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Information about Financial Instruments Directive MiFID II

On 3 January 2018, MiFID II, the Markets in Financial Instruments Directive of the European Union, and numerous related legal acts entered into force. In Estonia, the requirements ensuant from the MiFID II directive took effect with the amendment to the Securities Market Act. In addition to the legislative amendment, several directly applicable European Union regulations entered into effect, by which investment firms must abide in their activity.

MiFID II is a continuation of the MiFID directive, which took effect in 2007. It contains additional requirements for the providers of investment services.

The main goal of MiFID II is to further increase investor protection and the transparency of the market

In order to ensure increased investor protection, investment firms have a new requirement of establishing rules for developing, approving, and distributing investment products as well as an obligation to assess the compliance of the planned distribution strategy of investment products with the target group of the investors.

Everything related to conflicts of interest is now regulated in more detail. Investors must be given a complete overview of the general type and source of potential conflicts of interest and the measures taken to mitigate such risks.
The conditions under which an investment firm may receive fees and benefits from a third party, whose investment products or securities they mediate to an investor, were made stricter.

Prior to making a transaction, an investment firm is obligated to disclose to the client the costs and charges related to the transaction in a way that gives a clearer overview to the client about the costs of the specific transaction. In addition, several new reports must be submitted to the client during the provision of investment services (e.g. an yearly report on costs and charges, a report on the decrease in the values of securities with leverage and the positions of transactions with conditional obligations).

Likewise, the rules of executing client  orders have been amended. For example, the rules must include how the best execution of an order is ensured per each specific class of instruments, and describe the factors that are considered when choosing the method of handling and executing a client’s order.

In order to ensure the transparency of the market, the reporting obligation of investment firms has been increased. For example, a supervision authority must be informed of each transaction that is made with a instrument which was admitted to trading in a trading venue. For this, the investment firm shall gather various data about its clients and their transactions (e.g. the LEI – legal identity identifier – from legal persons).

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