MiFID – Markets in Financial Instruments DirectiveMiFID (Markets in Financial Instruments Directive) refers to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, i.e. collective investment undertakings, investment securities, financial instruments, and derivatives. MiFID and Commission Decision 2006/73/EC have been implemented into the legal system of the Czech Republic through national laws, particularly Act No. 256/2004 Coll. on Capital Market Undertakings. One of the most important objectives of MiFID is to harmonize investor protection throughout Europe and to adapt client protection to the level of their investment-related knowledge and experience.
Rules for Providing Investment ServicesMiFID proposes three main rules for providing investment services. These rules must be observed by securities traders:
- Acting honestly, fairly, and professionally in accordance with the client’s interests.
- Providing the client with appropriate and complete information that is fair, clear, and not misleading.
- Providing the client with investment services that take into account his specific situation.
You can find relevant documents here.
Categories of ClientsThe rules for dealing with clients set out in the directive are much more extensive than in the past. MiFID introduces client categories and classifies clients as professional and retail. In line with this categorization, securities traders face stricter requirements for collecting information from clients – the directive describes in detail the methods for giving information to clients, handling and processing clients’ instructions, etc. Before providing an investment service to you, we are required under the law, specifically Act No. 256/2004 Coll. on Capital Market Undertakings, to classify you in one of the following categories:
- retail client
- professional client
- eligible counterparty
Categories of Investment ServicesMiFID also defines conditions for provision of investment services and classifies these services into three categories:
- Execution only trading – A trader completes only a transaction you request based on your initiative without carrying out any assessment of the transaction’s suitability for you.
- Trading without investment consulting – Before signing a contract, a trader will ask you to complete an appropriateness test to evaluate your experience and knowledge of investment instruments. If the trader concludes that you have the necessary experience and knowledge to understand the relevant risks, he will complete the transaction. Otherwise, the trader will point out the unsuitability of the transaction and will carry it out only if you insist on its completion. However, the transaction will be completed at your risk.
- Investment consulting – In this case, the securities trader must determine your specific needs and situation and offer you an appropriate investment instrument. The trader must complete a suitability test during which you will be asked about your investment objectives, financial situation, and experience and knowledge. If you, as the client, do not provide the trader with information necessary for assessing the suitability of a transaction, the trader is unable to give you investment recommendations and, accordingly, to complete the applicable transaction.