Insights

On the 28 October 2021, the Court of Justice of the European Union (“CJEU”), in delivering a ruling in the case of Varchev Finans’ EOOD v. Komisia za finansov nadzor, clarified that the relevant provisions of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 (“MiFID CDR”) supplementing Directive 2014/65/EU (“MiFID II”), which deal with the record-keeping obligations of investment firms subject to the requirements of MiFID II, must be interpreted as meaning that investment firms are not required to record the suitability and appropriateness assessments undertaken in respect of clients, and the information provided to clients on the costs and charges associated with the investment services provided to clients, in a particular format (e.g., in the form of a database). The CJEU concluded that an investment firm is free to choose the manner in which it is to keep such records on file, provided that the firm meets all the requirements emanating from Article 72(1) of the MiFID CDR.

Background

Varchev Finans (“Varchev”) is an investment firm authorised by the financial services regulator in Bulgaria (“KFN”) to provide investment services to clients in terms of the Bulgarian law transposing the relevant provisions of MiFID II (“Bulgarian Law”).

In August 2018, the KFN conducted a compliance inspection in respect of Varchev. As part of the inspection, Varchev had been requested to grant KFN access to all records maintained on file in respect of its clients pursuant to the relevant provisions of the MiFID CDR.

In terms of the MiFID CDR (which, for the avoidance of doubt, is directly applicable in the Member States of the European Union), investment firms are subject to the following obligations, amongst others:

• to maintain the records referred to in Annex I to the MiFID CDR, including, without limitation, of the appropriateness assessments undertaken in respect of clients, and of information about costs and associated charges relating to the investment services and products made available to clients; and
• to retain such records in a medium that allows for the storage of information in a way accessible for future reference by the relevant national competent authority, and in such form and manner that the following conditions are met (i) the national competent authority is able to access such records readily, and to reconstitute each key stage of the processing of each transaction, (ii) it is possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained, (iii) it is not possible for the records to be otherwise manipulated or altered, (iv) the firm utilises information technology systems (or equivalent) when the analysis of the data cannot be easily carried out due to the volume and the nature of the data, and (v) the firm’s arrangements comply with the record-keeping requirements irrespective of the technology used.

During the compliance inspection, the KFN found that Varchev had failed to maintain a specific register recording (i) information on the appropriateness assessments undertaken in respect of clients in the provision of investment services, and (ii) information provided to clients on the costs and associated charges relating to the investment services and products made available to its clients. As a result of the inspection, in May 2019, the KFN issued two penalties on Varchev for infringing the relevant provisions of the MiFID CDR.

Judicial Proceedings before the Bulgarian National Courts

Varchev subsequently brought an action before the District Court of Varna, Bulgaria (“District Court”), challenging the KFN’s decision. The District Court dismissed Varchev’s action and confirmed that by having failed to maintain specific registers containing the information referred to in the MiFID CDR (as noted above), Varchev had in fact breached its record-keeping obligations under the MiFID CDR.

Varchev also lodged an appeal from the District Court’s decision before the Administrative Court of Varna, Bulgaria (“Appellate Court”), claiming that the KFN had interpreted and applied the relevant provisions of the MiFID CDR incorrectly. In particular, it noted that the German, English and French texts of the MiFID CDR do not require investment firms to maintain ‘registers’ containing such information in the formal sense, but only to keep ‘records’ thereof. Varchev therefore claimed that since it retained such records, which records were provided to, and reviewed by, the KFN in the course of the compliance inspection, it had not breached the relevant provisions of the MiFID CDR.

In its reply, the KFN argued that the Bulgarian version of the MiFID CDR imposes a mandatory requirement on investment firms such as Varchev to maintain formal registers containing such information, as opposed to records in a general sense.

In view of the above, the Appellate Court referred the matter to the CJEU for a preliminary ruling. In summary, the Appellate Court requested the CJEU to confirm whether the relevant provisions of the MiFID CDR should be interpreted as imposing a requirement on investment firms (i) on the one hand, to record the information maintained on file pursuant to the MiFID CDR in each separate client file, or (ii) on the other hand, to systematically record such information in a centralised register designed for such purpose.

The CJEU’s Considerations

The CJEU started by noting that while the Bulgarian version of the MiFID CDR refers to an obligation for investment firms to maintain formal registers containing the information referred to in the MiFID CDR, it is evident that inconsistencies exist between the various language versions of the MiFID CDR. Indeed, whereas certain language versions refer to a ‘register’ (such as the Bulgarian, Spanish and Italian versions), other language versions refer to the requirement to maintain ‘records’ of such information (such as the English, French and German versions).

In this regard, the CJEU recalled that, according to settled case-law, the wording used in one language version of a provision of EU law cannot serve as the sole basis for the interpretation of that provision or be made to override the other language versions. The provisions of EU law must be interpreted and applied uniformly in the light of the versions existing in all the languages of the European Union and, in the case of divergence between those versions, the provision in question must be interpreted by reference to the purpose and general scheme of the rules of which it forms part.

The CJEU then proceeded to assess the general scheme and purpose of the provisions of the MiFID CDR dealing with record-keeping requirements and found that the MiFID CDR only imposes generic and light requirements on the form and manner in which that information is to be stored, which include, inter alia, the requirement that the information should be easily accessible to national competent authorities. In addition, it noted that the relevant provisions of MiFID II imposing record-keeping obligations on investment firms likewise do not prescribe the technical form in which records must be retained by investment firms.

Following its analysis of the rationale behind the provisions of the MiFID CDR under consideration, the CJEU clarified that those language versions of the MiFID CDR which specifically refer to ‘registers’ cannot be interpreted in such a way as to require investment firms to store the records referred to in the MiFID CDR in a specific format (such as, in the form of a centralised database).

The CJEU’s Ruling

In light of the above considerations, the CJEU ruled that the provisions of the MiFID CDR under consideration must be interpreted as meaning that investment firms are not required to record the suitability and appropriateness assessments undertaken for each client with respect to investment products and services. The CJEU also ruled that the information provided to each client on the costs and charges relating to the investment services, in the form of a specific or centralised database, and the manner in which those records are kept may be freely chosen by the firm, provided, however, that the firm meets the requirements laid down in the MiFID CDR.

This article was first published in The Malta Independent.