Uniform regulations are the only way to ensure that private investors are adequately protected. The MiFID II Directive contains such legal requirements, which are intended to guarantee cost transparency and individual recommendations, for example. In this article, you will find out what exactly MiFID II is, what its objectives are and what changes have been made.
MiFID 2 Directive Meaning
MiFID II is a EU Markets in Financial Instruments Directive. This is Directive 2014/65/EU. The abbreviation stands for "Markets in Financial Instruments Directive”. This has been in force since 2018, while its predecessor MiFID I came into force in 2007.
The directive offers the regulatory framework for securities transactions within Europe. It sets high standards in terms of investor protection. Extensive revisions have been made. The directive was introduced together with the European Markets in Financial Instruments Regulation (MiFIR). Together, they form the legal framework for regulated markets, data reporting services and investment firms.
Objectives of MiFID II
The fundamental aim of MiFID II is to Creation of a transparent, secure financial market system through new requirements for investment service providers. The directive focuses on Market structures, investor protection, transparency and reporting obligations. This will regulate markets more strongly and curb price speculation. Important goals are:
- Market data should be of higher quality and more readily available.
- Improved transparency is to be achieved with the help of extensions.
- The financial market infrastructure is to become more stable. In addition, integrity is to be further improved. The measures introduced will make the financial markets more efficient and more resilient.
- Another aim is to revise the microstructure of the markets.
MiFID II legal text: examples of changes that have occurred
One important change concerns Costs incurred on conclusion of the transaction. Investment service providers are obliged to provide their clients with all information on the costs and ancillary costs incurred before concluding a transaction.
This is intended to achieve complete cost transparency. As costs are not always precisely known at this stage, it is permissible to make estimates based on values from previous years.
Another regulation relates to the Recording of telephone conversations. All telephone conversations relating to a securities order must be recorded. This also applies if the call does not lead to the conclusion of an order. Further requirements regulate the storage media used and the retention period.
New regulations in the area of Product Governance require investment service providers to set up product monitoring procedures. This involves manufacturers determining the target market for each financial instrument. The target market describes the typical customer.
This is intended to ensure that financial instruments are only offered to customer groups if they meet their needs. The following aspects are taken into account for the target market categories:
- Risk tolerance
- Goals
- Bedürfnisse
- Knowledge and experience
- Financial situation with a focus on loss-bearing capacity
In addition, the directive contains the so-called Declaration of suitability regulated. This is a document that must be handed over to the customer by the advisor before the contract is concluded as part of securities advice.
The document records how the individual recommendation was made to the customer and the extent to which it suits the customer. The customer's knowledge, experience, goals and financial circumstances are taken into account. This is a kind of Safety mechanism, which is intended to prevent unsuitable products being recommended to customers.
Conclusion: MiFID 2
To summarize, MiFID II is a EU Financial Markets Directive, that the regulatory framework for securities transactions within the EU. As the successor to the MiFID I directive, extensive revisions were made to achieve greater investor protection.
The Overriding goal is to Financial market system safer and more transparent to make. Investor protection, reporting obligations and changes to market structures play a key role here. Market data should be more easily available and the financial market infrastructure should become more stable.
Specific changes are aimed, for example, at Obligation to record telephone calls for advice on the purchase of securities. In addition Costs incurred must be disclosed to the customer in a binding and transparent manner before the transaction is concluded.
A so-called Declaration of suitability is issued by the advisor to the client and is intended to provide comprehensive information on why certain financial products are recommended to the client. Advisors take into account the client's knowledge, experience, objectives and financial status. New requirements in the area of product governance oblige companies in the securities trading sector to Product monitoring procedures.