It’s been on the minds of fund managers and bankers alike, the new European regulatory guideline MiFID II, which is short for Markets In Financial Instruments Directive Level II, goes into effect as of January 2018.
It are rules that financial institutions across the European Economic area (of which 31 countries are part) must adhere to if they wish to sell investment products or provide advice to clients.
As the name suggests, it is the second version of these guidelines. The first version was introduced almost eleven years ago (1 November 2007 1https://en.wikipedia.org/wiki/Markets_in_Financial_Instruments_Directive_2004). This first version made it mandatory for banks to create an investment profile for all its clientele. It was only allowed to provide clients with investments that aligned with their determined profile. This way of working is called ‘duty of care’. This ‘Duty of care’ is being strengthened with MiFID II. With the new rules, clients must get informed even better than before.
Other important changes are:
- limitations on the commissions they receive when giving advice. With level, I institutions could get remunerations for advising an external fund instead of their own ‘in-house’ funds. These type of non-transparent are not allowed anymore except under certain strict conditions.
This is done to prevent conflict of interest since the bank might be more inclined to sell a product that gives them a higher commission than one that is actually better for the client.
- A clear distinction between independent and biased advice.
The institutions, such as banks, are required to clearly inform their clients about what kind of advice they are giving.
In case of biased advice, meaning the advice is giving by a bank employee, it is allowed to only discuss and provide information about the bank-specific
independent advice requires providing a wide range of products
- Institutions are required to log all telephone and chat conversations which prevents conflict about the given advice. Of course, the client must be informed about this logging.
While the above changes are all to protect the clients, there are other important changes such as Improved transparency for the exchanges, rules about new forms of trading (algo’s and automated trading), etc.
MiFID II will bring a lot of hassle for clients which will impact the way financial institutions handle investment advice. Some (smaller) banks like Rabobank already decided to not provide this type of service anymore.
In general, it is considered a good thing since it will better protect both clients and institutions.
Source: Beleggers nóg beter beschermd. (2017, December 30). De Standaard, p. E8.
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