MiFID II: more protection for small investors

On 1 December 2017 the Council of Ministers received a report from the Economy Minister on the draft Securities Market and Financial Instruments Bill, which adapts to Spain the European directive known as MiFID II and other regulations. Its aim is to ensure high levels of protection for investors in financial products, especially retail ones, and to increase the security, efficiency, proper functioning and stability of securities markets in Europe.

The text has already completed the consultation and public hearing stages, in which 50 documents with more than 450 comments were received from 38 individuals or entities. It will now be sent to the Council of State for its opinion, return to the Council of Ministers and be sent to Parliament for approval, with the aim of entering into force as soon as possible.

Fees and inducements

The most notable feature is the protection of the small investor against fees known as inducements. The typical example is an institution, usually a bank, that markets or recommends an investment fund to a client and receives an incentive from the fund manager, which in some cases can distort the advice. MiFID II allows or prohibits such incentives depending on the service provided.

Specifically, receiving fees, inducements or other incentives is absolutely prohibited when independent financial advice or portfolio management is provided. If other investment services are provided, the quality of advice must be raised and the firm must act honestly, fairly and professionally in the client’s best interest, which is considered met, for example, when the offer includes products from competing third parties. Implementing regulations will specify that at least 25% of third-party products of the same category must be offered.

Structured deposits and product governance

Structured deposits, those whose return depends on the performance of an index or the price of a financial asset, will be treated in a way they have not been until now: like any other financial instrument. When credit institutions market them or advise on them, they must comply with good governance rules, internal organisation measures, conflict-of-interest prevention, recording of conversations and conduct rules, such as client classification, assessment of appropriateness and suitability, remuneration and order handling.

Product governance requires firms that design financial instruments for clients to establish a prior approval process for each instrument, to identify the target market of end clients, and makes the board of directors responsible for its operation. They must also keep records of their dealings with clients and, under MiFID II, of telephone conversations or electronic communications relating at least to own-account transactions and to the reception, transmission and execution of client orders.

What to review

For anyone who uses investment services, the change will be visible in how it is explained who is paid and why. It is worth asking your institution whether the advice you receive is independent or not, what fees it charges and from whom, and what client classification you have. If you already hold a fund or a structured deposit, review its features, costs and terms, and be clear about your risk profile and the investment horizon.

Investment firms and the institutions that market products will have to adapt procedures, systems, contracts and staff training. Companies that manage their cash or savings in financial products can take the chance to review with their institution how they are classified and what information they receive. These are protection rules, not recommendations: the decision to invest still depends on each person and their adviser.

Understanding who is paid and why is the first step to deciding wisely.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.