On 24 March 2015, the European Securities and Markets Authority (ESMA) published a Consultation Paper setting out draft guidelines on complex debt instruments and structured deposits.

Background -

The Consultation Paper is focussed on a relatively narrow (but important) aspect of the MiFID II2 legislation, namely the “execution-only exemption”. This is already part of the existing MiFID regime and relates to the level of diligence that firms are required to carry out on their clients before providing financial services to such clients. For investment advisory and portfolio management services, a full “suitability” assessment is required under which the firm must obtain sufficient information regarding the client’s knowledge and experience, financial situation and investment objectives. For other financial services, including execution-only services, a less stringent “appropriateness” assessment is permitted, which is limited to considering the client’s relevant knowledge and experience to enable the firm to assess whether the service or product is appropriate for the client. However, where an execution-only service relates to non-complex financial instruments specified in Article 19(6) of MiFID and certain other conditions apply, the investment firm can provide the service to the client without having to carry out the appropriateness assessment. The Article 19(6) list of instruments includes bonds and similar debt instruments admitted to trading on a regulated market or equivalent third country market but specifically excludes any such bond or other instrument that embeds a derivative.