MiFID II serves as a comprehensive reform package aimed at strengthening financial regulation within the EU, particularly following the 2008 global financial crisis. Importantly, MiFID II expands the EU’s oversight of securities markets by establishing a comprehensive framework for a wide range of financial instruments, including equities, commodities, debt instruments, futures and options, and exchange-traded funds.
MiFID II Overview
The MiFID II directive acts as a comprehensive rulebook for the EU’s financial playground, casting a wide net. From bankers and brokers to fund managers and investors, all financial professionals working in the EU are subject to MiFID II. Importantly, it applies to all firms accessing or trading in EU products, regardless of their location.
Understanding MiFID II’s complexities is crucial for financial firms operating within member states. This article serves as a roadmap for organizations subject to the directive, with a specific focus on navigating MiFID II key points.
MiFID and MiFID II summary
MiFID II builds upon the original MiFID regulation which was introduced in 2007. One of the principal criticisms of the original directive was its lack of coverage of firms and investment products from outside the EU. The other major shortcoming was its myopic focus on stocks, with other assets like fixed-income vehicles, derivatives, and currencies laying by the wayside.
MiFID II prioritizes investor protection and fosters market transparency, bringing nearly all assets and professions within the EU financial services industry under its umbrella. Consequently, investment firms, wealth managers, and other market participants face strict rules regarding trading.
MiFID II’s reach: Is the UK subject to MiFID II?
The UK is no longer part of the EU, so you may be wondering whether MiFID II applies to the UK. Here are a few considerations to bear in mind:
- Following Brexit, the UK implemented its own set of financial regulations that have a strong resemblance to MiFID II. The Financial Conduct Authority’s (FCA) Conduct Standards Sourcebook (COLL) and the Markets Financial Instruments Regulation (UK MiFIR) are arguably MiFID II UK equivalents.
- The UK regulations share many of the same core principles as MiFID II, emphasizing investor protection, market transparency, and fair competition.
- A so-called ‘MiFID II over-ride’ has found its way into UK financial regulation, giving precedence to the EU’s directive in certain situations. Navigating this provision in particular can be challenging for UK organizations.
Core objectives of MiFID II
The directive tackles several key areas to achieve its goals. Let’s explore each of these in turn.
- Market transparency and integrity
MiFID II’s focus on transparency creates increased accountability for firms, which in turn helps foster increased investor confidence. This contributes to building safer, stronger securities markets, benefiting both investors and the financial system as a whole.
2. Investor protection
The directive promotes fairer and more orderly market conduct, as can be seen in Article 24 of the MiFID II directive, which requires investment firms to;
“Act honestly, fairly and professionally in accordance with the best interests of its clients.”
This sweeping statement may not be concrete, but its objective is clear. MiFID II emphasizes best execution practices when handling client orders, ensuring investors receive the best possible outcomes.
3. Reporting requirements: Article 16 MiFID II
MiFID II Article 16, centered around organizational requirements, outlines that investment firms must:
- Establish adequate policies and procedures to ensure compliance with MiFID II, including processes specifying the approval of each financial instrument and significant adaptations of existing financial instruments.
- Take all reasonable steps to avoid conflicts of interest from adversely affecting the interest of its clients, and avoid undue operational risk.
- Make arrangements to ensure that records (including recordings of telephone conversations or electronic communications as outlined in MiFID II Article 16 7) are retained for all services, activities and transactions with the core objective of demonstrating compliance to the appropriate regulatory bodies for eDiscovery purposes.
4. Regulated trading
By shifting trades onto regulated platforms and limiting over the counter trading and dark pools, MiFID II improves market oversight, reducing the potential for hidden manipulation and price distortions. This is another important factor for increasing consumer confidence in securities markets.
5. High-frequency trading
MiFID II tightens the grip on high-frequency trading (HFT) in the EU. It demands clearer reporting, robust algorithms, fair market-making, and curbs manipulative practices. This aims to bring transparency and a level playing field to the HFT landscape.
By robustly tackling these principal areas, MiFID II strives to create a more transparent, fair, and ultimately, safer financial environment that benefits everyone within the EU.
Staying compliant with MiFID II
Staying on top of MiFID II regulations requires a comprehensive strategy that should encompass:
- Establishing clear internal procedures and staff training to ensure everyone understands and follows the regulations, highlighting and addressing any risk areas.
- Maintaining meticulous records of client interactions, transactions, and communications (refer to Article 16 MiFID II and Article 16 7 MIFID II for full details).
- Keeping up to date with the regulatory landscape by actively monitoring updates and revisions issued by relevant bodies. Be sure to update processes and procedures accordingly.
This proactive approach helps safeguard organizations and fosters a culture of MiFID II compliance.
Consequences of breaching MiFID II regulations
The European Securities and Markets Authority can apply significant penalties both at an individual level and an organizational level if organizations fall foul of the MiFID II framework. Here’s a breakdown of the potential repercussions:
Individual level:
- Fines: Regulatory bodies can impose hefty fines on individuals who are found to be in breach of MiFID II, which can vary depending on the severity of the offense.
- Loss of license: In extreme cases, regulatory bodies may revoke a financial professional’s license to operate within the EU, effectively preventing them from working in the industry.
- Reputational damage: Non-compliance can severely damage an individual’s reputation within the financial sector, which can be disastrous for their future employment prospects.
Organizational level:
- Fines: Organizations face the potential for substantial fines from regulatory bodies for breaches of MiFID II. These fines can be crippling financially, impacting the organization’s profitability. In 2019, Goldman Sachs International was fined £34.3 million for breaches of the directive.
- Reputational damage: Similar to individuals, organizations that fail to comply with MiFID II risk serious reputational damage, making it difficult to attract clients and partners. This can lead to a decline in business activity.
- Operational disruption: Regulatory investigations and potential legal action can significantly disrupt an organization’s operations, which is why robust eDiscovery systems are critical.
MiFID II breaches are serious, with potentially career-ending consequences for individuals and significant financial and reputational risks for organizations.
Summary
MiFID II equips EU financial firms with a robust framework to navigate the complexities of financial regulation. By adhering to its principles of investor protection, fair market practices, and best execution, firms not only comply with regulations but also contribute to a more secure and trustworthy financial environment within the EU. While MiFID II’s intricacies demand a strategic approach, the resulting benefits foster confidence and stability for both firms and investors.