Compliance / Customer protection
MiFID's two main issues
- investor protection: the Directive harmonizes the rules in this area and aims at affording customers the same protection all round whatever the European Bank which provides the investment service,
- competition: the Directive does away with the stock exchanges' monopoly, permits the use of several different types of quotation and imposes best order execution, i.e the introduction of procedures that the banks have to implement to yield the best result for their clients. It reflects market trends: most transactions today are via electronic channels and the number of trading locations has increased (the stock exchanges come under competition from electronic trading platforms and from the banks' proprietary trading activity).
The MiFID aims at offering clients gradual protection adapted to the category they are classified in. The Directive distinguishes between three types of clients, viz
- non professional customers,
- professional customers
- eligible counterparties
The Banks' obligations vis a vis non professional customers are greater than towards professional customers. Eligible counterparties (i.e. credit institutions, insurance companies) enjoy less protection.
Clients assessment and information
Banks must assess their clients based on suitability criteria - i.e. their knowledge about, and experience with, financial products and their financial situation - and on their investment objectives, as appropriate. For instance, if the bank gives investment advice, it must ensure that the products that it recommends are suitable for the client in question.
Furthermore, financial institutions must provide information which is adapted to the client on the financial products and on the risks they involve before carrying out an operation or a transaction with them.
The Bank must provide the client with information about its order execution policy and check its efficiency.
Each entity must identify those activities apt to generate conflicts of interest. A Group policy for handling conflicts of interest specifies the conditions for their identification, prevention and settlement.