shall take into account the costs and charges rules set out in Regulation 32(7) of these Regulations and Article 50 of Commission Delegated Regulation (EU) No 2017/565.

• (7) When more firms are involved in a distribution channel, each investment firm providing an investment or ancillary service shall comply with its obligations to make disclosures to its clients.

Inducements in respect of independent investment advice on an independent basis or portfolio management services

• (2) Investment firms shall formulate and implement a policy to ensure that any fees, commissions or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of independent investment advice and portfolio management are allocated and transferred to each individual client.

• (3) Investment firms shall inform clients about the fees, commissions or any monetary benefits transferred to them, such as through the periodic reporting statements provided to the client.

• (4) Investment firms providing investment advice on an independent basis or portfolio management shall not accept non-monetary benefits that do not qualify as acceptable minor non-monetary benefits in accordance with subparagraph (5).

• (5) Without prejudice to subparagraph (6), the following benefits shall qualify as acceptable minor non-monetary benefits only if they are—

• (a) information or documentation relating to a financial instrument or an investment service that is generic in nature or personalised to reflect the circumstances of an individual client,

• (b) written material from a third party that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an ongoing basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any investment firms wishing to receive it or to the general public,

• (c) participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service,

• (d) hospitality of a reasonable de minimis value, such as food and drink during a business meeting or conference, seminar or other training events mentioned in clause (c), and

• (e) other minor non-monetary benefits which are capable of enhancing the quality of service provided to a client and, having regard to the total level of benefits provided by one entity or group of entities, are of a scale and nature that are unlikely to impair compliance with an investment firm’s duty to act in the best interests of the client.

• (6) Minor non-monetary benefits, to be regarded as acceptable, shall be reasonable and proportionate and of such scale that they are unlikely to influence the investment firm’s behaviour in any way that is detrimental to the interests of the relevant client.

• (7) Disclosure of minor non-monetary benefits shall be made prior to the provision of the relevant investment or ancillary services to clients. In accordance with paragraph 1(5)(a), minor non-monetary benefits may be described in a generic way.

Inducements in relation to research

• (a) direct payments by the investment firm out of its own resources;

• (b) payments from a separate research payment account controlled by the investment firm, provided the following conditions relating to the operation of the account are met:

• (i) the research payment account is funded by a specific research charge to the client;

• (ii) as part of establishing a research payment account and agreeing the research charge with their clients, investment firms set and regularly assess a research budget as an internal administrative measure;

• (iii) the investment firm is held responsible for the research payment account;

• (iv) the investment firm regularly assesses the quality of the research purchased based on robust quality criteria and its ability to contribute to better investment decisions.

• (2) Where an investment firm makes use of the research payment account, it shall provide the following information to clients:

• (a) before the provision of an investment service to clients, information about the budgeted amount for research and the amount of the estimated research charge for each of them; and

• (b) annual information on the total costs that each of them has incurred for third party research.

• (3) Where an investment firm operates a research payment account, the investment firm shall also be required, upon request by their clients or by the Bank, to provide a summary of the providers paid from that account, the total amount they were paid over a defined period, the benefits and services received by the investment firm, and how the total amount spent from that account compares to the budget set by the firm for that period, noting any rebate or carry-over if residual funds remain in that account. For the purposes of subparagraph 1(b)(i), the specific research charge shall—

• (a) only be based on a research budget set by the investment firm for the purpose of establishing the need for third party research in respect of investment services rendered to its clients, and

• (b) not be linked to the volume or value (or both) of transactions executed on behalf of the clients.

• (4) Every operational arrangement for the collection of the client research charge, where it is not collected separately but alongside a transaction commission, shall indicate a separately identifiable research charge and fully comply with the conditions in subparagraph (1) (b) and (c).

• (5) The total amount of research charges received may not exceed the research budget.

• (6) The investment firm shall agree with clients, in the firm’s investment management agreement or general terms of business, the research charge as budgeted by the firm and the frequency with which the specific research charge will be deducted from the resources of the client over the year. Increases in the research budget shall only take place after the provision of clear information to clients about such intended increases. If there is a surplus in the research payment account at the end of a period, the firm should have a process to rebate those funds to the client or to offset it against the research budget and charge calculated for the following period.

• (7) For the purposes of subparagraph (1)(b)(ii), the research budget shall be managed solely by the investment firm and is based on a reasonable assessment of the need for third party research. The allocation of the research budget to purchase third party research shall be subject to appropriate controls and senior management oversight to ensure it is managed and used in the best interests of the firm’s clients. Those controls include a clear audit trail of payments made to research providers and how the amounts paid were determined with reference to the quality criteria referred to in subparagraph (1)(b)(iv). Investment firms shall use the research budget and research payment account to fund internal research.

• (8) For the purposes of subparagraph (1)(b)(iii), the investment firm may delegate the administration of the research payment account to a third party, provided that the arrangement facilitates the purchase of third party research and payments to research providers in the name of the investment firm without any undue delay in accordance with the investment firm’s instruction.

• (9) For the purposes of subparagraph (1)(b)(iv), investment firms shall establish all necessary elements in a written policy and provide it to their clients. It shall also address the extent to which research purchased through the research payment account may benefit clients’ portfolios, including, where relevant, by taking into account investment strategies applicable to various types of portfolios, and the approach the firm will take to allocate such costs fairly to the various clients’ portfolios.

• (10) An investment firm providing execution services shall identify separate charges for these services that only reflect the cost of executing the transaction. The provision of each other benefit or service by the same investment firm to investment firms, established in the Union shall be subject to a separately identifiable charge; the supply of and charges for those benefits or services shall not be influenced or conditioned by levels of payment for execution services.

GIVEN under my Official Seal,

10 August 2017.

PASCHAL DONOHOE,

Minister for Finance.

EXPLANATORY NOTE

(This note is not part of the Instrument and does not purport to be a legal interpretation)

The Markets in Financial Instruments Directive (Directive 2014/65/EU), along with its accompanying Regulation (Regulation 600/2014/EU), collectively known as “MiFID 2”, establishes requirements in respect of the provision of investment services and activities in the EU. In particular, requirements are established in respect of the authorisation and operation of investment firms, stock exchanges and other types of trading venues, and certain data reporting service providers. Credit institutions, when providing investment services, are also subject to MiFID 2.

These regulations transpose MiFID 2 into national law and will enter into force on 3 January 2018. As MIFID 2 replaces MiFID 1 (Directive 2004/39/EC), accordingly these regulations revoke the regulations transposing MiFID 1 (SI 60/2007).