The revision of the Markets in Financial Instruments Directive (MiFID II) is now due for implementation on 3rd January, 2018.
MiFID II represents a fundamental change for financial markets across multiple areas, requiring not only a major implementation effort, but also a vast re-assessment of business models.
The Markets in Financial Instruments Directive (MiFID) is the framework of European Union (EU) legislation for the organised trading of financial instruments.
The new and improved legislation, MiFID II, will include a revised version of MiFID and the new Markets in Financial Instruments Regulation (MiFIR). The changes are currently set to take effect on 3rd January 2018.
Firms will need to start preparing for MiFID II ahead of the finalisation and the subsequent changes which will have to be made.
MiFID II is an extensive piece of legislation and, depending on your business model, has the ability to affect a wide range of your firm’s services.
Due to the rapidly growing complexity in financial instruments, insufficient levels of investor protection have arisen, resulting in miss-selling. Therefore, regulators are increasingly focusing on investor protection issues and taking disciplinary action including fines, to improve outcomes for investors and prevent miss-selling.
A clear requirement for firms to establish a reliable and sustainable control framework for the accuracy of transaction reporting has also been highlighted, it is vital for firms not to underestimate the challenges and lead time that will be brought by this requirement.
Furthermore, all transaction reports and orders will need to be retained at the disposal of the competent authority for five years. With the significant increase in the quantity and nature of data points, this is likely to have a substantial impact on organisations.
Some of the biggest concerns of MiFID II have been surrounding the extended measures of pre and post trade transparency and the potential impact on certain markets, depending on the waivers and liquidity thresholds.
MiFID II highlights a requirement to store records of all orders and transactions for a minimum period of 5 years. However, national authorities have the capacity to impose firmer record keeping standards; such as the Belgian and German National Competent Authorities, who have set a requirement of 7 and 10 years.
MiFID II introduces extensive product governance duties for both manufacturers and distributors of investment products. Firms will need to implement a strong product governance and product approval process in place and conduct ongoing reviews of those products.
MiFID II states that cost of service should be provided with the costs of the product recommended to be included. This breakdown should include distribution and management fees, payments to and from third parties, including broker commissions and platform fees.