Trailer Fees & MiFID II: The Luxembourg Private Banking Rules

Article 37-3(3d) of the Luxembourg law of 5 April 1993 on the financial sector, as amended (the “LFS”), governs trailer fees in Luxembourg private banking.

In this context, a trailer fee falls within the MiFID II inducements framework. It may consist of a fee, commission or other monetary or non-monetary benefit paid or provided by a third party, or by a person acting on behalf of a third party, to a credit institution or investment firm in connection with an investment service or ancillary service provided to a client.

The framework derives in particular from Article 24(9) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”), Article 37-3(3d) of the LFS, and Articles 11 and 12 of Commission Delegated Directive (EU) 2017/593 of 7 April 2016.

A trailer fee may be retained only if two conditions are met. It must be designed to enhance the quality of the service provided to the client. It must not impair compliance with the duty to act honestly, fairly and professionally in accordance with the client’s best interests. Prior disclosure of its existence, nature, amount or calculation method is then required.

Trailer fees under the LFS: admissibility, transparency and client-interest protection

Service classification determines the rules applicable to fees and benefits received. For certain services, such as independent investment advice or portfolio management, the bank may not accept and retain monetary fees or other monetary benefits paid by third parties, for example by an investment fund management company. Those monetary benefits must be transferred in full to the client.

This rule reduces conflicts of interest and protects the client’s interest. For independent investment advice, it results from Article 37-3(3b) of the LFS. For portfolio management, it results from Article 37-3(3c) of the LFS.

Certain minor non-monetary benefits, such as information documents or technical training on the features and risks of financial products, remain permitted where they meet the applicable conditions. They must be capable of enhancing the quality of the service provided to the client and must not impair compliance with the duty to act in the client’s best interests.

Prior disclosure is mandatory. The bank must inform the client, before providing the relevant service, of the existence of the trailer fee, its nature, and its amount or calculation method.

Annual reporting applies to ongoing trailer fees. Article 11(5)(c) of Commission Delegated Directive (EU) 2017/593 requires annual disclosure, on an individual basis, of the actual amount of payments or benefits received or paid.

Article 37-3(3d) of the LFS provides the legal anchor for the relevant documents and disclosures in this area. Service classification, admissibility, prior disclosure and annual reporting must remain consistent.

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References:

• Law of 5 April 1993 on the financial sector, as amended, Article 37-3 (https://www.cssf.lu/wp-content/uploads/L_050493_lfs.pdf)
• Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, Article 24(9) (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A02014L0065-20250117)
• Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Articles 11 and 12 (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A02017L0593-20221122)