1. What is MiFID?
Directive 2004/39/EC on Markets in Financial Instruments (MiFID – Markets in Financial Instruments Directive) is a European Parliament and Council directive on investment services issued 21 April 2004. It entered into force on 1 November 2007 in the European Union and required amending the Spanish Securities Market Act.
MiFID represents the biggest change in financial market legislation in Europe and introduces a single regulatory regime for investment services on the continent.
2. Changes and objectives
MiFID defines new harmonised standards in the European legal framework that modify the bases of the financial services industry and pose a significant impact for the organisation and relationship of investment services companies (ISC) with their clients.
The main objectives are:
– To strengthen investor protections. MiFID requires compliance with a very strict set of regulations that defend the interests of clients across the EU.
It regulates the terms under which investment services can be provided (authorisations, information, KYC, etc.) and requires entities to assess the suitability and appropriateness of an investment based on the client’s profile.
– To improve transparency. MiFID establishes requirements when reporting to clients, necessitating a higher level of transparency throughout the entire business relationship.
3. What changes does it entail?
A – Categorisation of clients, given the fact that levels of investment experience, training, and information vary. As such, MiFID classifies clients as:
Eligible counterparties: basically between financial institutions; in this case, the lowest level of protection applies.
Professional clients: those with the knowledge and experience to assess risk and make investment decisions; mainly large companies, public institutions and organisations.
Retail clients: the vast majority will fall into this category; in this case, MiFID grants the highest level of protection.
B – Classification of products, given that not all have the same level of complexity or risk. The directive differentiates between:
Demand deposit passbook accounts
Fixed and variable rate deposits with guaranteed capital
Pension funds and benefit plans
Structured unit-linked deposits with guaranteed capital
MiFID products are divided into:
– Non-complex products:
Shares and other negotiable securities
Units and shares in harmonised collective investment undertakings (investment funds and SICAVs)
Bond and debentures (proprietary, public and private bond issues)
Money market instruments (treasury bills and promissory notes)
– Complex products:
Financial derivatives: swaps, interest-rate hedges, OTC options and futures, exchange insurance and warrants
Contracts for difference: CFDs
Units and shares in non-harmonised collective investment undertakings (hedge funds, funds of hedge funds), under certain circumstances
C – New policies
Best execution policy: requires ISCs to take all responsible steps to obtain the best possible result when executing a client’s order. The best result is not limited to price, but also encompasses cost, speed, and the likelihood of execution, among other factors.
Incentive policy: establishes control over payments received or issued by ISCs in the course of providing investment services, in order to prohibit those that are unnecessary or inappropriate. Only those previously communicated to the client, with details as to the nature and amount are permitted, provided they improve the quality of the service provided.
4. Retail client rights
Right to information about the nature and risk of financial instruments, order execution centres, incentives, expenses and costs associated with contracting the service provided.
Right to know the policies: processing of client orders, conflicts of interest, and the safeguarding of financial instruments (all available and accessible at any branch, as well as on this website).
Right to have the contracts and orders executed appear in the corresponding records.
Right to request a change from the “Retail” category assigned by EDM. To execute the change, EDM will follow the procedure designed for these cases. When the requirements are met, a voluntary change from “Retail” to “Professional” client invariably entails a lower level of protection.
5. Adapting the product to the client
MiFID includes two types of evaluations or tests that clients must undergo, depending on the different circumstances:
– Suitability Test
A comprehensive questionnaire to assess the client’s investment capacity, knowledge and experience, as well as risk profile, in an effort to determine the investment objectives, expected return, and time horizon. The test will apply in instances of portfolio management and always with the signing of a prior contract.
– Appropriateness Test
A questionnaire designed to assess the client’s experience and knowledge whenever EDM is asked to provide investment services related to a MiFID product. The result of the test will show the appropriateness of the product for the client and thus enhance their level of protection.