The general economic crisis and the various bank collapses have brought to light all the vulnerabilities of small investors and savers. To boost their level of protection, the MiFID 2 regulation entered into force at the start of the year for those who purchase
investment products. It introduces a number of innovations into the sector: from the mandatory three-page document describing what the products consist of, to the alert system that specifies when they are complex and risky; from product design based on customer risk profiles to the duty to report conflicts of interests, as well as greater clarity regarding fees, which now need to be described in analytical detail. Let’s look more closely at the innovations and obligations introduced by this regulation.

 
More transparency concerning fees

MiFID 2 is the second version of the Markets in Financial Instruments Directive, the directive on the provision of financial services, which came into force on 3 January 2018 in 31 European countries. It introduces significant new aspects concerning the costs of financial products. When they are proposed to investors, the costs must be specified in aggregate and in detail, with a clear specification of investment, disinvestment and management or placement fees. The investor must receive this detailed information before and during the investment, at least once per year. This system will make it much easier to compare products and easily identify those which are most cost effective and exclude those which are more expensive.

The “KID” for clarity

As regards transparency, MiFID 2 introduces another system to ensure that no part of the investment is left unclarified: the “KID”, i.e., a simplified statement with just a few pages but containing certain key information such as the degree of risk (specified on a scale from 1 to 7), the expected return in certain market scenarios, management costs and their impact on the return. The Authorities – first and foremost Consob and the Bank of Italy – may suspend the sale of products deemed too risky.

Risk goes through an X-ray

The precise mapping will also regard investors, for whom a veritable risk identikit will be completed. The question “how much can I lose?” will no longer remain unanswered. According to what is introduced by the MiFID 2, financial products must be designed based on a precise target, with requirements, risk propensity and financial skill spelled out in black and white. Basically, financial advisors need to ask themselves whether that particular product is the right one for the specific investor, by evaluating their objectives and ability to handle losses.

The independence factor

The broker who proposes the acquisition of a financial product must be clear with the customer and state whether his or her advice is independent. Thus, the investor is made aware of the fact that the broker may have an interest in the sale of the product.

Transparency costs

More than two billion dollars in 2018 alone and laborious compliance work: according to the “Financial Times”, these will be the costs of applying the MiFID 2 that banks, asset managers and brokers will need to incur to adjust to the new rules. The regulation also received the blessing of independent advisors: “In Italy,” Andrea Rocchetti of Moneyfarm told the Italian wire service ANSA, “this regulation is highly necessary, because the industry is producing high-cost instruments and is captive to conflicts of interest”.

The sceptics

Various players are looking with scepticism at the new tracks on which the investment industry will run. For example, S&P sees “generally negative” effects for brokers and investment banks, except for the largest ones, “somewhat negative” effects for asset managers, “slightly positive” effects for companies that manage financial infrastructure and manageable effects for the majority of other banks.