MiFID II

MiFID II is a legislative framework established by the European Union (EU) to oversee financial markets within the European Economic Area (EEA) and enhance investor protections. Its primary goal is to standardize practices across the EU and restore confidence in the financial industry.

One of the most significant laws introduced by the European Union to regulate the investment sector is the Markets in Financial Instruments Directive. Commonly referred to as MiFID, this directive has been in effect since 2007 and has profoundly transformed the operation of the investment sector.

The original Markets in Financial Instruments Directive (MiFID) came into force in November 2007. However, the subsequent global financial crisis revealed certain shortcomings in its provisions. It was overly focused on stocks, neglecting fixed-income vehicles, derivatives, currencies, and other asset classes, and did not address transactions involving firms or products outside the EU, leaving those regulations to individual member states.

Recently, the legislation underwent significant updates and is now known as “MiFID II.” This revised directive aims to strengthen the previous law, primarily focusing on enhancing customer protection, increasing transparency in trading platforms, and ensuring proper portfolio management.

MiFID II harmonizes oversight practices among member nations and expands the scope of regulations. With this updated version, trading transactions and information will be more transparent than ever before. MiFID II mandates that all prices be clearly displayed before and after trades, regardless of the trading platform used. This transparency provides investors with access to a broader range of data, enabling them to make more informed decisions regarding their clients’ portfolios.

Furthermore, the new MiFID II encompasses a wider array of financial instruments beyond just shares. It includes equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies. If a product is available in an EU country, it falls under the jurisdiction of MiFID II, even if the trader interested in purchasing it is located outside the EU.

Sellers are required to clearly communicate their prices before and after all transactions, along with other relevant information. This new requirement aims to empower retail firms and their customers to find the best available deals by comparing prices and other factors based on the newly accessible data.

MiFID II also extends its coverage to structured deposits, which were previously unregulated by the European Union despite being a common investment with various protection challenges. Under the new regulations, companies involved in the sale and purchase of structured deposits must adhere to specific rules regarding client interactions and oversight by supervisory bodies, along with a range of other stipulations.

Another significant change introduced by MiFID II is the prohibition for certain firms from accepting payments or benefits (“inducements”) from third parties. Consequently, if an individual, such as a consultant, or a firm provides financial advice on behalf of another individual, they will no longer be allowed to retain any payments received. Instead, they must pass these payments on to the actual investor. This provision represents a major shift in the European financial sector.

MiFID II not only addresses nearly all aspects of financial investment and trading but also encompasses virtually all financial professionals within the EU. Bankers, traders, fund managers, exchange officials, and brokers—and their firms—must comply with its regulations, as do institutional and retail investors.

For retail investors, the law significantly enhances protections and imposes strict limitations on the types of financial instruments that can be traded without a legal obligation to consult a trader or similar professional.