Structural reforms in the financial services market brought about by MiFIR & MiFID II
MiFID (Markets in Financial Instruments Directive) II and MiFIR (Markets in Financial Instruments Regulation) are the most important changes in legislature of the last decade and are expected to change the current state of the financial sector by improving the functioning of the financial market by becoming more transparent and efficient allowing for more benefits to be enjoyed by the investors.
Market failures of the recent past have emphasized the need to strengthen regulation as a number of flaws have been identified i.e. weak corporate governance led to excessive risk-taking and poor systems of checks have left financial institutions seriously injured etc.
Both MiFID II and MiFIR must enter into force on 03.01.18. CySEC has given particular emphasis on the importance of market participants affected by the changes introduced by MiFID II and MiFIR to start taking all necessary steps, measures and preparations to comply with and fully implement the new legislative framework.
The market participants involved include CIFs, entities that will no longer be exempt from the scope of this legislation, persons undertaking high frequency algorithmic trading and the currently unauthorised entities/businesses that will have to be authorised under MiFID II.
The key changes ahead are as follows:
- Higher investor protection to account for the rapid innovation and complexity in financial instruments.
- More transparency for market participants through greater reporting requirements etc.
- Improved market structure through the creation of a level playing field for participants.
- More internal controls through strengthened governing board and increased compliance role.
- Product governance introduced.
- New powers for stronger external controls by national supervisory authorities.
Further, the management and directors of such entities must assess the way their employees and officers are incentivised and ensure that remuneration schemes offered do not incentivise the promotion of a certain financial instrument irrespective of the consumers’ needs. Also, MiFID II will expand the types of products that are considered complex for investors to understand. Firms selling such complex products without advice will need to assess whether potential consumers have the required necessary experience to understand the product they intend to buy. Additionally any commission and fees involved in the process should from now on be disclosed to the investors clearly and in advance.