The Markets in Financial Instruments Directive (MiFID) is a European directive for the regulation of investment services and regulated markets. The revision of the MiFID Directive and the introduction of the European Markets in Financial Instruments Regulation (MiFIR), together with a large package of lower-level regulations, are referred to as MiFID II. MiFID II aims to make European financial markets more transparent and better protect investors. All financial institutions must follow MiFID II if they want to offer investment products. MiFID II has been applicable in the Netherlands since January 3, 2018.
What is MiFID II?
In November 2007, MiFID came into force in all European Union member states. MiFID replaced the Investment Services Directive (ISD) from 1993. In the Netherlands, the Markets in Financial Instruments Directive (MiFID) has largely been implemented in the Financial Supervision Act (Wft) and its implementing regulations, such as the Bgfo. Because an evaluation conducted in 2010 revealed a number of shortcomings, including in the area of transparency and because of technological developments, the directive was revised and replaced by MiFID II. The principles of MiFID I have been retained under MiFID II, but they have been further strengthened in a number of areas.
Investor protection has increased due to the tightened and new regulations. For example, investment firms must provide more information about the cost of an investment service and the independence of their advice.
What is the aim of the MiFID II directive?
MiFID II ensures that financial markets function better by making them more efficient, stable and transparent. Investor protection is at the heart of MiFID II. One of the requirements within this regulation is that financial institutions must comprehensively document their services and make this information available to their clients. Since the introduction of MiFID II, every investment product must be reviewed, approved and attributed to a particular market before it can be rolled out in the market.
What is the scope of MiFID II?
Markets in Financial Instruments Directive II regulates trading in financial instruments. The directive and regulation include rules for providing investment services and performing investment activities. There are also rules for operating trading venues, such as stock exchanges. The revised rules cover virtually all aspects of trading in financial instruments within the European Union and apply to all parties engaged in investment services and activities, from banks and asset managers to exchanges and trading venues.
How is MiFID II structured?
MiFID 2 has a layered structure. The main rules are contained in the MiFID 2 directive and the MiFIR regulation, known as the level 1 regulation. The regulation has direct effect in all member states of the European Union, while the directive must be implemented by each member state in national legislation.
A large part of the topics are further elaborated in the so-called delegated acts, the “level 2 regulations”. This involves another approximately 50 regulations and one delegated directive. In addition, the European Securities Markets Authority ESMA has issued several guidelines and various Q&As, the “level 3 regulations”. The whole package of regulations makes it very complex to have a complete and correct picture of the applicable rules and thus to comply with the set requirements.
What are the key focus areas of MiFID II?
MiFID II directive contains important concerns regarding the transparency of capital markets and investor protection. For example, there are rules regarding cost transparency, investment advice and professional competence of staff with client contact. Also, the best execution obligation under MiFID II has been expanded and tightened. In terms of market structure and transparency of financial markets, MiFID II has expanded the licensing requirements for proprietary traders and introduces a new trading platform, the Organised Trading Facility (OTF). It also expands transaction reporting to regulators and requires every legal entity customer to have a Legal Entity Identifier (LEI) when transactions are executed on the exchange for or by the customer.
Who supervises compliance with MiFID II?
In the Netherlands, the Dutch Authority for the Financial Markets (AFM) supervises compliance with MiFID 2. According to the regulator, the regulations are “comprehensive and complex”. In its supervision, the AFM pays particular attention to protecting investors and implementing safeguards for the proper functioning of capital markets. With regard to investor protection, cost transparency and product development are key areas of MiFID II supervision. In the area of capital markets, the regulator is looking in particular at market transparency, transaction reporting and regulation of orderly market structure.
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