Investment Services

During the last few months, reform of MiFID II, which includes, among other very relevant issues, a review of the inducements regime, has gained momentum. Following the consultation carried out by the European Commission in 2020, the Commission itself published, in July 2022, a report requested by an external firm that highlights the possibility of restricting and even prohibiting the charging of commissions by third parties, to anyone other than the end client, on the provision of investment services.

However, although the Commission wishes to promote a common market in relation to the collection of inducements, the differences between member states are significant. Specifically in Spain, MiFID II entailed a very important adjustment to the margin applied to products and services more in line with the interests of clients, because of the inclusion in the regulations of a closed list of options that allowed inducements and the express prohibition by the Spanish regulator of so-called vertical integration (basically a ban on adding any type of distribution fee for investment funds’ clean shares or units to avoid hidden commission in relation to retro-free services such as discretionary portfolio management or independent advice).

MiFID II has driven important changes in the financial industry. Particularly, it has significantly reduced the distribution of financial instruments through mere reception and transmission of order services. Nowadays, the main investment service provided in Spanish to retail clients is the portfolio management service, in which the charging of inducements is no longer allowed. In addition, for small investments, financial entities are now mostly providing one-off investment advice, in which, although inducements continue to be charged, entities are required to strictly comply with regulations that ensure an increase in the quality of services. However, the idiosyncrasy of the sector in Spain is clear when one considers how far it is from achieving independent advisory services with explicit fees. For this reason, the potential prohibition of inducements in the MiFID II reform may have very relevant consequences for the Spanish market and lead to a thorough revision of the service provision models implemented only five years ago, which may entail a very high implementation cost for the entities.

Although demographic changes and technology improvements may cause an increase of execution-only platforms in Spain, this trend does not seem likely to occur in the short term due the narrowness of the main banks’ office networks. In any case, it does not seem that the MiFID II reform is adjusted to the context of the Spanish market and could lead to a service gap, as has happened in other countries in the EU environment, where the charging of inducements has been expressly prohibited, better known as the “advice gap” in retail client segments.

Finally, it is important to note that the Spanish regulator has been focusing on issues associated with marketing procedures, such as a review of suitability and appropriateness tests and the commercial system, with mystery shopping exercises to detect poor marketing practices in the retail client segment. Therefore, some of the aspects to be included in the MiFID II reform have already been overcome in Spain, where supervision is very active.

Therefore, investment services regulation faces its most important moment in recent years, one which could lead to a real revolution in the provision of those services in Europe and with a significant impact in Spain, which is why it is so important to closely follow the reform and anticipate the potential impacts on the business that such regulation could produce.

ESG

Spain continues implementing the EU regulation on sustainable finance. Also, the mobilisation of finance towards long-term sustainable growth continues to be one of the European Union’s main priorities.

One key element in 2022 is the entry into force and application of the modification of MiFID II, known as Green MiFID, on 2 August 2022. This modification of MiFID II to incorporate the requirements on sustainability will oblige financial institutions to ask their clients, within the framework of the provision of portfolio management and advisory services, about their sustainability preferences, and to take them into account when recommending products or including them in their investment portfolios.

In addition, the provision of investment insurance advisory services (IBIPS) will be subject to similar requirements, as the Insurance Distribution Directive (IDD) has been amended in identical terms and requires clients to be asked about their sustainability preferences in the provision of the advisory service.

This change will require the inclusion of a new section, which will follow the traditional test, since sustainability preferences must be taken into account after the traditional customer profiling, in which the customer's ESG preferences must be asked about in a high degree of detail. To this end, given that these are new concepts with which the customer will not always be familiar, it is very important that distributors carry out this training task with the customer, so that they are aware of the implications of their answers and of the relevant sustainability concepts.

The fundamental objective of this regulation, as part of the EU Sustainable Finance Action Plan, is to achieve an increase in the supply of and demand for sustainable financial products by ensuring that customer preferences on this issue are taken into account when recommending products to them or in the construction of their managed portfolios. The challenge for Spanish financial entities is to review the product offer in order to meet their clients’ sustainability preferences, including for sustainable products.

This regulation represents one of the most significant changes in product offerings in recent years. Both at national and European level, the range of sustainable funds (Articles 8 and 9 according to the Disclosure Regulation, or SFDR) is increasing, and this growth has been greatly accelerated with the entry into force of these modifications.

Although institutions have been adapting their range for some time, the complexity of the regulation, coupled with the lack of clear supervisory criteria, since the ESMA guide containing guidelines for institutions on how to implement the requirements of the regulation were approved after the regulation came into force, made it difficult for entities to comply with all the new requirements in the timeframe envisaged. Likewise, the fact that the delegated regulation that develops the SFDR and establishes the templates to be completed by sustainable products will not come into force until 2023 also made it difficult to comply with these new obligations in August 2022.

Digital Assets: New Regulations and Trends

In Spain, digital assets are at the centre of the strategy of both new players and traditional financial institutions.

Two European regulations are at the heart of the projects being worked on. On the one hand, the already approved Pilot Regime and, on the other, the Regulation on crypto-assets, known as MiCA. Another prudential EU Regulation is also very relevant for MiCA projects: the Travel Rule, which prevents money laundering and the financing of terrorism in the transfer of crypto-assets.

Unlike other countries in the region, Spain has not yet enacted a local regulation on digital assets to advance the provisions of MiCA. However, as mentioned in the Spain Trends & Developments chapter of the 2022 edition of this guide, the advertising of crypto-assets and their taxation has been regulated in Spain. Regarding the Pilot Regime, and despite being a Regulation and not a Directive, certain changes are expected to be incorporated into the Spanish Securities Market Law to allow the provisions of the Pilot Regime to be compatible with those established in Spanish regulation.

The Pilot Regime will apply from March 2023. This regime aims to create distributed ledger technology-based market infrastructures for trading digital assets that qualify as financial instruments (MiFID financial instruments), specifically shares and bonds of SMEs and shares and units of undertakings for collective investment in transferable securities (UCITS) investment funds. The competent authority in Spain to select the projects that may be submitted to the Pilot Regime in Europe is the Spanish Securities and Exchange Commission (CNMV). According to the information available at time of writing (December 2022), there are already some applications to the CNMV to apply for the Pilot Regime. These applications are being made either through the regulatory sandbox (a regime that has been operative in Spain since 2021 and which allows new projects to be tested with real clients, but in a test environment) or through direct discussions with the supervisor. Spain's major banks, traditional stock exchanges and new players are all on the lookout for new business opportunities offered by the Pilot Regime, and 2023 will probably see some of these decentralised market projects come to fruition.

Crypto-asset projects regulated by MiCA (those that are not MiFID financial instruments and do not benefit from any other specific EU regulation) have, to date, been led by actors that can be called “native crypto” – ie, by the exchanges. These are being registered in the registry created because of the implementation of the 5th AML Directive in Spain. To date there are 19 crypto-wallets custody providers and 42 exchanges registered in Spain. None of them to date is a bank or regulated entity in Spain, although there are some licensed European players.

The reason why banks are probably waiting to jump into this business is that the prudential regime for crypto-asset exposure needs to be clarified by the Basel Committee and the European Central Bank needs to set criteria on banking and crypto-asset risks.

The final approval of MiCA, which is expected in the first quarter of 2023, will undoubtedly also provide an impetus for banks to start offering this type of asset.

Lastly, within the MiCA crypto-assets category, stable coins and e-money tokens deserve special mention. Both the Spanish Banking Association and Iberpay (the company that manages the Spanish retail payment system) are analysing alternatives for tokenised bank money in line with initiatives in other countries in and in view of the advance of a digital euro that is becoming increasingly important.

New Spanish Distribution Rules for Private Equity Products

The long-awaited reform of the distribution rules for Spanish private equity vehicles has finally taken place. Until now, Spanish private equity vehicles could be marketed to non-professional investors, provided that they (i) committed to invest at least EUR100,000, and (ii) signed a disclaimer declaring that they were aware of the risks of the product.

Under the new rules, which are in force from October 2022, the private equity products – fondos de capital riesgo (FCR) and sociedades de capital riesgo (SCR) – can be subscribed by non-professional clients investing only EUR10,000. The condition for this possibility is that the clients invest on the basis of a personalised recommendation that they have received from an intermediary that provides them with the investment advice service. If the investor’s financial assets do not exceed EUR500,000, it is required (i) that the investment is at least EUR10,000, (ii) that the investor maintains it, and (iii) that it does not represent more than 10% of those assets. Therefore, where investor’s financial assets exceed EUR 500,000, the minimum investment requirement of EUR10,000 does not even apply.

In addition, Spanish distribution rules still provide for the possibility of marketing the private equity products to non-professional investors that have not received an investment recommendation; in this case, the investor must undertake to invest at least EUR100,000, and declare in writing, in a document separate from the contract relating to the investment commitment, that they are aware of the risks associated with the intended commitment.

Considering the new rules, the private equity industry is defining new business models for the marketing of products to investors that, despite not qualifying as professionals due to that category’s extremely rigid definition in Spain, also want to invest in this asset class but with more flexible conditions. 

The new Spanish regime is inspired by the one that has already existed since 2015 for European long-term investment funds (ELTIF), which provides for the possibility of distribution to non-professional investors in similar terms. However, now the distribution rules for ELTIF have started to change, since, in the process of the amendment of the ELTIF Regulation currently followed at the level of the European Union, the European Commission and the European Council have agreed that the distribution of ELTIF to non-professional investors will require that the client invests in the ELTIF on the basis of an assessment of suitability, but without any minimum investment threshold being applicable.

It is relevant to note that the rest of the European harmonised alternative products – the European venture capital funds (EuVeCA) and the European social entrepreneurship funds (EuSEF) – cannot benefit from the new Spanish distribution regime since they have their own marketing regime, governed by the relevant EU regulations.

As a complement to the above, in accordance with the regulators’ public announcements, the minimum investment threshold applicable to non-professional investors will also change soon where this applies to their investment in Spanish alternative investment funds of an open-ended nature – fondos de inversion libre (FIL) or sociedades de inversión libre (SIL). This amendment is expected to be defined in terms very similar to the ones introduced for private equity and, therefore, to result also in a minimum investment of EUR10,000 provided that the investor is following an investment recommendation.

These modifications will bring important changes in the distribution strategies of the main players in Spain. Not only for diversification, alpha and marketing purposes, but also because of the good margins of these products, it is likely that Spanish private equity and alternative products will soon form part of the portfolio of retail investors in Spain.

Consumer Credit Contracts and PSD3: New European Initiatives That Will Bring Important Changes to the Current Landscape

The proposal to amend the Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers, currently being discussed by European Union bodies, is expected to bring relevant changes to the European and Spanish consumer credit markets.

Even if member states will have 24 months from the adoption of the Directive to implement it locally, players in this industry must start preparing for the changes that will come. To this extent, the proposal includes relevant impacts for a business that, in the last years, has become one of the main growth areas of financial institutions, regardless of whether they are consolidated banking groups or new entrants.

With respect to the Spanish consumer credit market, among the many effects of the new regulation, it must be highlighted that the new framework will have the following particular impacts.

It will result in limitations to the interest rates, annual percentage rates of charge or the total costs of the credit to the consumers. Although the specific terms of the proposal on this matter are still under discussion, the objective is to avoid consumers’ over-indebtedness. Whereas the European Commission proposes that the member states introduce explicit caps to such items, the European Council proposes that they do not introduce caps but rather measures to ensure that consumers cannot be charged with excessively high interest rates, annual percentage rates of charge on loans or total credit costs. In any case, in member states such as Spain, where caps do not exist and measures were adopted only in very general terms and many years ago – by means of the Spanish Act on the nullity of usurious loan contracts of 1908, as complemented by the case law – the institutions will need to adapt the costs that they charge for the products to the new conditions.

It will also mean that players that are not credit, payment or electronic money institutions will need to be registered with the relevant authority – most likely, the Bank of Spain – to conduct the consumer credit activity. In Spain, this will result a major impact since the development of consumer credit activities does not require holding a licence or being registered with the authority. In addition, the activity will require complying with conduct of business rules such as, among others, the remuneration paid to personnel and to third parties.

It will broaden the scope of the agreements subject to the regulations on consumer credit and, therefore, to specific rules that aim to protect consumers. As in the case above, the terms of the proposal have not yet been agreed, but it is very likely that contracts for a total amount of credit less than EUR200, as well as “buy now, pay later schemes”, among others, will fall within the scope of the new regulations. As a result, these agreements will need to comply with rules on transparency, contract terms, ex ante and ex post information and costs for the client, among many other aspects. Buy now, pay later (BNPL) has experienced a very notable increase in recent years in Spain so will be one of the market segments most impacted by the new directive.

In addition to the above, the future Revised Directive on payment services, known as PSD3, which is still in its early stage of definition, will involve additional changes for financial entities due to the interconnection between the credit and the payments markets. BNPL, for instance, is being analysed to ascertain whether it must be considered as an ancillary activity subject to the regulation on payments.