The purpose of the Markets in Financial Instruments Directive (MiFID) is to protect consumers and to ensure the financial market remains fair and competitive by enforcing a common regulatory framework upon financial firms operating within the European Union (EU). The Financial Conduct Authority (FCA) is the regulatory body responsible for ensuring that the purpose of MiFID is upheld by all appropriate financial firms in the UK. If a financial firm fails to comply with MiFID, they are subject to an investigation with the FCA subsequently imposing a penalty. Therefore, employee awareness training on how to comply with MiFID is essential.
What is MiFID?
MiFID was enforced across the UK in 2007 to regulate the conduct of financial services firms, focusing on their activity in the financial market and their relationships with clients. MiFID was revised and re-enforced in the UK in January 2018, under the title of MiFID II. MiFID II was established in response to the financial crisis of 2008, which had affected financial firms only a year after MiFID was originally introduced into the UK.
The 2008 financial crisis exposed that financial firms outside of the EU were able to exploit and enjoy a competitive advantage over the financial firms in the EU, as they were not subject to as high regulatory standards. Consequently, MiFID II was enforced at the start of 2018 to standardise financial practice across the EU, ensuring that these affected firms were not placed at a disadvantage. Moreover, MiFID II aimed to restore investor confidence in the industry through creating a stronger legislative framework for financial firms to abide by, and through incorporating protective measures for the consumer.
What is the purpose of MiFID?
The purpose of MiFID II is to protect individual investors and clients by ensuring that financial firms are behaving with integrity and transparency.
MiFID II demands that financial firms behave transparently by providing periodic reports with details of the firm's transactions, charges, costs and conduct. Moreover, MiFID II demands that financial firms prove that decisions are made in the best interest of their clients and are not influenced by third parties.
Why is MiFID II important?
If MiFID II was not enforced across financial firms within the EU, consumers who engage in financial activity would not be sufficiently protected and could be vulnerable to exploitation.
Without MiFID II, there would be room for potential financial corruption and deceit. Financial firms would be able to use the money they are receiving from their clients for alternative reasons, which the clients may not have agreed upon. Moreover, the client would not receive access to a range of financial instruments and products, because there would be reduced competition in the market.
Consequences for failing to comply with MiFID II
The FCA has made their legal stance on enforcing MiFID II very clear. Following the introduction of MiFID II at the start of January 2018, financial firms had a six-month transitional period to become fully compliant. After this period, the FCA confirmed that they would begin investigating financial firms to decide whether they were compliant with MiFID II.
In February 2019, the FCA reported that 48 investment companies were currently under investigation for a lack of compliance with MiFID II, this had risen from 34 in October 2018. Therefore, the FCA has acknowledged the difficulty for firms trying to comply with MiFID II, but the FCA wants to ensure the purpose of MiFID is upheld, and to do this they must investigate firms thoroughly.
MiFID is very important to a vast majority of people within the UK and across the EU, and therefore it is important to understand the purpose of MiFID II.