MiFID is short for Markets in Financial Instruments Directive, which took effect on November 1, 2007. It is an EU directive that lays down rules for trading in and advisory services related to financial instruments and foreign exchange products.
The overall objective of the new rules is to create a well-functioning and competitive market that promotes trading in financial instruments across borders in the EU and ensures strong investor protection.
Basic changes to customer services
The rules change the requirements for services to customers and apply to investment advice, order execution and portfolio management. For financial institutions that trade in and provide advice about financial instruments, the changes concern two areas in particular:
- organisation
- investor protection
Organisational requirements
Organisational requirements apply to the following:
- the compliance function, risk management, internal audit, management reporting and training
- management of conflicts of interest
- outsourcing
Compliance and related functions
Financial institutions must have the following three organisational functions: compliance, risk management and internal audit. In addition, they must have management reporting procedures and ensure employee training. The implementation of MiFID makes the compliance function mandatory.
Management of conflicts of interest
It is a requirement that financial institutions prepare a policy on conflicts of interest. In addition to this policy, they must have procedures to prevent, identify and handle conflicts of interest.
Outsourcing
In case of outsourcing, financial institutions must ensure that the third parties involved are qualified to ensure compliance with the MiFID rules.
New investor protection rules
The new rules on investor protection cover the following six areas:
- Classification of customers
- Information given to customers
- Execution
- Documentation
- Assessment of a customer’s experience and knowledge
- Assessment of whether a transaction is suitable for the customer
Classification of customers
Customers are classified as retail customers, professional customers or eligible counterparties.
Retail customers have the highest level of protection, and most of our customers, including all personal customers and by far the majority of our small and medium-sized business customers, belong to this category.
Professional customers have a lower level of protection because they are often very large businesses that regularly trade in financial instruments and foreign exchange products.
Eligible counterparties are typically banks, insurance companies and pension funds, and generally the rules on investor protection do not apply to these clients.
Information given to customers
A number of requirements apply to the information customers receive. They must be informed in detail about the individual types of financial instrument, including the risks incurred, the trading venues available and the costs (also expenses payable to third parties).
Execution
Financial institutions are obliged to take all reasonable measures to achieve the best possible result for customers. They must prepare an order execution policy that explains these measures.
Documentation
Documentation must be prepared for services and transactions in financial instruments.
Assessment of a customer’s experience and knowledge
The customer’s experience and knowledge of the financial instruments must be assessed so that the customer does not incur inappropriate risks without having been warned.
Assessment of whether a transaction is suitable for a customer
To be able to recommend suitable investments to a customer, the financial institution must collect information about the individual customer’s experience, knowledge, financial situation and investment objective. An investment profile must be created on the basis of this information, stating the types of financial instrument appropriate for the customer.
Additional requirements
Additional requirements imposed by the MiFID rules include changes to post-trading data, reporting to government authorities and trade reporting to customers. In addition, businesses that provide advisory services only must now have special permission to run this type of business.
Implementation by the Danske Bank Group
The Danske Bank Group is MiFID-compliant. It spent more than DKr150m on updating its IT systems, and more than 400 employees were involved in the preparations over a two-year period. Danske Bank’s employees who are involved in advising customers trading in financing instruments completed a training programme, increasing their competencies and enabling them to provide advice in accordance with the new rules.
Last updated on October 12, 2007