ESMA outlines enhanced protection for retail traders in MiFID II

The European Securities and Markets Authority (ESMA) announced yesterday that changes are being made to a key piece of European law whose purpose is to protect retail investors when purchasing or investing in financial products. The Markets in Financial Instruments Directive (MiFID) is being updated and strengthened in some important areas and will be known as MiFID II.

As far as retail FX is concerned, a series of benchmark rulings have been included under the MIFID II framework, including the requirements to ensure that prices are clear before and after trading on an exchange or other type of trading platform.

The new European regulations will now apply to a wider set of financial instruments than just shares. For instance, firms will have to be clear about prices offered to buy or sell bonds, depositary receipts, exchange traded funds, structured finance products and derivatives and must also be clear at what price these products were actually bought and sold.

These new requirements will allow customers of retail firms to see more clearly the actual prices of various financial instruments, enabling them to compare prices and find the most competitive offer available.

MiFID II will increase the protections provided to retail investors at the point of sale. It will do this by limiting the types of non-complex instruments that can be sold without the firm needing to ask about, or assess, any trader’s knowledge and experience.

In addition, MiFID II will cover structured deposits – a category of financial products which was previously unregulated at EU level, but which satisfies similar investor needs and raises comparable investor protection challenges to the types of financial instrument already within scope of MiFID.

In the future, the sale of structured deposits will have to comply with several MiFID requirements – in particular, with the conduct of business and conflicts of interest rules which govern how financial firms should behave towards their customers, including when they are designing, advising or distributing MiFID instruments.

A further matter to consider is that in some circumstances, MiFID II will introduce a complete ban on some firms receiving a payment or some other form of non-monetary benefit from third parties (such as payments that managers of investment funds make to investment firms that sell investment funds to retail clients).

In the future, any portfolio manager or firm which professes to provide independent financial advice will no longer be able to accept or retain payments (fees, commissions or any other monetary benefit) or non-monetary benefits that they receive from a third party for a service they carry out on your behalf. Where they receive any payments from third parties in relation to the provision of investment advice or portfolio management to retail investors, they have to pass it on to the investor.
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