August 17, 2017

The Markets in Financial Instruments Directive (“MiFID”) consists of a framework of EU legislation that regulates financial institutions. Banks, brokers and asset managers who provide investment services to clients linked to financial instruments such as shares, bonds, units in collective investment schemes, derivatives and the venues where those instruments are traded will be effected.

With hundreds of pages of legislation, it is confusing for senior management of financial institutions involved to comply before the deadline of MiFID II in January 2018 and to analyse the far-reaching consequences for their business-models and client relationships. Financial firms are making enormous investments, building data-reporting systems to deal with MiFID II. In 2016 the start date was delayed because technical standards and IT systems weren’t ready.

What are the reasons for implementing MiFID II?

MiFID was originally applied in the EU in 2007 but is now ten years later being revised to increase the efficiency, competition and trading transparency of the European financial markets because of the 2008 financial crisis. The legislator wants to restore trust, root out conflict of interest and to strengthen the protection for the investor.

What is very confusing is that a part of the new legislation is already directly applicable through regulations in the EU member states (“MiFIR”). No national law conversion is required. The other part of legislation will be revised through EU directives that requires conversion into national law. The new MiFIR and revised MiFID together are called MiFID II. MiFIR regulation is mainly focused on function of the European capital markets. The MiFID directives main objective is to enhance protection for the investor.

Broadly speaking, and without being comprehensive, the coming MiFID reforms can be divided in the following four main themes and subjects:

1.             Capital Markets & Transparency

Requires firms to post trades and prices for a broad range of securities, opens trading platforms. Main purpose is standardising of the marketplace.

The main topics are:

  • Pre-post trade transparency rules;
  • Data reporting;
  • New rules covering automated trading like High Frequency Traders;
  • New rules covering (new) trading platforms and (non) equity instruments like Commodities.

2.             Corporate Governance & Control

To avoid conflict of interests and to stimulate fairness and competition in the marketplace.  The rules covering data storage and recording of telephone calls with clients are designed to give regulators the proper information when something goes wrong.

Main topics:

  • Risk & compliance;
  • Conflict of interest;
  • Organisational obligations;
  • Telephone records;
  • Bonus-policy.

3.            Product Governance

Banks and asset managers must define target markets for investment products and monitor the distribution of investment products.

4.             Investor Protection

An expansion of the protection of the non-professional investor. A better, in depth understanding and analysis of the needs and objectives of the non-professional clients is required. It also bans inducements and puts your client’s best interests first.

Main topics:

  • Independent investment advice;
  • Suitability & appropriateness tests;
  • Transparency of costs;
  • Reporting requirements to clients;
  • Minimum level knowledge & experience of staff;
  • Inducement ban.

In our upcoming i-KYC Trend Letter, we will focus first on the theme of investor protection. A practical and effective on-boarding process of your clients in accordance with the legal requirements is a first step. The next step is to give your client the correct investor protection in accordance with MiFID II and safeguard your company from regulatory and reputational risk.

Pieter Hoogeveen, August 2017