The European Union has some undeniably important goals on its agenda, like ensuring peace and freedom, maintaining a high standard of living, and achieving sustainable economic growth in Europe. As part of this last objective, the EU developed MiFID, which stands for the Markets in Financial Instruments Directive. Simply put, it is a Directive that aims to create a regulated market in investment services all over Europe, guaranteeing full protection for investors and their assets.
So what are MiFID II and MiFIR then?
MiFID came into effect in 2007. It was the first regulation on such a scale, and it certainly could not cover all aspects of the investment sphere right from the very beginning. What is more, since 2007, the market has, of course, expanded, and new financial technologies have appeared. To keep up with the times, the EU released a new regulation under the name of MiFID II, which came into effect in 2018. Currently, this Directive, taken together with MiFIR (Markets in Financial Instruments Regulation), covers gaps in the previous MiFID and makes the legislation even more integrated. In lay terms, MiFIR complements MiFID II and mostly focuses on business requirements like trade reporting and transaction reporting.
And who does MiFID II affect?
MiFID II affects all businesses that provide investment services, including banks and non-banks. It covers all types of financial services, whether they provide advice, asset management, or brokers. In short, all organizations that frequently and systematically perform operations within the financial markets are subject to MiFID II. It is vital to understand that this Directive does not directly regulate private investors; it is about firms dealing on behalf of these individuals. Though the Directive sets out a remarkable number of rules to comply with, it is not opposed to the practices of investment firms. Actually, it helps them to ensure they provide the most transparent and useful service for their clients while encouraging the improvement of infrastructure.
And most importantly, how do you comply?
There are two vital points for MiFID.
Not surprisingly, we have already mentioned this word in our article: MiFID II (MiFIR to be exact) talks about transparency a lot. Businesses must ensure transparency in everything — in how they deal with clients and what they offer them, how they create a client database, and what transactions they make and how they report them.
- Data Recording, data storing, and data protection
In MiFID II, a lot of emphasis is placed on data recording, data security, and the management of sensitive data. For instance, if you talk over the phone with your client and discuss any sort of financial advice, the call must be recorded. This includes making transactions or even just recommending a service. Data must be protected in accordance with the GDPR (General Data Protection Regulation), and its quality, availability, and, once again, transparency, must be put at the top of the list. Unfortunately, herein lies another challenge — investment firms have to update the technology they use to be able to record, store, and properly protect the data.
In summary, to comply with MiFID II, investment firms have to reconsider how they deal with their clients. They are obliged to provide services of the utmost clarity and transparency and issue reports containing necessary investor-oriented information. Investment firms also have to make sure that they record and store any client data in a correct and legitimate way. These regulations have already proven quite effective. The cost of financial services throughout the EU has decreased, which has made the European market especially appealing for investors.