MiFID II, or the second Markets in Financial Instruments Directive, came into force on 3 January 2018: this revised version was launched by the European Commission in order to strengthen the existing legal provisions of MiFID I and to make European markets more transparent, more efficient and safer for investors. Concretely, what does it change for you?
The MiFID rules were implemented into Luxembourg legislation earlier this year and mainly concern investment firms regulated by the PSF Law, including investment advisers, brokers in financial instruments, portfolio managers, distributors of shares in investment funds, credit institutions when providing investment services and activities, investment firms and credit institutions when selling or advising clients in relation to structured deposits, etc. They all now have new obligations when executing, receiving and transmitting orders, or when conducting portfolio management services.
What is the impact of these new obligations on you as a private investor? To make it clear and simple, there are three key areas where you will notice significant changes: the suitability assessment, the reporting frequency and the client disclosures.
A more suitability-centric approach
An investment firm has always had to show suitability on certain products, looking at your objectives, time horizon (short or long term), risk appetite, knowledge about the financial markets and their products, and financial position (assets).
Under MiFID II, the suitability tests are extended to all advice. In other words, an investment firm must provide you with a report for each piece of advice given in case of an investment advice, even if the advice is to do nothing. In this report, the investment firm must explain why they believe that the investment advice is suitable based on the information that you have transmitted. In addition, they must document changes of circumstances in even more detail (changes in your family, changes in the type or the number of the assets that you own, and so on). An investment firm must also clearly indicate whether a suitability assessment is performed periodically with regard to your existing portfolio.
Increased report frequency
An investment firm has always had to provide you with regular reports such as transaction confirmations (e.g. contract notes) and periodic updates (e.g. valuation summaries and statements). Now, according to the new rules, some documents must be sent more often. For instance, financial statements will no longer be issued bi-annually, but quarterly. If your money is being managed on a discretionary basis, either by advisers or discretionary fund managers, new safeguards under MiFID II mean you must be notified if and when the value of your portfolio falls by 10%, and each subsequent 10% fall, since the last quarterly statement.
Better transparency of cost and charges
An investment firm has always had to provide you details of the total costs of the investment services and the financial instruments, and to inform you of any changes in a way that is clear, fair and not misleading. MiFID II stipulates extra requirements and clarifies a number of existing ones. An investment firm must now provide a total overview of all the expected costs BEFORE providing any services, make use of an illustration to give you insight into the cumulative effect of the cost on the return and inform you about the manner in which the costs are charged. The investment firm with which you have an ongoing relationship must provide you information about all the total costs charged to you at least once a year. This information can be included in the regular periodical reports.
Know who you are before starting to invest
In short, the philosophy of MiFID II is the more the investor is informed, the better. Unfortunately, this remains to be seen. According to some specialists, the new rules could have an adverse effect for inexperienced investors: information overload and the 10% rule could have unintended consequences such as panic selling. This is why it is so important to determine your investor profile, preferably with a professional adviser. You need to know who you really are before starting to invest. Be good at money with a detailed investor profile: www.ing.lu/mifid !