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MiFID II December 2015 1

MiFID II

ESMA's Guidelines on cross-selling

December 2015

MiFID II December 2015 1

Key Points

 The European Securities and Markets

Authority ("ESMA") issued the final

MiFID II guidelines on cross-selling on

22 December 2015. The guidelines

apply to the sale of two or more products

or services bundled or tied together in a

"package".

 The guidelines require firms to:

- disclose the total price for the

package and for each component

product;

- disclose key information on the non-

price features of the package and

related risks;

- inform clients whether each

component product can be

purchased separately;

- train sales staff properly and ensure

that their pay does not incentivise

mis-selling; and

- ensure that clients can cancel

component products within the

package, where applicable.

 National competent authorities

("NCAs"), including the FCA, must

make every effort to comply with the

guidelines. Once the guidelines have

been translated into the other EU

languages, NCAs will have two months

to confirm whether they comply or

intend to comply.

Background

On 22 December 2015, the European Securities

and Markets Authority ("ESMA") issued its

final report (the "Final Report") on guidelines

on cross-selling practices (the "Guidelines")

for the purposes of the revised Markets in

Financial Instruments Directive ("MiFID II").

The MiFID II Directive requires ESMA, in

cooperation with the European Banking

ESMA, Final Report: Guidelines on Cross-Selling

Practices (22 December 2015) (ESMA/2015/1861),

which is available at

https://www.esma.europa.eu/press-news/esma-

news/esma-publishes-mifid-ii-guidelines-cross-selling-

practices. The Guidelines are contained in Annex 5 of

the Final Report.

Authority ("EBA") and the European Insurance

and Occupational Pensions Authority

("EIOPA") (together, the European Supervisory

Authorities ("ESAs")), to develop guidelines on

the assessment and supervision of cross-selling

practices.

The Joint Committee of the ESAs published a

consultation paper containing draft guidelines

on 22 December 2014.

However, following

concerns over the legal basis of the guidelines in

relation to banking and insurance, the final

report contains cross-selling guidelines issued

by ESMA for the purposes of MiFID II only.

Aims

According to the Final Report, the Guidelines are

intended to:

 improve the content of disclosure on

price, costs and other non-price features

when different products are cross-sold

with one another;

 require that all relevant information is

communicated in a timely and

prominent manner;

 improve client understanding of whether

the purchase of the individual products

is possible;

 address training and remuneration

aspects; and

 clarify the application of any post-sale

cancellation rights attached to the

purchase of one of the products.

Scope

The Guidelines apply to cross-selling practices

as defined in the MiFID II Directive, that is, the

offering of an investment service together with

another service or product as part of a package

or as a condition for the same agreement or

package.

Article 24(11), MiFID II Directive.

Joint Committee of the European Supervisory

Authorities, Joint Committee Consultation Paper on

Guidelines for Cross-Selling Practices (22 December

2014) (JC/CP/2014/05), available at

https://www.eba.europa.eu/documents/10180/936747

/JC+CP+2014+05+(Consultation+Paper+on+Cross+Se

lling).pdf.

Final Report, p. 3.

Final Report, p. 4.

Article 4(1)(42), MiFID II Directive.

MiFID II December 2015 2

The Guidelines will apply to the marketing and

sale of products to retail and professional

clients. ESMA has confirmed that references in

the Guidelines to "clients" should be understood

as referring to both retail and professional

clients.

The Guidelines distinguish between "bundled"

packages and "tied" package. Bundled packages

involve products or services that are available

separately and where a client may choose to

purchase each component product separately.

Tied packages on the other hand contain at least

one product or service that is not available

separately to the client.

The Guidelines are not intended to override any

other conduct of business standards that may

apply to the services or product. They apply to

tied and bundled packages, except to the extent

any legislation prohibits them from applying to

the relevant services or product.

The Guidelines are addressed to national

competent authorities ("NCAs") with

responsibility for supervising firms that are

subject to MiFID II, the Undertakings for

Collective Investments in Transferable

Securities ("UCITS") Directive or the

Alternative Investment Fund Managers

Directive ("AIFMD"). NCAs are required to

notify ESMA whether they comply or intend to

comply with the Guidelines within two months

of the date of publication of the translated

versions of the Guidelines.

Application

The Guidelines apply irrespective of the sales

channel used, meaning that companies using

social media or other online methods to

promote and sell their products and services

need to be just as aware of the rules as those

using more traditional methods, such as

telephone sales or over-the-counter transactions

in a branch.

The Guidelines only apply to cross-selling

within the meaning of MIFID II. Consequently,

they apply only to the following firms:

 investment firms;

 credit institutions when providing

investment services;

Final Report, p. 7.

Final Report, p. 35.

 UCITS management companies when

providing investment services; and

 external AIFMs when providing

investment services.

The Guidelines

The Guidelines contain 10 high-level guidelines

illustrated by practical examples. The

Guidelines are intended to indicate to national

competent authorities ("NCAs") how to ensure

firms' compliance with general conduct of

business standards expected of firms in the

context of cross-selling practices.

Disclosure of price information

The first four guidelines relate to the disclosure

of pricing information by firms to their clients.

Guideline 1 states that clients should be

provided with information on the price of the

package and of its component products.

The Guideline states that the information

should comprise a clear breakdown and

aggregation of "all relevant known costs". This

includes administration fees, transaction costs

and exit or pre-payment penalty charges.

Example of Guideline 1: The Guidelines provide

the following example:

 When cross-selling an interest rate swap

with a variable rate loan to allow a client

to hedge interest rate risk, the firm

provides information on all aspects of

the swap that materially affect the cost

incurred by the client, such as: (a) the

client's potential payment liability when

interest rates change; and (b) the exit

charges from the swap contract.

Guidelines 2 and 3 state that such price and

cost information should:

 be made available in good time before

the agreement becomes binding, in

order to allow clients to make an

informed decision;

 be communicated in a prominent,

accurate manner;

Final Report, p. 4.

MiFID II December 2015 3

 be communicated in simple language,

with any technical terminology

explained; and

 ensure that equal prominence is given to

the price and cost information of

component products, so that clients can

assess the cost impact of buying these

products.

Examples of Guideline 3: By way of example,

the Guideline states:

 In marketing communications, the font

used to communicate the relevant price

and cost information for each

component product should be the same;

the price of one product should not be in

bolder or bigger type than that of

another.

 Where the sale takes place on the

internet or through another channel

without a salesperson, the price and cost

information should appear early on; it

cannot be "hidden" further down in the

online sales form.

Guideline 4 states that price and cost

information in tied and bundled packages must

be presented in a way that:

 is not misleading;

 does not distort or obscure the real cost

to the client; and

 does not prevent meaningful

comparison with alternative products.

Disclosure of non-price information

Guideline 5 requires clients to be provided

with key information relating to the non-price

features and risks of each of the component

products and the package. In particular, firms

should disclose how risks are modified as a

result of purchasing the tied or bundled package

rather than each of the components separately.

Example of Guideline 5: The Guideline

provides the example of a savings account that

offers a preferential rate only when purchased

with a structured bond. In this case, the level of

risk of purchasing the package is higher than

that of buying the savings account alone. The

different risk profile of the package compared

with the savings product should be disclosed to

the client.

Guideline 6 states that key non-price factors

and the relevant risks should be promoted to

clients with the same prominence and weight as

information on the price and cost. They should

be:

 made clear to clients in simple language,

with any technical terminology

explained;

 in good time before the client is bound;

 presented to clients in a way that is not

misleading; and

 presented in a way that does not distort

the impact of these factors for the client.

Examples of Guideline 6:

 The Guideline provides an example of

how a firm should:

- draw the client's attention to

limitations and risks of the package;

and

- guide the client through the

information setting out the key

benefits, limitations and risks.

In this example, the sales person

explains carefully and in due time how

the non-price factors materially change

according to: (i) whether the component

product is purchased; and (ii) which

component is selected.

 The Guideline also gives an example of a

firm not relying exclusively on a general

reference to its terms and conditions in

order to disclose non-price information

to its clients. Instead, the firm explains

the risks (if relevant) and non-price

information to the client in plain

language.

Whether components can be purchased

separately

Guideline 7 states that clients should be

properly informed whether it is possible to

purchase the component products separately.

Clients should be able to choose a product

actively, and make a conscious decision whether

to buy the component product or the package.

MiFID II December 2015 4

In particular, pre-ticked boxes (whether online

or in any other sales document) should not be

used when cross-selling one product or service

with another.

Examples of Guideline 7:

 The Guideline gives examples of a firm

setting out the client's options clearly:

- the firm makes it clear that the client

has the option to purchase the firm's

execution-only service with no

additional products such as market

data and financial analysis; or

- it is clear whether the client's choice

is restricted to particular bundles of

component products, or if he or she

has a free choice as to which ones

they can combine together.

 The purchase option for a bundled

package of execution-only service and

markets research on the firm's sales

internet pages is left blank. The client

has to opt in by clicking "yes" in order to

buy the add-on product.

Need for adequate staff training

Guideline 8 states that the staff offering

products that are cross-sold should have

adequate training. They should be familiar with

the risks (where relevant) of the component

products and the bundled or tied package and

be able to communicate these to the client in

plain (non-technical) language.

Remuneration of sales staff

According to Guideline 9, firms should ensure

that suitable remuneration models and sales

incentives are in place, and motivated by senior

management, that encourage:

 responsible business conduct;

 fair treatment of clients; and

 the avoidance of conflicts of interest for

staff.

Examples of Guideline 9:

 Remuneration structures should not

encourage sales staff to "push" sales and

encourage unnecessary or unsuitable

sales. For example, if sales staff are

incentivised to cross-sell a loan with a

brokerage account, this could incentivise

potential mis-selling.

 A firm avoids remuneration policies that

reduce sales staff's basic salary

substantially if a specific sales target in

relation to a bundled or tied package is

not met.

 A firm does not reduce bonus or

incentive payments because a sales

target or threshold for the bundled

package has not been met.

Post-sale cancellation rights

According to Guideline 10, firms should

ensure that where "cooling-off" periods or post-

sale cancellation rights apply to one or more

component products, these rights should

continue to apply to those components within

the package.

Firms should ensure that clients are

subsequently allowed to split the products

grouped in a cross-selling offer without

disproportionate penalties unless there are

justified reasons why this is not possible.

Detrimental cross-selling practices

The Final Report provides examples of

detrimental cross-selling practices in Annex 6.

The examples include:

 offering two products together where the

price of the package is higher than the

total price of the components if they had

been offered separately;

 inducing a client to buy a product by

promoting the fact that the overall cost

is lower than buying each component

separately, even though in reality the

costs over time will be a higher amount;

 not returning the proportion of fees

relating to a pre-paid insurance

premium where the insurance product is

no longer in force following termination

of an investment service;

 imposing disproportionate early

termination charges for an ancillary

MiFID II December 2015 5

insurance product if a customer wants to

move to an alternative provider, or

threatening the termination of the

contract with respect to another product

included in the package; or

 offering a product bundled with another

product that has not been requested by

the client when the firm is aware, or

should be awar,e that the product

unnecessarily duplicates another

product that the client already has and

cannot benefit from (including because

the client is not eligible).

Commentary

Recent initiatives by the FCA contain similar

provisions to the Guidelines, which may provide

the basis for implementing the Guidelines in the

UK. The FCA recently provided new rules

regulating the sales of "add-on" general

insurance products. In particular, the rules,

which will take effect from April 2016, will ban

opt-out selling, i.e. putting the obligation on the

client to choose to opt out of buying a product.

This is similar to the concept of banning a "pre-

ticked box" in Guideline 7, which is intended to

expand comparable requirements to the cross-

selling of investment services and products

generally.

Likewise, the FSA previously warned firms in its

guidance on the risk of financial incentives

encouraging staff to engage in mis-selling.

This existing guidance is similar to Guideline 9,

in that it requires firms to consider the need to

manage financial incentive schemes, and how

such schemes may impact on the marketing and

sale of their services and products.

Next steps

The Guidelines, which are contained in Annex 5

of the Final Report, are due to be published on

ESMA's website

(https://www.esma.europa.eu/).

FCA, General Insurance Add-Ons Market Study:

Remedies: banning opt-out selling across financial

services and supporting informed decision-making for

add-on buyers (September 2015) (PS15/22), available

at https://www.fca.org.uk/news/ps15-22-general-

insurance-add-ons-market-study-remedies.

FSA, Final guidance: Risks to customers from financial

incentives (January 2013) (FG13/1), available at:

http://www.fca.org.uk/your-fca/documents/finalised-

guidance/fsa-fg131.

National competent authorities ("NCAs"),

including the FCA, must make every effort to

comply with the guidelines. Once the guidelines

have been translated into the other EU

languages, NCAs will have two months to

confirm whether they comply or intend to

comply.

At present, the Guidelines are intended to apply

from 3 January 2017. This is in line with the

text of the MiFID II Directive which currently

states that it will take effect from 3 January

2017. However, due to legislative delays, it is

expected that the implementation of MiFID II

will be delayed until January 2018. The impact

of this expected delay on the Guidelines has not

yet been confirmed, but it seems likely that the

implementation of the Guidelines will be

delayed accordingly.

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