What is MiFID?

The Markets in Financial Instruments Directive (MiFID) is a conduct standard which financial firms within the European Union (EU) legally must comply with. MiFID is enforced across the EU to regulate firms which provide financial services and instruments to their clients, if they fail to comply, they will be subject to investigation by the Financial Conduct Authority.

What is MiFID?

Compliance Knowledge Base | FCA Compliance Training

Posted by: Morgan Rennie Published: Tue, 22 Oct 2019 Last Reviewed: Tue, 22 Oct 2019
What is MiFID?

The Markets in Financial Instruments Directive (MiFID) was created by the European Union (EU) in 2004, to regulate the conduct of financial services firms. The financial services industry can be volatile and therefore MiFID aims to protect consumers through subjecting firms to a rigorous regulatory framework. Moreover, MiFID aims to increase healthy competition within the financial services industry to offer consumers access to the best possible products. MiFID was revised in January 2018 and therefore it is important to understand the recent changes and how this can affect financial firms operating in the EU.

What is MiFID II?

MiFID was enforced in the UK in 2007, a year before the 2008 financial crisis hit. The effects of the 2008 financial crisis exposed weaknesses and oversights which had been incorporated into MiFID and therefore needed to be addressed. It was discovered that financial firms outside of the EU were enjoying a competitive advantage over financial firms in the EU because they were not subject to as high regulatory standards. Thus, MiFID II was enforced in the UK in January 2018 to standardise financial practice across the EU, and to restore confidence in the industry through creating a stronger legislative framework.

Key aspects of MiFID II include:

  • Increasing transparency between financial firms and their clients, with a specific focus on how costs and charges are decided and what they are used for.
  • Increasing transparency between financial firms and their activity in the market, by providing periodic reports with details of all transactions.
  • Regulation of over the counter (OTC) trading and off-exchange.
  • Ensuring investment decisions are not unduly influenced by third parties.
  • Ensuring portfolio and asset managers are acting in the best interest of the clients.

Why is MiFID II important?

MiFID II is important because it aims to protect the customer by ensuring there is transparency between the firm and the customer. Therefore, by ensuring the conduct of financial firms is transparent, investor confidence will hopefully increase.

MiFID II establishes tougher standards for investment products and therefore helps to ensure that clients are receiving the best possible products, due to an increase in healthy competition within the market.

What is MiFID?

Who is MiFID II relevant to?

MiFID II affects a large range of financial professionals across the EU, such as the following:

  • Fund Managers
  • Brokers
  • Retail Investors
  • Banks
  • Trading Venues
  • Pension Funds
  • Exchange Officials

Who enforces MiFID II?

The Financial Conduct Authority (FCA) regulates over 59,000 financial services firms and financial markets in the UK. Therefore, the FCA ensures that individual customers are protected when dealing with financial firms and their products.

The FCA will launch an investigation if they suspect that a financial firm is guilty of misconduct or of preventing healthy competition from taking place between financial service providers. In March 2019, the FCA dealt with the financial misconduct of Goldman Sachs and consequently fined them £34 million, the largest fine that the FCA has inflicted to date.

According to the FCA, Goldman Sachs had failed to provide complete data on 213 million transactions between November 2007 and March 2017, with a further 6.6 million transactions that did not need to be reported. Therefore, the FCA reported a total of 220 million misreported transactions which were not aligned with MiFID regulations.

Goldman Sachs is the fourteenth company that the FCA has fined for failing to produce reports in line with MiFID regulations. Therefore, the severity of the fines inflicted by the FCA reflects the importance of compliance with MiFID II and understanding its purpose.

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