Unit 4 / Section 3 - MiFID Flashcards
What does the Markets in Financial Instruments Directive (MiFID) set out?
Which investment services and activities should be licensed across the EU and the conduct standards that those providing such services should comply with.
In respect to conflicts of interest, what does the Markets in Financial Instruments Directive (MiFID) require firms to do?
1) Consider and identify where conflicts may arise in the course of their business between the firm and its clients, and between different clients
2) Retain (and keep up to date) a record of these actual and potential conflicts
3) Put in place organisational and administrative structures to prevent such conflicts from adversely affecting the interests of clients, and document this in a conflicts of interest policy
4) Disclose to clients where these organisational / administrative measures do not allow a firm to have reasonable confidence that the risk of damage to clients’ interests will be prevented
What restrictions does MiFID II impose on incentive schemes, internal rewards and sales targets, both in the retail and professional markets?
- It requires a formal remuneration policy to be approved and overseen by the senior management in a firm
- This policy should be aimed at the alignment of remuneration structures to encourage responsible business conduct, fair treatment of clients and to avoid conflicts of interest
- It prohibits firms remunerating or assessing the performance of staff in a way that conflicts with the clients’ best interests rule or which incentivises staff to sell particular products or services
What does MiFID requires all information addressed to clients or potential clients to be?
Fair, clear and not misleading, and for customers who receive marketing communications to be able to recognise them as such.
According to MiFID II, what is required in order for advice to be considered to be independent?
- A sufficiently wide range of financial instruments available on the market must be considered
- A sufficiently diverse range of financial instruments must be considered (for example by type, issuer, product provider)
- The financial instruments considered should not be provided only by the firm or other closely related businesses, or firms with close legal/economic relationships (such as contractual relationships) which mean that independence is at risk of being impaired
- The firm should not receive and keep any inducements / commission / monetary or non-monetary benefits from any third party (like product providers)
Where does MiFIR (the Regulation associated with MIFID II) give formal product intervention powers to?
> European Securities and Markets Authority (ESMA - in relation to financial instruments)
> European Banking Authority (EBA - in relation to structured deposits)
> National regulator of each member state
What did MiFID II introdue in terms of an EU-wide product governance requirements for Product Manufacturers?
> Maintain appropriate product governance policies and procedures, including product approval processes, to ensure investment products are designed appropriately and are ‘consistent with the needs’ of identified target markets.
> Distribute products appropriately to the target market
> Assess the relevant risks
> Provide appropriate information to distributors
> Review investment products regularly to ensure that they are being sold appropriately to the identified target market
What did MiFID II introdue in terms of an EU-wide product governance requirements for Product Distributors?
> Ensure that the firm’s knowledge and understanding of the products allows them to match these to the needs of their clients
> Regularly review the products they market to determine whether they remain consistent with the needs of the identified target market and whether the distribution strategy remains appropriate
What did MiFID II introduce with respect to firms obligations to their clients?
Firms must obtain information about the client’s ability to take losses and their risk tolerance.
It also makes explicit that, where products are packaged or bundled, there is an obligation to ensure the overall package or bundle is suitable.
Since MiFID II what must firms providing an advisory service do before a transaction is made?
Provide retail clients with a suitability report specifying how the advice given meets the client’s circumstances.
For retail portfolio management clients, the suitability report can form part of periodic reporting to the client.
What information did MiFID require investment firms to provide to clients or potential clients?
Information on:
> Its services
> Financial instruments
> Costs and charges
> Terms of business (in a client agreement)
What information requirements did MiFID II further extend?
Information on:
> Investment advice
> Financial instruments
> Costs and charges
What high-level requirements in relation to complaints did MiFID introduce?
The organisation of firms and the handling of complaints raised by retail clients, their record keeping and resolution.
What did MiFID introduce in relation to client assets?
- Organisational arrangements – incl safeguarding the client’s ownership rights, and to minimise the risk of loss or diminution of client assets
- Requirements relating to the registration of title to custody assets
- Requirements to keep accurate records and perform reconciliations
- Requirements for firms to perform due diligence on third parties with whom custody assets are deposited
- Restrictions on the use of client assets
- Requirements for auditor confirmation that firm’s arrangements for compliance with the custody rules are adequate
