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MiFID Conduct-of-Business Rules

Overview

The Markets in Financial Instruments Directive (MiFID) is a European Union (EU) directive concerning the market for financial instruments and products, which sets down a uniform legal framework for banks, brokerage houses as well as other brokerage operators in the EU as well as in Iceland, Norway and Lichtenstein. The MiFID directive seeks to enhance and harmonize client protection in banks, increasing consistency and transparency of the operation of banks as well as increasing competitiveness on the financial market.

The MiFID implemented new measures, such as pre- and post-trade transparency requirements, and set out the conduct standards for financial firms. The directive has been in force across the EU since November 2007. MiFID has a defined scope that primarily focuses on over-the-counter transactions.

Efforts to implement MiFID began prior to the 2008 financial crisis, but changes were made in light of the crisis. One such change was the regulatory approach to third-country firms, which in the regulations’ original draft was left up to each member state. This gave some firms outside the EU a competitive advantage by dint of easier regulatory oversight compared to firms inside the EU. This issue is being addressed through MiFID II, which will harmonize the rules for all firms with EU clients. The Markets in Financial Instruments Regulation (MiFIR) works in conjunction with MiFID and MiFID II to extend the codes of conduct beyond shares to other types of assets, including contract-based assets and structured financial products. 

Regulation

MiFID II comes into effect on 3 January 2018. It represents a major overhaul of the existing law, building on and extending the scope of the first MiFID. MiFID II places a heavy emphasis on improving investor protection. Its remit in this respect extends to the introduction of robust controls to avoid conflicts of interest, to encourage greater transparency both pre and post-execution and to ban commissions payable in respect of investment advice and portfolio management. In short, MiFID II will introduce stringent requirements in terms of communication, disclosure and transparency in favor of investors.

CFA Institute Viewpoint

 

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