Investor Protection
The chapter analyses the major changes occurred in investor protection, which is one of the broader aims of the whole of MiFID legislation. In particular, we focus on two disruptive novelties: first, the so-called know your merchandise rule, entailing tha
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Investor Protection
Abstract The chapter analyses the major changes occurred in investor protection, which is one of the broader aims of the whole of MiFID legislation. In particular, we focus on two disruptive novelties: first, the so-called know your merchandise rule, entailing that investment firms identify a ‘target market of end clients’; second, the overarching principle that they must act ‘in the best interest of the client’, including so-called ‘tied agents’ when providing investment advice. The heavily-impacting rules on inducements—which independent advisors are almost completely banned from receiving—are also discussed. In addition to this, we review the criteria determining the categorisation of both products (complex vs. non-complex) and clients (retail, professional, eligible counterparties). Besides, we show the content and the purpose of the suitability and appropriateness tests, discussing which conditions allow not to administer the latter. Also, the strengthening of investor protection is read in the light of product governance and intervention, which are critical to prevent wrongly-designed investment decisions from backfiring.
6.1
The Idea of Investor Protection Over Time
The rationale of investor protection has always been found in the information asymmetries between the providers (performers) of investment services (activities) —typically banks and other financial intermediaries—and their recipients. The two phrases are often intended as synonyms, in the Package itself as well as in many implementing legislations at a domestic level. Yet, some national legislations—e.g., the Dutch one—have actually discerned between them. In fact, there are significant differences across industries: in banking and insurance, counterparties might be the least viable ones (adverse selection) or might behave in a way inconsistent with their obligations (moral hazard). As of the underwriting of units of a collective investment scheme (CIS), as well as the purchase of a security, the uncertainty yielding the asymmetry is much more on the seller’s side, as this latter is often represented by an ‘institutional’ subject, endowed with far more awareness of that product’s risk than the vast majority of clients. © Springer Nature Switzerland AG 2019 M. Comana et al., The MiFID II Framework, https://doi.org/10.1007/978-3-030-12504-2_6
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6 Investor Protection
The concept of ‘investor protection’ is probably the first that comes to mind when thinking of MiFID, either the first or the second Directive. Before it, the idea that the weakest party (i.e. buyers) in financial relationships should BE adequately protected was present but not yet very well developed. In fact, the baseline idea— rooted in the legislation inspired by the French Revolution throughout continental Europe—was that there existed no relevant difference between financial contracts, on the one hand, versus non-financial ones. With the passage of time, along with the development of finance and an increasing number of mala gestio cases harmfully affecting
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