Markets in Financial Instruments Directive (MiFID) II

The Markets in Financial Instruments Directive (MiFID) II will come into effect on 3 January 2018 and deliver some significant changes to investing regulations in the UK.

In this article, we discuss ‘complex’ products and how the changes to MiFID II may affect you and the way in which you invest.

To read our earlier article about the additional information we need to collect from you and why we need to collect it, please click here.

The MiFID II regulation has a strong focus on consumer protection and ensuring that customers are sold the right products for their needs. This means that before enabling you to buy an investment, MiFID II requires the distributer to undertake actions regarding identifying a target market for the investment.

One area of focus for MiFID II is to try and prevent overly ‘complex’ products being sold to investors for whom they are unsuitable.

Currently securities such as Covered Warrants, Derivatives and Structured Products are considered to be ‘complex’ products and are products best suited to more experienced investors. This is due to the leveraged nature of these products, where a small change in price has a large impact on the value of the product. This means that profits and losses are heightened.

It’s already a regulatory condition that any execution-only broker selling ‘complex’ products to investors must test their ‘knowledge and understanding' first, but MiFID II will increase the number and range of products to which this applies. This means that you may be asked to complete a questionnaire (known as an Appropriateness Test) when purchasing certain products that you may have purchased before without completing the Appropriateness Test.

You’ll be asked for information about:

• your understanding of the product you are wishing to purchase
• your knowledge and experience of investing

You will be asked to complete the questionnaire when you first purchase a ‘complex’ product.

If you don’t invest in ‘complex’ products, then this does not apply to you.

As we explain in this article, in order to comply with other requirements of MiFID II, we need to collect some additional information from you. To find out what information we need to collect from you, please click here.

It is vital that you provide this information, as failure to do so may mean you cannot trade after 2 January 2018. This includes standing instructions such as Regular Investments or Dividend Reinvestments.