What is Mifid II?

In a move designed to increase transparency, mitigate risks and help consumers in the investment sector, the UK will implement the EU’s MiFID II legislation on January 3rd 2018. As a wide-ranging piece of law, MiFID II has the potential to affect a large proportion of firms in the sector – and those not prepared by the implementation date risk having to cease trading.

What is it?

The EU legislation is the second part of original legislation introduced ten years ago, which was created to regulate firms who provide services to clients linked to ‘financial instruments’. This includes shares, bonds, units in collective investment schemes and derivative, as well as the places in which those instruments are traded.

According to the Wealth Management Association, who represent 180 firms in the sector, the standardisation of definitions of advice to those outlined in MIFID II will allow firms to mitigate risks and better help consumers.

What does it mean?

Essentially, MiFID means that many of the firms affected will have to change the way they do business in order to comply.

Advice will need to be given out more carefully, with client accounts re-evaluated once a year to ensure the advice still meets the clients’ needs.

The recording of both mobile and landline calls will be obligatory, with the information needing to be kept secure for five year period in a ‘secure and professional manner.’

Investment companies will need to be more transparent about the cost of advice, providing investors with a breakdown of charges and the ongoing costs associated with investment

What about Brexit?

As early as February of this year it was confirmed that the implementation of MiFID would go ahead despite Brexit. The legislation will continue to remain in effect until the UK officially leaves the EU, which Theresa May has confirmed will be on the 29th March 2018.

After this, the future of the finance industry depends heavily on whether the UK is allowed to keep its passporting rights, which would allow UK firms to continue to operate across the EU. As this would involve the UK remaining part of the European Economic Area, which May has said she is against, this seems unlikely. This will dictate whether MiFID will remain in force after that time, or whether it will be replaced with a UK equivalent.

So what does it mean for investors?

In the short term, MiFID is likely to improve transparency and the efficiency of the service they receive, and possibly lower costs. The terms of MiFID dictating that transparency over costs needs to be improved may, however, have a negative effect on the research bought by investment firms, who may pass these costs onto the investors rather than absorbing them themselves.

Post-Brexit, if MiFID is replaced by UK legislation, there is concern that consumer choice may be restricted as the number of funds available significantly decreases.