The MIFID II Directive, in force since January 3, 2018, is intended to increase investor protection in the capital markets. Its main purpose is to bring more market transparency and protect clients against investing money without proper knowledge. It imposes additional disclosure obligations on financial institutions, including those related to the risks posed by specific products and greater cost transparency. What are the actual changes in the light of MIFID II investor protection?
Product governance MiFID II
The MIFID II directive requires investment companies to carry out a detailed analysis of a product before offering it to a client. The analysis must take into account the situations in which market conditions deteriorate, the product loses its value, the company that produces it faces difficulties, and many more. The Product governance MiFID ii directive clearly defines the need to create so-called “positive target market” for which the product is targeted. Next, the type of client for whom such basket of products can be offered must be defined, as well as the so-called "negative target market", i.e. for whom the product is not suitable. The Product governance MIFID II also requires identifying potential risks associated with product and recommends for the product to be aimed at client profit.
Suitability and appropriateness
The new MiFID II Directive regulations require banks to check how well the client understands the proposed product, as well as the client’s general knowledge about investment services and financial products. According to MIFID II, these changes are quite significant and banks now have an obligation to conduct an adequacy test that checks whether a given service or financial instrument is suitable for the investor. The client must demonstrate, among other things, an understanding of the risk associated with the transaction, and the bank should assess whether the product or service is best for them, based on their investment objectives and current financial situation. The MIFID II directive is aimed at achieving more careful matching of products to clients by companies and banks.
After the contract has been concluded, the bank must provide the client with a suitability report. It should contain a summary of the recommended products and a detailed explanation of why the service or product will be the best fit. A MIFID 2 summary should be provided before or after the transaction if it has been concluded remotely. In case of changes in the client portfolio, a bank or investment firm must prepare a written MiFID II summary report each time, which includes a comparison of the products exchanged and an evaluation of the benefits resulting from them.
MIFID II reporting
MIFID II reporting also introduces changes in informing the client about all key aspects of the client investment including benefits (fees paid by client) for banks and other financial institutions, which they receive in connection with the sale of a given product. This must be done in a clear and understandable way for the client. In addition, banks are obliged to provide clients with information on the advisory offered, as well as on potential risks. What's more, the MIFID II costs and charges specifies exactly how it should be done - the font must be the same size as for other product data, and the information should be presented in an understandable language. This is to avoid situations in which the client is led into error or when too intricate terminology causes a lack of awareness of the real risk associated with the purchase of a given product.
MIFID II Directive also requires informing the client once a year about the full costs and charges incurred, and their impact on the total financial result of the investment. Financial institutions should also provide a periodically updated suitability report that confirms that the product is properly matched to the client and that it takes into account the benefits the client has gained.
MIFID II summary and meeting minutes
According to MIFID II directive, banks are also obliged to record all conversations with clients that are related to the sale of the product or the preparation of reports from them. In practice, this means that you need to register all telephone conversations and archive any e-mail correspondence with the client. Additionally, the bank must inform the client that communication between them and the advisor is recorded, and also about the fact that it is available for review for the next five years. In accordance with the provisions of MIFID 2 Directive, the changes also apply to communication between supervisors and the advisor, if it concerns the sale of a product. Such communication also should be registered.
In case of face to face meeting with the client, according to MIFID II, it is necessary to take notes from each meeting in the form of meeting minutes. They should include the date and place of the meeting, the names of persons participating in it, necessary information about the product and a short record of the meeting and its effect. The report must be prepared and stored in such a way so it can be easily made available to the client when necessary.
MIFID II costs and charges
Under MIFID II directive, banks and investment companies must present their clients with full range of costs. This means that before making a purchase, the investor must receive an estimate of the annual cost associated with the acquisition and maintenance of the product. This should be done in the form of several scenarios: neutral, positive and negative. The MIFID II costs and charges also forces investment firms to inform clients once a year about all expenses they incur and how these affect the total financial result of their investments. Ideally, such a combination should be presented in a graphic manner, making it more understandable and transparent to the client. It should also include information on remuneration from third parties, e.g. investment funds, which the company receives in connection with the service provided to the client.
Comarch Wealth Management and MiFID II investor protection
MiFID II investor protection guidelines are covered by Comarch solution for Wealth Management. Starting from the analysis of client needs and client financial health, through to suitability and appropriateness tests with product governance logic, the client gets best product portfolio and full cost transparency. Meeting minutes can also be created, along with MIFiD II summary report or suitability report.