MiFID II - Inducements

The MiFID II will significantly overhaul the existing requirements regulating financial markets. This briefing is part of a series of briefings on the MiFID II framework which we hope will help firms to prepare for its coming into force. It considers one of the most discussed areas of MiFID II, namely the rules governing inducements.


The MiFID II Directive 2014/65 deals with the payment to, and/or receipt from, a third party of inducements in relation to the provision of services to clients of investment firms.  In doing so, it distinguishes between the rules that apply to investment services generally, and those that apply specifically in the context of portfolio management and investment advice. Generally, MiFID II permits investment firms to accept inducements in circumstances where certain requirements are satisfied. However, it prohibits inducements paid to, and/or received by, an investment firm carrying out portfolio management or providing investment advice: such firms are only permitted to pay or receive minor non-monetary benefits (“MNBs”) that fulfil certain requirements.

Commission Delegated Directive 2017/593 (the “Delegated Directive”) contains more detailed rules on inducements, including specific requirements governing inducements in relation to research. The European Securities and Markets Authority (ESMA) also deals with inducements in its Q&A on MiFID II and MiFIR Investor Protection Topics.


According to Article 24(9) of MiFID II, an investment firm is only permitted to pay, or be paid, an inducement (namely, a fee, commission or non-monetary benefit) in connection with the provision of an investment service or ancillary service where the relevant payment:

  • is designed to enhance the quality of the relevant service to a client of the investment firm; and
  • does not impair compliance with the investment firm’s duty to act honestly, fairly and professionally in accordance with the best interests of its clients;

In addition, the investment firm must clearly disclose to the client, the existence, nature and amount of the inducement or, where the amount cannot be ascertained, its method of calculation. This disclosure must be made in a manner that is comprehensive, accurate and understandable to the client and must be made prior to the provision of the relevant investment/ancillary service. Where applicable, the investment firm must inform the client on mechanisms for transferring to the client an inducement received in relation to the provision of an investment/ancillary service.

Payments or benefits received or provided by an investment firm which enable or are necessary for the provision of investment services and which are inherently incapable of giving rise to conflicts with the investment firm's duties to act honestly, fairly and professionally in accordance with its clients' best interests are not considered to be inducements. This includes, for example, custody costs, settlement and exchange fees, regulatory levies or legal fees. 

According to the Delegated Directive, an inducement should not be accepted if it results in the provision of the relevant services to the client being biased or distorted.

The Delegated Directive also provides further information as to when an inducement will be designed to enhance the quality of the relevant service to the client. Specifically, such an inducement must meet three conditions on an ongoing basis, namely, it must:

  • be justified by the provision of an additional or higher level service to the relevant client, which is proportionate to the level of inducements received – the Delegated Directive provides examples of such services;
  • not directly benefit the recipient firm, its shareholder or employees without tangible benefit to the relevant client; and
  • be justified by the provision of an on-going benefit to the relevant client in relation to an on-going inducement.

An investment firm must hold evidence that any inducement that it pays or receives is designed to enhance the quality of the relevant service to the client.

Regarding disclosure, MNBs may be described in a generic way while other non-monetary benefits must be priced and disclosed separately. Where an investment firm discloses the method of calculating the amount of a payment or benefit in advance of providing the relevant service in its prior disclosure, then it must disclose the exact amount of the payment or benefit on an ex post facto basis. 

An investment firm must inform its clients on an individual basis about the actual amount of payments or benefits received or paid 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.  

Independent advice and portfolio management

MiFID II prohibits an EU investment firm which carries out portfolio management or provides investment advice from accepting and retaining third party inducements (fees, commissions or monetary and non-monetary benefits) in relation to the provision of services to clients. However, such an investment firm may accept MNBs that are:

  • capable of enhancing the quality of service provided to a client; and
  • of a scale and nature such that they could not be judged to impair compliance with the investment firm’s duty to act in the best interests of the client.

In addition, the investment firm must clearly disclose the relevant MNB.

The Delegated Regulation sets out in more detail the benefits that qualify as acceptable MNBs as well as further details on returning inducements to clients and disclosure.

Minor non-monetary benefits

According to the Delegated Directive, the following benefits qualify as acceptable MNBs:

  • information or documentation relating to a financial instrument or an investment service which is either generic in nature or personalised to reflect the circumstances of an individual client;
  • written material from a third party that is commissioned or paid for by a corporate issuer (or potential issuer) to promote a new issuance by the company, or contractually engaged and paid by the issuer to produce such material on an on-going basis, provided the relationship is clearly disclosed in the material and that the material is simultaneously made available to any investment firm wishing to receive it or to the general public;
  • participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service;
  • hospitality of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or the training events mentioned above; and
  • certain other MNBs which a member state deems capable of enhancing the quality of service provided to a client and are of a scale and nature that is unlikely to impair compliance with an investment firm's duty to act in the client's best interests.

An MNB, in order to be acceptable, must be reasonable and proportionate and of such a scale that it is unlikely to influence the investment firm’s behaviour in any way that is detrimental to the relevant client's interests.  In addition an MNB must be disclosed prior to the provision of the relevant investment service or ancillary service.

The Delegated Directive imposes additional requirements on an investment firm in relation to the transfer of a third party inducement paid in respect of the provision of independent advice or portfolio management to a client. 

Research Inducements

According to the Delegated Directive, research provided by a third party to an investment firm may be considered as an inducement under MiFID II.

Research will not be an inducement if the firm either directly pays for it out of its own resources, or from a separate research payment account (“RPA”), which is controlled by the investment firm and which meets a number of conditions.  In particular, if an RPA is being used, the RPA must be funded by a specific research charge to the client.  In addition, as part of establishing an RPA, the investment firm must set up and regularly assess a research budget and then agree with the client:

  • the research charge as budgeted; and
  • the frequency with which the specific research charge will be deducted from the clients’ resources over the year.

The investment firm must regularly assess the quality of the research purchased based on robust quality criteria and its ability to contribute to better investment decisions. In order to do so, the investment firm must establish all necessary elements in a written policy and provide the policy to its clients.

When an investment firm makes use of the RPA it must provide its clients with certain information both before the provision of the investment service and annually. Moreover, where the competent authority or a client so requests, the investment firm must provide specified information, including a summary of the providers paid from the RPA, the total amount paid over a defined period and the benefits and services received by the investment firm.

Significantly, the Delegated Directive suggests that an investment firm which funds research through an RPA may collect the research charge alongside a transaction commission, provided that the separate costs of the two are clearly distinguished and the payment is not linked to the value/volume of transactions.  

Next Steps

MiFID II firms will need to review their current policies and procedures regarding third party payments in order to ensure that they comply with the MiFID II requirements.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.