1. What is MiFID and what are its objectives?
MiFID is an acronym for the Markets in Financial Instruments Directive (2004/39/EY).
The MiFID directive is part of the EU Commission Financial Services Action Plan which seeks to create a single market in financial services for the Union. The aim of the directive is to harmonise practices in national securities markets by facilitating provision of investment services across borders and by removing barriers to trading. At the same time, MiFID improves investor protection and strengthens confidence in the market.
2. What was the timetable for MiFID?
The MiFID directive was issued in April 2004. In autumn 2006, the Commission issued a regulation supplementing the directive and another directive on the implementation of MiFID. Changes to national legislation were to be approved by the member states by 31 January 2007 and passed into law effective from 1 November 2007.
3. Who are affected by MiFID?
MiFID applies to all companies providing investment services, such as banks and asset managers, and their clients.
4. What are the benefits of MiFID for customers?
Investor protection improves. Investors will also find it easier to buy investment services across national borders within the EU internal market. Moreover, service providers are required to obtain more detailed information on the client to ensure that the services provided are suitable for the client.
5. How did investor protection improve?
Investors in all EU countries will now get information on the service provider, choice of services, financial instruments and underlying risks, costs, safekeeping of client assets, execution of orders and management of conflicts of interest. Moreover, investors are asked to give more detailed information than up to now on their financial position, investment objectives, investment experience and investment knowledge. This information is used by the service provider for finding services and products suitable for the client. No changes are made in the compensation criteria applied by the Investors’ Compensation Fund.
6. What is Investor’ Compensation Fund?
The Investors’ Compensation Fund has been set up in Finland to safeguard investors’ claims on companies providing investment services who are members of the Fund and unable to settle the claims as agreed. All providers of investment services, including banks, are required to be members of the Investors’ Compensation Fund. If a service provider becomes insolvent, investors are paid 90% of their claims, yet no more than €20,000 per investor. The Fund does not compensate for losses arising from declines in equity prices or wrong investment decisions, as the client is responsible for the consequences of his or her own investment decisions. The Investors’ Compensation Fund only covers claims of non-professional investors. More information on the Investors’ Compensation Fund is available at address www.sijoittajienkorvausrahasto.fi.
7. What is the difference between professional and non-professional clients?
Customers using investment services are classified as non-professional clients, professional clients or eligible counterparties. Clients are classified as provided in the Securities Markets Act, which contains detailed provisions of factors which have an impact on the classification. Client classification determines the extent of investor protection and the scope of application of the code of conduct. (Link to the list of classification criteria)
Non-professional clients are covered by the widest investor protection available.
Non-professional clients are given and asked for more information than professional clients. Non-professional clients are also covered by the protection ensured by the Investors’ Compensation Fund, whose compensation criteria remain unchanged.
The term professional client is defined in the law. Public bodies and large undertakings, for example, qualify as professional clients.
If a client wants to change his or her client classification, he or she may apply the service provider in writing for reclassification. The service provider evaluates and decides on such applications case by case.
8. Why may some professional clients be treated as non-professionals under MiFID?
All retail investors are basically treated as non-professionals and thus enjoy the widest investor protection available. This means that non-professional clients are given and asked for more information than professional clients. Non-professional clients are also covered by the protection ensured by the Investors’ Compensation Fund.
Professional clients are defined in the law as clients with experience, knowledge and expertise sufficient for making independent investment decisions and assessing the risks involved.
If a client has not been a professional investor up to now but would like to be classified as one from now on, he or she may ask the service provider in writing to be treated as a professional client. This cannot, however, be done unless the client meets at least two of the following three requirements:
- The client has carried out transactions significant in size ( €50,000 or more) in the markets involved at an average frequency of ten times per quarter over the past four quarters.
- The size of the client’s investment portfolio is more than €500,000.
- The client works or has worked in the financial industry for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Yet another requirement is that the service provider has estimated the client to be capable of making independent investment decisions and understanding the risks involved and that the service provider accepts the client’s application for reclassification.
9. Is an individual customer classified in the same category by all bankers and asset managers?
Not necessarily. Every service provider classifies its clients on the basis of not only the information given by the client but also the services that the client is using.
10. Is an individual customer classified in the same category in all EU countries? Are the classification criteria the same EU-wide, or is it possible that a customer is ranked, for example, as a professional in one country and as a non-professional in Finland?
The service provider always assesses investors individually on the basis of their investment experience but the criteria applied to the assessment are the same in all EU countries.
11. What does MiFID mean for a new customer?
MiFID’s new provisions play a role for the client if:
1. investment service is offered by a bank or an investment firm, and
2. the client invests in financial instruments covered by MiFID such as shares, bonds or units in mutual funds.
New investors are advised to note that in the MiFID regime personal investment advice recommending investment in a certain financial instrument may only be provided by banks and investment firms and by agents working under the responsibility of such banks or firms. Financial Supervision issues authorisations for the bsuiness to Finnish banks and investment firms and also supervises their operations. In the future, investment advisory service may no longer be provided without authorisation.
MiFID has also other implications for the client’s relationship with the bank or investment firm. The client will be asked for various details so the service provider is able to provide suitable service. Moreover, the client will be given information on the service provider and its operations and on the financial instruments recommended.
If the client is going to invest in assets other than financial instruments, eg savings or life insurance policy, housing, forest or art, the investment is not covered by MiFID and its investor protection provisions. Neither does MiFID apply to bank deposits, which in turn are covered by the deposit protection scheme.
12. What does MiFID mean for old investors?
As long as the client continues to use the present services without any change, MiFID does not impose any changes to the accustomed practices. The client may, however, be asked some supplementary questions. The service provider will give the client more information on MiFID and its implications.
13. Why is the client asked for more information on financial standing? What kind of information? How do the new questions differ from the questions already asked?
In order to find the services suitable for the client, the service provider asks the client for more detailed information on his or her financial standing than before.
Before providing investment advice or asset management service, the service provider is required to ask the client to give adequate information on the sources and amounts of his or her regular income, liquid assets, investments and properties as well as regular financial commitments. A requirement for information as detailed as this has been imposed by Financial Supervision.
If the client does not give the information asked by the service provider on investment experience and knowledge, financial position and investment objectives, the service provider may not be able to recommend any financial instrument or service as suitable for the client.
The service provider is entitled to rely on the information provided by the client. The client naturally carries the final risk involved in the performance of the investments.
14. Why are phone calls recorded?
The law requires that all telephone calls relating to orders be recorded. This is important for not only the service provider but also the client to ensure that the content of orders can be verified afterwards if needed.
As telephone conversations have been recorded even before MiFID, the practice does not change much in this respect.
15. Is the service provider allowed to make use of client information for providing other services?
The service provider is bound by the duty of secrecy in respect of all information given by the client. The information may only be disclosed and used on the conditions provided in the law. MiFID does not bring any changes to present regulation on this point. The client will from now on be required to give information on his or her financial position for the purpose of the service provider’s assessment of what financial instruments or services are suitable and appropriate for the client. The service provider is entitled to disclose and use the information in-house for the purpose of customer relationship management, marketing and risk management. As a result, the service provider has an opportunity to market other products suitable for the client.