Regulatory Change: Disclosures for investor protection under MIFID II

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(Image courtesy: financialexpress.com)

 At the Battle of Tannenberg in August 1914, 30,000 Russian soldiers were killed or wounded and another 95,000 were captured. The Germans lost fewer than 20,000 soldiers and captured military supplies. After this defeat, the Russian army could not muster an offensive against the Germans until World War II.

‘German leaders had a thorough understanding of their adversary’s capabilities, schedules, and concept of operations, and this knowledge allowed them to exploit Russian vulnerabilities and defeat them in detail’, says Gregory Elder in a paper titled ‘Intelligence in War: It can be Decisive’, filed with the CIA library.

Clearly, access to ‘intelligence’ / disclosure of information can be powerful. It can affect outcomes.  ‘OUTCOMES’ determine the financial future and/or quality of life of the investors in the financial markets.

Investor protection is a large theme under MIFID II/ MIFIR which aim to enhance the efficiency, resilience and integrity of financial markets. On 25th April ’16, the Commission adopted a delegated regulation supplementing Directive 2014/65/EU. MIFID II/MIFIR provide an updated harmonised legal framework governing the requirements applicable to investment firms, regulated markets, data reporting services providers and third country firms providing investment services or activities in the Union.

MIFID II, which comes into force in January 2018, bolsters requirements regarding the “appropriate information” that an investment firm must provide in good time to the client. Here is a closer look at some of the key features of MIFID II/ MIFIR pertaining to ‘disclosure’ of information.

  • Investment firms should provide clients or potential clients with the necessary information on the nature of financial instruments and therisks associated with investing in them.
  • Investment firms’ should disclose information on allcosts and charges, in good time before the provision of services. These obligations extend to relationships with professional clients and eligible counterparties.
  • In case the firm offers ‘investment advice’, it must say whether the advice is provided on an independent basis or not and whether it is based on a broad or more restricted analysis of the financial instruments available on the market.
  • Such firms must conduct aSuitability test based on the clients’ investment objectives, financial situation and knowledge and experience. These must be repeated at a regular frequency. Appropriateness must be examined for non-advised services.
  • Clients should be informed of the performance of their portfolio and depreciation of their initial investments.
  • Investment firms must have a ‘Best Execution’ policy in place and must report to the clients the quality of their execution. They must also report the top five execution venues in terms of client orders.
  • Information requirements should be established which take account of the status of a client as   either retail, professional or eligible counterparty. To this end, it is appropriate to establish less stringent specific information requirements with respect to professional clients than to retail clients.

Finally, disclosures must be made in a clear, understandable, unencrypted manner, so as to be useful to investors; much as the intercepted Russian military intelligence was, in the Battle of Tannerberg, to the delight of the Germans!

It is upto investors to make best use of the disclosed information. To quote  Gregory Elder,  ‘Intelligence at Tannenberg did not win the battle, but it did play a decisive role in dictating the way Germans employed their units against a force that was larger than theirs’.

 

© Anu Maakan 2016

(Disclaimer: all views published here are the personal views of the author and do not represent those of any organization).

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