MiFID II: What is it, how will it affect the world of finance and why should we care?
From January 3rd 2018, one of the EU’s most ambitious, yet controversial, packages of financial reforms will be rolled out.
In very broad terms, MiFID II builds on stock trading regulation introduced in 2007, and aims to protect investors and make sure that financial markets operate in the fairest and most transparent way possible. Some have summarised it by saying that MiFID II aims to democratise financial markets.
Banks and advisors will have greater responsibility to make sure that they are targeting appropriate investors for anything that they sell. The way market research can be obtained will also change, and an EU securities watchdog will have the power to prevent or restrict certain financial products that they deem harmful or overly risky.
How big of an impact will it have on banks, asset manager and other financial institutions?
In short, the impact has been, and will be, huge. The regulation covers basically all aspects of trading across the whole of the EU. Some trading desks at banks have had to completely rethink the way that they do business. They’ve had educate employees to make sure that they are compliant, and update systems that they have been using for years.
Employees will also have to get used to changing the way that they communicate and do business with clients and counterparts, to ensure that maximum transparency is provided to regulators.
Aside from that, financial research – which in many cases so far has been bundled with other services and associated costs – will need to be paid for by separately funded managers and other third parties, in a bid to reduce the possibility of a conflict of interest among analysts.
How will it affect investors, savers and companies?
In the first instance, the new regulation is designed to protect investors and make sure that they get the fairest possible deal, but they will also have to come to terms with a new way of interacting with banks, brokers, traders and other financial professionals to ensure that they are complying with the law.
On the upside, if an investor feels like he or she has not been treated fairly, that person will likely have more evidence and opportunity to question a broker, trader or salesperson’s decision.
Felicia Meyerowitz Singh, co-founder and chief executive of Akoni Hub, which is a London-based fintech company, said that from a corporate perspective, there is a risk that small and medium-sized companies could be disadvantaged by MiFID II because of the new restrictions around the availability of stock research. Because of the new costs associated with distributing research, she said that brokers might avoid covering smaller companies in their research, which in turn might impact those firms’ ability to access investors. Investors often base their decisions on whether to invest in a certain stock on research reports.
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