Investor Protection
With the revision of the EU Markets in Financial Instruments Directive (MiFID II), the European Legislator has expanded the uniform legal framework for investment services in key areas. The MiFID II rules include a comprehensive package of measures to improve investor protection.
The new rules oblige banks and other investment firms to comply with numerous stricter requirements regarding the disclosure of costs and documentation of securities transactions. In addition, investor protection has been extended considerably in regard to advisory services for clients, such as relating to the suitability of products (product governance). The extensive changes required in the banks’ internal systems and processes have necessitated considerable investment, especially in the banks’ internal IT infrastructure.
The main focuses of extended investor protection are:
- Product governance & suitability of a product for the client:
New products have to pass through a precisely defined approval process. For all new financial instruments, a target market must be determined and taken into account for purposes of marketing. It must also be assessed whether the product is suitable for the client depending on the client’s classification, knowledge and experience, financial situation, risk tolerance, as well as objectives and needs. - Cost transparency:
Clients will be informed even more precisely about costs incurred in the securities business before and after the service is provided.
To avoid conflicts of interest, banks that offer ‘independent investment advice’ or ‘asset management’ can accept fees, commissions, and other monetary or non-monetary inducements from third parties only to a very limited extent.
- Product information for Packaged Retail and Insurance-based Investment Products (PRIIPs):
Packaged investment products include investment funds, certificates, and related life insurance policies. For these products, a key information document must be provided to non-professional (retail) clients. This document should enable the client to compare products with each other and make a sound investment decision. - Documentation of the advice:
When advisory services are provided, the client receives a suitability statement as evidence for why a product was considered suitable for the customer in the consultation. If the client places an order following such advice, the time and place of the meeting, the persons present, the initiator of the meeting, and details of the order itself must be documented. - Record-keeping requirements:
Telephone conversations on securities transactions must henceforth be recorded. The records must be kept for 5 years and made available to the client on request. - Client information:
Investors receive quarterly statements on the financial instruments they hold. - General requirements for the qualification of investment advisors:
The existing requirements for the specialist knowledge of investment advisors have been extended and standardised across Europe.