What exactly is Mifid II and what does it mean for the ordinary investor?
‘Mifid’ is an acronym for the Markets in Financial Instruments Directive, which was introduced in 2007 by the EU with the aim of increasing transparency in investment for those investing in both the retail and institutional sectors. It also standardised the requirements for regulatory disclosures in certain markets. Essentially, those in the investment sector were required to openly offer a standard explanation of any costs, charges and fees, making matters much clearer for investors.
Mifid II is the second iteration of this directive, which builds on the regulation introduced by the first. Required to be fully implemented by 3rd January 2018, it is now the new rulebook for trading for EU countries, creating even greater transparency across their financial markets.
Firms affected by Mifid II are those providing services to clients linked to ‘financial instruments’ and the places where they are traded. Such instruments include bonds, shares, derivatives and units in collective investment schemes. Simply put, Mifid II now governs how providers, traders, brokers and advisers exchange data and information, as well as the way in which they charge investors and how those charges are disclosed.
Whilst the UK is set to leave the EU, as Mifid II has been implemented before Brexit takes place, UK firms are required to comply with the new regulation. That said, the Brexit process will almost certainly make matters more complicated, as financial services firms attempt to adjust to the currently undefined marketplace that will exist once the UK has left the EU.
Financial services firms are required to hold accurate customer information, so clients of such firms should have already received a letter asking them to confirm their information, including their nationality and national client identifier, to ensure the firm is complying with the EU directive. If you haven’t done this by now, it may well mean that you are unable to trade shares, bonds and many other stock market-listed securities until you do so.
Whilst Mifid II is intended to improve the transparency and suitability of propositions for investors, some of the additional costs incurred by firms – such as fund managers no longer being able to get free investment research from brokerages and investment banks they use – could also end up being passed onto investors, in some cases. Ultimately, you should find investment within EU markets more transparent than ever, but you may also end up paying a little more because of this.