MiFID II: Why it matters for you
Ten years after the financial crisis, the need to ensure adequate protection for savers and investors still looms large for regulators. But this can also create tension between banks and their clients. To meet regulatory requirements, banks often need to ask detailed – and seemingly intrusive – questions. In turn, clients rightly demand to know why banks need so much information about them and how that data is used.
The process is about to get more onerous. The EU’s revised Markets in Financial Instruments Directive – known as MiFID II – introduces various new consumer protection rules. While the aim is to increase the transparency and accountability of financial service providers, and to protect consumers from fraud, in the early stages clients may find the information requirements excessively detailed.
What is MiFID II?
MiFID II will take effect next January. It has been adopted to offer greater protection and transparency for investors in a wide range of asset classes, including bonds, shares, exchange-traded funds and foreign exchange. It creates tougher standards for investment products and aims to provide customers with much greater clarity on the costs they will have to pay.
As a bank, we have two key obligations:
It is tempting to believe that banks are only in the business of selling additional products, so questions about your financial set-up, or whether you have dependent children, might appear a not-so-subtle means of stealth marketing.
However, this isn’t necessarily the case. Under MiFID II, financial services companies are obliged to assess the suitability and appropriateness of every financial product to the customers who use it. For example, we need to assess our clients’ “ability to bear losses” and their tolerance of risk. To do this, we need to know more about you, in order to understand what financial products are right for you.
Suitability needs to be measured at an individual product level, but also in context of your financial portfolio and assets as a whole. This requires us to know what investments and financial products you hold elsewhere so we can judge whether your investments with us are suitable both on their own and as part of your overall financial position.
We also need to gauge our clients’ understanding of financial products so we can classify them as either retail, professional or eligible counterparties. This will influence the type of products we are permitted to offer you and the support that needs to be provided with those products.
Banks and financial services providers look after large amounts of capital. Regulators want to understand the origin of that money to ensure it has not been generated through crime or is being used to finance terrorism. As a result, banks are obliged to ask more questions about the source of their clients’ financial assets.
Again, these questions can seem intrusive, but they are also an important weapon in fighting crime. The better we know our clients and the source of their assets, the more easily we can spot suspect transactions. You can help by letting your bank know in advance of any unusual transactions – for example, large transfers or house purchases – which will help keep questions to a minimum.
The important thing to remember is that while more detailed requests for information may be annoying and even intrusive, the aim of MiFID II is to protect clients from being sold unsuitable products that could undermine their financial management and investment strategies. And we all have an interest in preventing the financial system being used to facilitate crime.
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