MiFID II simply explained - Regulation & investor protection

The 2008 financial crisis led to major financial market reforms. One of the key measures introduced was the MiFID II directive (Markets in Financial Instruments Directive II), aimed at enhancing investor protection and increasing transparency in financial services. A crucial component of this regulation is product governance, ensuring that financial products are responsibly developed and distributed.

What is MiFID II?

The MiFID II directive, in effect since 2018 across the EU, establishes stringent rules for securities trading. Its primary objectives include improving market transparency, protecting investors, and preventing financial misconduct. It applies to banks, investment firms, and other financial service providers.

Key Aspects of MiFID II

1. Target Market Definition & Product Governance

Financial institutions must conduct a target market analysis for every product to ensure its suitability for the right customer group. This includes evaluating factors such as investment experience, risk tolerance, and financial capacity.

2. Transparency & Reporting Requirements

One of the most significant changes under MiFID II is the requirement for detailed cost and fee disclosure. Financial service providers must ensure that investors receive clear and comprehensive information about all expenses and associated risks.

3. Stricter Rules for Investment Advice & Distribution

MiFID II differentiates between independent and non-independent investment advice. Independent advisors are prohibited from receiving commissions from third parties to prevent conflicts of interest.

4. Best Execution – Ensuring Optimal Trade Execution

Financial service providers are required to execute transactions at the best possible price for clients. This involves a thorough assessment of trading venues and order execution practices.

5. Sustainability & ESG Criteria

Since 2021, financial advisors must also consider sustainability preferences in investment recommendations. ESG-compliant investments are gaining increasing importance in the financial industry.

Impact on Investors & Financial Institutions

For investors, MiFID II offers enhanced transparency and greater protection, while financial institutions must adapt their internal processes to comply with the directive. Many firms leverage advanced software solutions to meet regulatory requirements efficiently.

Conclusion

MiFID II imposes strict requirements on financial service providers, but it ultimately benefits investors by fostering greater transparency and trust in the financial markets. Through effective product governance strategies, firms can ensure compliance while maintaining a competitive edge. Want to learn how to create MiFID II-compliant financial products? Contact our WealthTech experts for professional guidance!