On January 3, 2018, a new MiFIDII will come into force, significantly changing the existing requirements on regulating the financial markets in the EU. We will consider in today’s blog what exactly is MiFIDII and how the regulation of the European financial markets will change.
The MiFIDII (Markets in Financial Instruments Directive) is the common name for a complex network of legislation, which includes two Directives and three EU Regulations, supported by a number of technical standards and guidelines of the European Securities and Markets Authority (ESMA). The measures provided for in the Regulations are directly applied in the EU member states. For the implementation of other standards and harmonization of the national legislation, the updated requirements are established by the competent authorities in each Member State.
The current MiFID was adopted in 2004 and it operates with small updates of the end of 2007. Thus, the MiFID not only preceded the financial crisis, but it also did not consider many business models and technologies, which today became a common phenomenon. Consequently, there was an extreme need for such an update. When developing the new provisions, the EU legislators, having taken the opportunity, expanded several existing requirements.
The MiFIDII will affect everyone who works with financial instruments, from operational and business models to the systems, data, people and processes. The most interesting for the financial advisors are the provisions that improve the quality of obtaining permits for the activities of investment companies through the introduction of large prudential requirements for the management bodies, systems and controls, as well as higher requirements for the investor protection in terms of categorizing and disclosing the information to the clients, product management and fair attitude to the consumer.
However, now many independent financial advisers (IFA) in Europe are known as the companies exempted from the MiFID regulation in accordance with the Article 3. In fact, this is the status for the companies carrying out a limited range of the activities of the MiFID, allowing them to choose, if they should be considered as “Investment company” or not.
According to the MiFIDII, the company will have to meet a number of requirements to have this status.
It is not permitted to withhold money or assets of the client and, therefore, give or borrow money of their clients;
The business of such companies should be limited to the “organization” and “consulting” only for certain types of investments – for example, they cannot make deals for their clients or provide trust management services;
In their activities, they can transfer the orders only to the regulated investment companies or credit institutions (or their equivalents of the third countries) authorized by the EU Directive on joint investments in circulating securities, to other regulated funds or listed companies in the stock market with variable capital (for example, investment trusts funds).
Any company that goes beyond these limits should be considered an “investment company”. Many companies that do not want to be limited by the transfer of their orders will be treated as “investment companies”, but they will be categorized as “exempted from the requirements of the EU Capital Adequacy Directive”. These are companies which permits are also limited to advising on investing and / or obtaining and transferring orders, without holding money or securities of the client and without providing depository services. However, such exempted companies may transfer the orders to a wider range of persons than those listed in Article 3 and may provide services in respect of derivative instruments that are non-transferable securities.
Any company providing, for example, dealing services or trust management services, will be governed by both MiFIDII and the EU Capital Requirements Directive, which will be generally higher, with a baseline depending on the specific activities of the company.
The IFA now have to evaluate their activities to check whether they are classified correctly. Any company that needs to change an activity permit (for the transition from the category of exempted companies in accordance with the Article 3 to the category of regulated MiFIDs) must apply to the national authority regulating the financial markets with an appropriate statement so that the regulator can review it and make a decision by January next year.
The MiFIDII contains a requirement that the EU member states cannot regulate in accordance with the MiFIDII activities of the companies, not regulated by the MiFID. But, unfortunately, for the companies exempted from the MiFID in accordance with the Article 3, no less burdensome rules are applied. The regulators will apply the rules, which in many cases are “at least similar” to the relevant requirements of the MiFIDII.
Among the key rules applied to all IFAs, regardless of whether there is an exemption under Article 3, are the following:
customer categorization, requirements for agreements and information disclosure;
incentives, including the accrual of a consultant;
independence and conformity;
product management (in terms of distributing the products related in compliance with the MiFIDII to financial instruments);
literacy and competence.
The rules in which the regulators can provide some discretion to the IFA, exempted from MiFID in accordance with the Article 3:
recording of telephone conversations and electronic messages;
expediency (existing rules will be applied);
systems and management rules (many of them will be used as guidelines, not rules, however, some key requirements, such as conflict of interests, will be applied as rules).
All European IFA, both exempted under the art. 3, and the regulated MiFID, need to review the changes in the rules of the national regulator and conduct an analysis of its activities to assess the segments that are most affected by these changes. By this time, the national regulators should already have a plan and timetable for making appropriate changes, including providing the companies with sufficient time to properly notify the customers and prepare client documentation in accordance with the requirements of the MiFIDII, by the time it comes into effect.
On January 3, 2018, a new MiFIDII will come into force, significantly changing the existing requirements on regulating the financial markets in the EU. We will consider in today’s blog what exactly is MiFIDII and how the regulation of the European financial markets will change.
The MiFIDII (Markets in Financial Instruments Directive) is the common name for a complex network of legislation, which includes two Directives and three EU Regulations, supported by a number of technical standards and guidelines of the European Securities and Markets Authority (ESMA). The measures provided for in the Regulations are directly applied in the EU member states. For the implementation of other standards and harmonization of the national legislation, the updated requirements are established by the competent authorities in each Member State.
The current MiFID was adopted in 2004 and it operates with small updates of the end of 2007. Thus, the MiFID not only preceded the financial crisis, but it also did not consider many business models and technologies, which today became a common phenomenon. Consequently, there was an extreme need for such an update. When developing the new provisions, the EU legislators, having taken the opportunity, expanded several existing requirements.
The MiFIDII will affect everyone who works with financial instruments, from operational and business models to the systems, data, people and processes. The most interesting for the financial advisors are the provisions that improve the quality of obtaining permits for the activities of investment companies through the introduction of large prudential requirements for the management bodies, systems and controls, as well as higher requirements for the investor protection in terms of categorizing and disclosing the information to the clients, product management and fair attitude to the consumer.
However, now many independent financial advisers (IFA) in Europe are known as the companies exempted from the MiFID regulation in accordance with the Article 3. In fact, this is the status for the companies carrying out a limited range of the activities of the MiFID, allowing them to choose, if they should be considered as “Investment company” or not.
According to the MiFIDII, the company will have to meet a number of requirements to have this status.