MiFID: Changing with the times

Since its adoption in 2004, the Market in Financial Instruments Directive (MiFID) has evolved into Directive 2014/65/EU (MiFID 2), with MiFID 3 already on the horizon. The most recent changes to the MiFID framework include MiFID Quickfix and the introduction of sustainability requirements.

Quick-fixing MiFID 2

The amendments introduced by EU Directive 2021/338 to MiFID 2 came into effect on 28 February 2022. Rather than a complete overhaul, the European legislator choose to make limited and targeted changes to the MiFID 2 framework, a “quick fix” so to speak. The reason for these changes were twofold: 

• The first reason was to counter the harmful effects that the COVID pandemic has had on the European economy. Since liquidity in the markets and access to finance are crucial for a rapid recovery of the economy, MiFID Quickfix has removed certain administrative burdens and thereby the related costs. The most notable of these changes include a shift from a paper-based communication to an electronic one as the standard form of communication between investment firms and their clients.
• The second reason is that some requirements under MiFID 2 did not always achieve the desired objective of increased investor protection and some were even considered as having the opposite effect.

The easing of regulatory complexity, administrative burdens and the reduction of the associated costs, is an initiative that has been received positively by the industry. 

Making MiFID 2 environmentally sustainable

As of 2 August 2022, the application date of Commission Delegated Regulation 2021/1253, MiFID firms providing discretionary portfolio management services or investment advice must i.a. collect specific information about their clients’ and potential clients’ sustainability preferences as part of the suitability assessment.

Consequently, transactions recommended or entered into in the context of portfolio management or investment advisory services now also have to meet the client’s sustainability preferences in addition to the other parameters of the suitability test, including the client’s financial situation, knowledge and experience.

The implementation effort of these new requirements is not negligible since it triggers changes to the documentation, processes and the business of investment firms.

There are also questions as to the practical details on how to integrate the client’s sustainability preferences in the suitability assessment. If investment firms had hoped to be able to rely as much as possible on the “guidelines on certain aspects of the MiFID 2 suitability requirements” of the European Securities and Market Authority (ESMA) (Guidelines), these are still in the process of being updated and are therefore not yet finalised.

Even so, the Commission de surveillance du secteur financier (CSSF) has published on 2 August 2022 a communiqué¹ in which it reminds supervised entities of these new sustainability requirements and expects supervised entities:

1. (i) to comply with these requirements even if the guidelines are not yet finalised; and
2. (ii) to monitor the developments of the regulatory framework and the publication of the guidelines and to continue to adapt their processes and governance accordingly.

Overall, the implementation of the sustainability requirements is a challenging task, not least because of the complex regulatory framework and the practical difficulties these bring with it.

MiFID 3: not really a “3”

MiFID 2 improved considerably upon its predecessor in terms of ensuring fairer, safer and more efficient markets as well as facilitating greater transparency for all markets participants. The proposal published by the European Commission for a directive amending MiFID 2², so-called MiFID 3, aims as part of the effort to create a Capital Markets Union, to do the same by improving, simplifying and further harmonising market transparency.

MiFID 3, however, can hardly be seen as a complete overhaul of the MiFID framework in the same way as was MiFID 2, since the changes it will introduce are quite incidental.

Indeed, the amendments to MiFID 2 mainly serve the purpose of ensuring coherence with the amendments introduced to the Market in Financial Instruments Regulation (MiFIR), which is the second pillar of the European Union’s regulatory framework of financial markets.

Be it as it may, MiFID 3 will certainly not be the last set of changes and MiFID, without a doubt, will continue to change with the times.

(This article was first published in PaperJam on 7 September 2022.)