MiFID II

What it means

MiFID II is the EU Markets in Financial Instruments Directive, which governs investment services and investor protection. It has applied since January 2018, replacing the original MiFID. Alongside it applies the MiFIR regulation, which mainly covers trading transparency and transaction reporting.

The directive applies to banks, investment firms, management companies for certain services and financial agents who arrange investments. In Slovakia it is transposed mainly into the Securities Act, and supervision is carried out by the National Bank of Slovakia.

The aim is that investors receive suitable products, understand their risks and costs, and that markets operate transparently. The directive therefore introduced mandatory suitability assessments, detailed cost disclosure, rules on inducements and recording of communications relating to orders.

How it works in practice

Before giving investment advice, the provider must carry out a suitability test: establish the client's experience and knowledge, financial situation, investment objectives and risk tolerance. For complex products such as derivatives, appropriateness is also assessed, meaning whether the client understands how the product works.

Clients receive an overview of all costs and charges and their effect on returns, both in advance and afterwards. For mutual funds and other products, a key information document is added. This information makes it possible to compare offers from different providers.

For companies that invest surplus cash or enter into hedging derivatives with a bank, MiFID II shows up in client categorisation, questionnaires and documentation. Professional clients enjoy less protection than retail clients, so it matters which category the company falls into.

What to watch out for

The rules on inducements limit when an adviser may receive payments from product providers, and independent advice almost entirely prohibits them. Clients should ask whether the advice is independent and how the adviser is paid, because this affects which products are recommended.

MiFID II does not cover insurance products with an investment element, such as unit-linked life insurance; these are governed by the Insurance Distribution Directive, with similar but not identical rules. When comparing investment and insurance products, watch for differences in cost disclosure.