Revised from the original MiFID, the MiFID II (Markets in Financial Instruments Directive) is the EU legislation that regulates the organisations who provide services to their clients via financial instruments and the venues where the instruments are traded. The legislation was initially applied to the UK from November 2007, however the changes made to the MiFID will be simply known as the MiFID II. These changes will heavily affect the EU’s financial industry, so it’s important that financial organisations begin planning ahead before MiFID is fully enforced, as changes will cover everything from client calls to fintech investment.
Specific Changes That The MiFID II Will Bring
The new legislation will affect numerous sections of the financial industry, including dealing, broking and advisory services that are provided by banks, non-banks and other service providers. Therefore, all investment firms and financial services must comply with the new rules put in place by the MiFID II. Under these new terms, financial services who provide financial advice of any kind to clients over the phone must record the calls, as well as face-to-face meetings being formalised with minutes taken to allow all transactions to be recorded.
The revised version of the MiFID legislation covers how asset managers pay for the research that they conduct in order to make investment decisions. Assets managers were able to receive research, including documents such as written reports and phone calls for free, until now. However, the cost of this service was built into the trading fees, normally being paid for by the managers’ clients. Now that the MiFID II is going to be put in place, fund managers will be forced to budget separately for research and trading costs, with the technical term being unbundling. When it comes to longer-term, institutional investors, however, they will have further evidence to prove to their brokers that they’re working to the best of their ability.
Impact On Capital Markets
The regulations of the MiFID II are heavily aimed at strengthening the conduct of business, however capital markets businesses have become an unintended target as well. The MiFID II insists that firms meet a quality enhancement test, meaning that the clients need to benefit from your services; however, “the client” can refer to both issuer and investor clients. This raises questions, as for capital markets this could refer to typical daily activity such as making reciprocity agreements during book running. This activity is fundamental for the majority of businesses, meaning that an alteration to these arrangements could impact a firm’s ability to make successful trade.
How Can Businesses Comply With The MiFID II?
Complying with the revised legislation is imperative for your organisation and so there are a few simple steps that you should take to ensure you qualify. As a financial firm, you will need to reconsider the products that you have on offer and the platform used to make trade. With this update, it’s likely that old systems will need to be revitalised to ensure that your digital infrastructure is a strong as possible to help data handling. The biggest change comes with increased demands around regulatory reporting, with many buyside firms now obliged to report under the new legislation. All databases need to be refined to ensure all costs and charges are accurately recorded.