MiFID II is a regulatory framework created to standardise financial markets and enhance investor protection across the EU. The updated directive was introduced in 2018 to cover all financial securities and professions in the bloc.
What is MiFID II?
The original framework, MiFID, came into effect a year after the 2008 financial crisis. However, it only covered equity securities.
The updated version, MiFID II, handles virtually all securities and derivatives. It is aimed at standardising market regulation across the EU, safeguarding investors, empowering authorities to supervise market activity and increasing obligations for transaction reporting.
Key elements
Here are the key elements included in the MiFID II framework:
Transparency requirements
Transparency of costs and improved record-keeping are the key regulations under MiFID II. It requires Multilateral Trading Facilities (MTFs) and Regulated Markets (RMs) to continuously announce the latest bid and offer prices for all their advertised financial instruments. It also aims to reduce OTC trading and the use of dark pools.
Investor protection
Through disclosure of costs, increased frequency of portfolio statements, improved product attention and suitability assessments, the framework ensures that financial instrument manufacturers and distributors act in the best interest of the client at every step.
Inducements
Under Articles 24(7)(b) and 24(8), asset advisers and managers are prohibited from retaining inducements. This means they can only receive inducements if these are passed onto the client, such as for enhancing the product or service.
Conflicts of interest
MiFID II emphasises the importance of the prevention and management of conflicts. The regulation assumes that all identified conflicts will be resolved and any that cannot, will be disclosed.
Transaction reporting
Under MiFID II, authorised investment firms, credit institutions and market operators are required to submit complete and accurate reports detailing their transactions to competent authorities before the end of the next business day. The aim is to inform the authorities of all possible circumstances leading to a transaction.
Enforcement
Under the new regime, when an individual violates the terms of the framework, they are susceptible to several penalties, including:
- Public disclosure of their identity and the nature of the violation.
- A cease and desist order.
- Suspension from trading on a certain platform.
- Temporary or permanent ban, depending on the severity of the violation, on a natural person holding a management position in an investment firm.
- A fine of up to €5,000,000 or up to 10% of the total annual revenue for legal persons. For natural persons, up to €5,000,000 in fines.
- A fine of up to twice the price of illegal profits gained, even if they surpass the maximum penalty of €5,000,000.