The Markets in Financial Instruments Directive (MiFID) came into force in all EU member states on 1 November 2007, with the idea of creating a more integrated and competitive Europe-wide financial market, while strengthening protection for investors.
The Directive introduced important innovations in the regulation of markets, services and financial instruments, permanently removing the rule that required a concentration of trading on regulated markets and envisaging the introduction of two new types of trading places, in addition to regulated markets: Multilateral Trading Systems and Systematic Internalisers.
The new rules provide for, among other things, an obligation to classify customers in three new categories, in rising order of investment competence; a different level of protection is attributed to each of them, which is inversely proportional to the level of competence: Retail Customer (non-professional), Professional Customer, and Qualified Counterparty.
This means that, for each of the three categories, the bank is obliged to adopt different rules of conduct regarding:
- communicating to customers that they have been classified in one of these three categories;
- information requirements, providing for explicit acceptance by the customer as regards the methods of order transmission and execution;
- assessment of the appropriateness/adequacy of the investment services offered to customers or required by them;
- execution of customer orders at the best terms available (so-called “best execution”) in relation to transactions with any type of financial instrument (stocks, bonds, derivatives, government bonds, listed or otherwise), identifying for this purpose and for each financial instrument an execution strategy that ensures that the best possible results are achieved;
- order management and periodic reporting;
- information on conflicts of interest, with measures to prevent and manage conflicts of interest and, if such measures are not considered sufficient, communicating to customers the nature and sources of such conflicts;
- regulations for the management of orders with price limits.
The personalised advisory service on financial transactions has also been regulated: only an intermediary expressly authorised by the Supervisory Authority can provide investment advisory services.
To implement the MiFID, the bank has to ask its customers for the information needed to create a financial profile for each of them. The purpose is to verify the appropriateness and adequacy of investment transactions carried out by customers in relation to their risk profile and investment objective. If the customer refuses to provide the information needed for this assessment of appropriateness, the bank can still provide the service that has been requested, but informing the customer that it cannot make an assessment of whether the transaction is appropriate or not; otherwise, in the case of an evaluation of adequacy, the Bank has to refrain from providing investment advisory services.
These elements will be taken into account also for investments linked to any portfolio management services chosen by the customer, which cannot be implemented if the customer refuses to provide the above information.