Interest on Client Funds under MiFID II: What ESMA Q&A 2785 Means in Practice

On 21 September 2026, ESMA published an answer from the European Commission to a short question with large consequences. In the Commission's interpretation of the existing obligation in Article 16(9) of MiFID II, investment firms may not retain interest accrued on client funds held with a credit institution. For many firms, that interest has quietly sat in the profit and loss account for years. It now has to go elsewhere, and working out where, client by client, is the real challenge.

This article walks through the Q&A, what status it carries, what the rest of the safeguarding framework already requires, and why calculating the interest for a single client in a pooled account is far harder than the answer itself.

1. The question and the answer

The question, published as ESMA_QA_2785 on 23 February 2026, asked whether MiFID II permits investment firms to earn interest on client funds deposited in a savings account at a credit institution.

Because the question required an interpretation of EU law, ESMA forwarded it to the European Commission. The answer, published on 21 September 2026, begins with "No" and then sets out its reasoning.

The Commission grounds its answer in Article 16(9) of MiFID II. A firm holding client funds must make adequate arrangements to safeguard clients' rights and prevent the use of client funds for its own account. In the Commission's reading, that obligation includes the obligation not to retain any interest accrued on those funds while they are deposited with a credit institution.

What the answer covers: interest accrued on client funds deposited in an account with a credit institution. It does not address how that interest should be allocated, calculated, credited or reported to individual clients.

2. What status the answer has

ESMA's own explanation of its Q&A process is worth reading alongside the answer. Questions that require the interpretation of EU law are passed to the Commission. Published answers are non-binding for market participants, and only the Court of Justice of the European Union can give a definitive interpretation of EU law.

That is the formal legal position. Its practical supervisory significance is a separate matter. In Circular C801 of 29 September 2026, CySEC informed Cyprus Investment Firms of the answer and stated that it expects them to review without delay their arrangements relating to interest generated on client funds held with credit institutions. Firms elsewhere in the EU should expect their own supervisors to read the answer the same way.

3. What the safeguarding framework already requires

The Q&A does not sit in isolation. Commission Delegated Directive (EU) 2017/593 already sets out how client funds must be held and recorded. Several provisions bear directly on the interest question.

Article 2(1)(a) requires firms to keep records and accounts that allow them, at any time and without delay, to distinguish assets held for one client from assets held for any other client and from their own assets.

Article 2(1)(b) requires those records to be accurate, to correspond to the funds actually held for clients, and to be usable as an audit trail.

Article 2(1)(c) requires regular reconciliations between the firm's internal records and those of the third parties holding the assets, including the banks where client money sits.

Article 2(5)(a) requires firms to make readily available internal records that identify the balance of funds held for each client.

Article 4 sets out where client funds may be placed: a central bank, a credit institution, a bank authorised in a third country or a qualifying money market fund. Placement in a qualifying money market fund requires the client's explicit consent. The Q&A speaks only to funds held with a credit institution.

Article 7 requires a single officer of sufficient skill and authority with specific responsibility for the safeguarding of client assets.

Article 8 requires the firm to ensure that its external auditors report at least annually to the competent authority on the adequacy of the firm's arrangements under Article 16(8),(9) and (10) of MiFID II.

Practitioner interpretation: read together, these provisions mean a compliant firm should already know each client's cash balance on any given day. The new task is to convert that balance history into an interest figure per client that ties back to what the bank actually paid. That link is my reading of the framework. Neither the Q&A nor the Delegated Directive spells it out.

4. One ordinary client

To see why this is harder than it sounds, follow one retail client through an entirely unremarkable few months.

Five events in roughly four months. Nothing about this client is unusual, and every one of those events changes the balance on which interest accrues. Each change has a booking date and a value date, and they do not always coincide.

5. From one client to the pooled account

That client does not have an account of his own at the bank. His €1,000 sits in a pooled client account alongside the money of thousands of other clients, with a total balance in the millions and thousands of inflows and outflows every day.

The bank sees one balance and pays one interest amount. Everything below that line is the firm's problem. Based on how client money accounts typically operate, the firm will have to deal with at least the following.

Rate changes. The rate applied by the bank can move during a period, so a daily balance has to be matched to the rate in force on that day.

Multiple banks and accounts. Firms that diversify client money across several institutions, as Article 4(2) expects them to consider, receive different rates on different accounts. Each client's cash has to be traced to the account where it actually sat.

Value dates. Deposits, withdrawals and trade settlements do not all start or stop earning interest on the day they are booked.

Bank charges. Where a bank nets its fees against the interest it pays, the firm needs a basis for deciding whether clients receive gross or net interest.

Funds outside the bank. Cash passed to brokers or liquidity providers to support open positions may not sit with a credit institution at all, which raises the question of whether the Q&A reaches it.

Closed and dormant accounts. Clients who leave mid period still accrue interest for the days their money was held.

Reconciliation. The sum allocated to every client has to equal what the bank paid, and the difference has to be explained.

The question every operations team now faces: how much time is needed to calculate the interest actually earned by one client whose money sat in a pooled account of millions, moving every day? Multiply that by the full client base and the answer is a standing process, not a one-off exercise.

6. Questions firms will need to answer

The Q&A says what a firm may not do. It leaves the firm to decide how to comply. Before revising their arrangements, firms will need clear answers to questions such as these.

Methodology. Will interest be allocated on daily balances, average balances or another basis, and how will the choice be justified as fair to clients?

Frequency. Will interest be credited monthly, quarterly or annually, and how will it appear on client statements?

Thresholds. Is there a level below which allocation is impractical, and if so, what happens to those amounts? Any answer that results in the firm keeping them sits uneasily with the Q&A.

Documentation. Terms of business, client asset policies and safeguarding procedures will need to reflect the new approach.

Accounting. Interest on client funds will need to come out of the firm's own revenue lines and be tracked as owed to clients until it is paid over.

Assurance. Article 7 requires a single officer with specific responsibility for the firm's compliance with its safeguarding obligations. In my view, the treatment and allocation of interest on client funds falls within that compliance oversight, and within the scope of the external auditor's annual report under Article 8 on the adequacy of safeguarding arrangements.

7. The cost, and the fee question

None of this is free. It needs people, systems, reconciliations and a methodology that will stand up to audit. For the largest firms there is a second effect: interest that used to support the profit and loss account does not, on the Commission's reading, belong on it.

Which leads to an obvious commercial question. Where I am based, banks already charge firms for the periodic KYC review of their own accounts. Firms pay the bank to carry out the bank's own obligations.

Will investment firms respond by charging clients for calculating and crediting the interest that, on the Commission's reading, they may not retain? Could that become a fair and commonly accepted term? Any such fee would need to be disclosed under the MiFID II costs and charges rules and justified as fair to clients. A fee that happens to approximate the interest itself would invite an obvious question from any supervisor.

There is only one way to find out. Wait and see.

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Sources

This article is for general information only and does not constitute legal or regulatory advice. Firms should take advice on their own arrangements.