What is the MiFID?
The Markets in Financial Instruments Directive (MIFID), which came into force on 1 November 2007 and was transposed into Spanish law by Royal Decree 217/2008, provides harmonised regulation for investment services across the member states of the European Economic Area. The main objectives of the Directive are to increase competition and consumer protection in investment services by providing better information and establishing greater transparency in security markets.
Types of clients
MiFID requires firms to categorise all their clients in order to provide appropriate levels of protection. Clients are classified into three categories – retail, professional or eligible counterparties – depending on their level of training and experience in financial products. Based on this categorisation they are then assigned a higher or lower level of protection.
- Eligible counterparties: are basically financial institutions and intermediaries. Their sector knowledge and experience mean that as clients they do not need any protection.
- Professional clients: are basically clients who have the experience, the knowledge and the skills required to take their own investment decisions and correctly evaluate the risks they entail.
- The remainder are categorised as retail clients. They are afforded maximum protection. Consequently, financial and investment institutions must ensure that the product the customer is going to buy is right for them, in other words that they understand and accept the risk involved.
Level of knowledge and risk profile of the client
MiFID has two evaluation tools.
- Appropriateness Test
Its purpose is to assess the client’s ability to understand the features and risks of a product and hence whether the product is appropriate for that client.
- Suitability Test
This test is only used when an entity provides investment advice or portfolio management. The purpose of this test is to classify the client in one of the risk profiles defined by the entity in order to provide them with investment portfolio management or advisory services.
Non-MiFID products (excluded from the application of the MiFID). They are:
Not all products have the same degree of complexity or risk. As a result products are divided as follows:
MiFID products: a distinction is drawn between non-complex and complex ones.
- Current accounts
- Demand deposit accounts
- Fixed interest term deposits
- Variable interest term deposits with guaranteed capital
- Pension plans
- Insurance products
- Non-complex products
- Money market instruments
- Investment funds and SICAV (except real estate)
- Mortgage bonds
- Complex products
- Subordinate debt
- Preference shares
- Real estate investment funds
- Foreign exchange and interest rate insurance and atypical contracts
- Summaries of MiFID policies
- Información general sobre incentivos percibidos de terceros
- Pre-contractual product information:
- Repo assets
- Public debt
- Investment funds
- Real estate investment funds
- CX Private fixed-income securities
- Other private fixed-income securities