MiFID II And VAT: What To Expect

In April 2014, the final text of the revised Markets in Financial Instruments Directive (MiFID II) was adopted. Almost four years later—including a one-year delay—the text should come into effect on 3 January 2018.

The aim of the first MiFID, applicable since 2007, was to establish a harmonised regulatory framework for the provision of investment services by banks and investment firms as well as for the operation of regulated markets. Even though the initial MiFID is widely recognised as achieving closer integration of the financial markets in the European Union, shortfalls in investor protection (including prevention of conflicts of interest) and market transparency remain.

According to the European Commission, MiFID II aims to address these limitations by (i) making financial markets in the European Union more robust and transparent and (ii) creating a new legal framework that both better regulates trading activities on financial markets and enhances investor protection.

My colleague Jan has already blogged about the consequences of MiFID II from a regulatory point of view.

Regulatory issues are an important aspect of MiFID II, but there will also be other, less obvious consequences, like the VAT impact on banks and investment firms, or the VAT burden borne directly or indirectly by investors. Having heard the takes of several Europe-established VAT advisers who have already felt MiFID II's effects, I'd like to explore the VAT consequences of the ban on inducements and the related unbundling of research and brokerage costs.

Ban on inducements

In order to improve transparency and investor protection, MiFID II will prevent portfolio managers and independent investment advisers from receiving third-party inducements. Such inducements often consisted in commissions (or non-monetary benefits) retroceded by various parties (often banks or fund managers) to investment professionals as a consequence of their clients' investments. MiFID II will also limit and frame the payment of inducements to other professionals (such as non-independent advisers or agents) by requiring that these amounts be paid in the best interest of the client and that they be linked to an enhancement in the quality of the service provided to the investors.

A possible consequence of this could be a decrease in the number of investment firms and intermediaries, which may not be MiFID II's intended purpose. Looking past that, however, will portfolio managers and independent...