How does MiFID II protect investors?

Monday, 29 january 2018 | Redacción CEU

The new European regulation on investor protection is already here. It is known as MiFID II and, in addition to completing its predecessor, it promises substantial changes in the financial field and, specifically, in the sector of investors and financial products. Its arrival implies new ways of operating and a greater transparency in financial advice. Entities, fund managers and  investors themselves will have to adapt to this new regulatory framework because there is no turning back. What is MiFID II? Why does it matter so much in the sector? How does it affect  investors?


There was not enough time. Although MiFID II came into force on January 3rd, it has only implemented in part. The Council of Ministers, through a Royal Decree Law, approved a part of the directive transposition, in particular, the one related to trading centers, regulated markets, multilateral contracting systems and organized contracting systems. However, although the transposition is not complete, the National Securities Market Commission has indicated that even when they have not been incorporated into Spanish legislation yet, the measures contemplated in this regulation are directly applicable since the mentioned date. The European Commission is determined and urges Spain to complete it within two months.

The first directive on Financial Instruments Markets (MIFID) came into force in 2007. It was designed with the aim of creating a single market for financial services, promoting transparency and increasing the investor security level. Shortly after, the crisis appeared on the scene and radically changed the set. The growing complexity of financial products, the new distribution channels and the increase in complaints also partly motivated the germ of a new regulatory framework that would finally be approved in 2014 by the European Parliament. MiFID II is a response from Brussels to the new post-crisis context, an attempt to correct the deficiencies of the past and to create a more transparent and safer space for investors.

What changes with MiFID II?

The main goal of this directive is the increase in investor protection. The MiFID II application helps investors to be aware of some issues that previously could not be clear when opting for a specific financial product offered by entities, in particular, the exact knowledge of how much they are charging them and what are the exact figures in absolute terms, not in percentage. When entities offer a service, they also receive a payment, an amount that fund managers pay to distributors, they  are called rebates. Before this regulation arrival, investors were not aware, on many occasions, of this point. The new regulatory framework aims to prevent entities from trying to offer products that give them greater incentives, at least, without investors having knowledge of this interest. As we can see, this new regulation requires a greater level of transparency on behalf of the entities that will be key for the complete assimilation of this normative.

How does MiFID II protect investors?

The directive intends to draw a clear line between commercialization and consultancy for avoiding the conflict of interests as much as possible. In the portfolio management service, clients delegate the final decision about the product choice, and, therefore, this new regulation does not contemplate the rebates collection in these cases. On the other hand, entities have to decide whether they offer independent financial advice, where only customer advice services are charged, or non-independent financial advice, where they must specify what commissions they are charging them to  offering a specific product with the aim of generating more rebates. The regulation does not forbid the issuance of these in the latter case, but it does require that it is done in an open architecture regime with a greater transparency.

Although there are few exceptions, most Spanish banks have opted to provide a non-independent advisory service. They may continue to charge sales incentives but with new conditions like the  opening of the offered range with access to third parties, the suitability assessment or the periodic reporting. However, some experts warn that this regulation may also contemplate assumptions that allow entities to continue maintaining an architecture as closed as possible.

MiFID II sets out a big change in the investment funds commercialization. Investors have to understand what is being offered to them and what risks does the acquisition of different financial products results in. The products offered must respond to both their needs and their investor profiles, meaning, they must be adapted to each client and adjusted to their current financial situation and be the most appropriate and timely possible based on suitability tests.

An indispensable condition for entities to offer accurate information that does not result in swindles is the appropriate training of their workers –even more if we take into account that the level of financial education in Spain is so low–. Financial advisors will need to demonstrate specific training and have a concrete experience to develop their work. This way, investors will have access to a detailed knowledge of the product before investing in it. In theory, this will allow them to get to know better offers, save on costs and rely more on transparency.

The experts also warn that although MiFID II has been designed with the aim of reversing the effect of expulsion of retail investors, it could just originate the opposite, in the medium term, the costs of advice may increase which could mean a reduction in the access of retailers to this service. Other debates that, among others, arise around the implementation of this regulation are the  concentration risk, the preference of investors for digital platforms, the commitment to technological development or the overload of rules in the sector. If there is something that is clear is that this regulation means a "before" and an "after" in the financial market, its arrival leaves no one indifferent.

In order to get to know better this new regulatory framework, as well as understanding what the new rules of the game consist of and what new opportunities arise after the practical knowledge of the standard, CEU IAM offers you the possibility of signing up for its program focused on The new investor protection framework: MiFID II & PRIIPS. You can find more information here.