by Domenico Iodice
1.2. The European Union Directive 2004/39/EC (so-called ‘MiFID I’) The first organic intervention of the Community legislator marks the will to
reg-ulate savings, in the form of investment advice, with new and binding principles:
Directive 2004/39/EC, also known as ‘MiFID’ (acronym of Markets in financial instruments Directive), and subsequently referred to as ‘MiFID I’, intending to dis-tinguish it from the recast Directive (2014/65/EU), referred to as MiFID II.
With a view to preventing financial market distortions, the European legislator of MiFID I followed the so-called Lamfalussy method, approved by the Stock-holm European Council in 2001, and introduced the first level (i.e. the general principles) of a complex stratification of regulations articulated in four main reg-ulatory levels. This was followed by Executive Directive 2006/73/EC and Im-plementing Regulation 1287/2006/EC, which contain the technical measures to implement and enforce the MiFID.
Directive 2004/39/EC contributes, as a whole, to the construction of an inte-grated, effective and competitive financial market in the Union. It applies to sub-jects operating in the financial markets: intermediaries; trading venues (managers of regulated markets, managers of multilateral trading facilities and systematic internalisers); providers of financial consultancy services. The objective pursued responds to the need to create a level playing field among financial intermediaries in the European Union, without prejudice to investor protection and the free-dom to provide investment services. This can be achieved through: investor pro-tection, differentiated according to the degree of financial expertise; the safe-guarding of market integrity; the reinforcement of competition mechanisms, with the abolition of the obligation to concentrate trades on regulated markets;
the efficiency of markets, also aimed at reducing the cost of the services offered;
the improvement of the governance systems of investment firms, also through better management of conflicts of interest.
Among business activities, the one placed under the magnifying glass of the Eu-ropean legislator is, essentially, financial advice. The term ‘advice’ refers to the provision of personalised recommendations to a client, at his or her request or at the initiative of the investment firm, in respect of transactions relating to fi-nancial instruments.
The first safeguard introduced by MiFID I operates through precise classification of clients. MiFID requires investment firms to make this classification in order to modulate the information obligations to be fulfilled and the protections to be guaranteed. The legislator divides clients into three categories: eligible counterparties
(a subset of professional clients made up of investment firms, credit and insur-ance institutions, pension funds, national governments, central banks and inter-national institutions); professional clients, a category to which belong, by right, en-tities authorised to provide investment services, national and local governments, public bodies, companies that exceed certain turnover thresholds, etc.; retail cli-ents, a category to which belong entities authorised to provide investment ser-vices, national and local governments, public bodies, companies that exceed cer-tain turnover thresholds, etc.; and financial institutions, such as banks, insurance companies and financial institutions. Retail clients, which the legislator does not define, i.e. defines by difference, as they belong neither to the first nor to the second category described above.
The second instrument of protection is the client adequacy and appropriateness test.
From the point of view of customer protection, the test must necessarily be ad-ministered in the case of the provision of financial advice, and is preparatory to it. The sense of the provision is that the intermediary must objectify and trace its verification: a) that the advice given about the financial instruments proposed actually corresponds to the investment objectives of the client to whom it is ad-dressed; b) that the same are appropriate to his assets. This consistency check concerns the investment in relation to the results of the Mi-FID profiling. It is up to the intermediary to gather all the information necessary to understand whether the client’s knowledge and experience are sufficient for a proper assess-ment of the advice provided. In practice, the principle translates into the obliga-tion of intermediaries to introduce appropriate internal organisaobliga-tional rules that formalise the advisory process, with propaedeutic and conditionality constraints that link the various steps, determining the scope of the advisory proposal itself.
The appropriateness test is the first requirement imposed on the consultant, and therefore also on the employee who provides consultancy services. The appro-priateness test, on the other hand, is provided for all other investment services.
In this case, the criteria are the information and experience the client has about the specific financial product and the general level of financial literacy possessed.
A special case is that of the execution-only clause, for which there is no require-ment to carry out the appropriateness test and there are no information obliga-tions except in the phase of access of the client to this modality. Execution only may only concern non-complex financial instruments and must be expressly re-quested by the client.
The third safeguard introduces the rule of best execution and the execution policy. The intermediary is required to execute transactions on behalf of clients on the best possible terms, taking into account price, costs, speed and likelihood of execu-tion and settlement, and the nature and size of the order. Best execuexecu-tion applies to transactions involving all financial instruments, but not to eligible counterpar-ties or in the case of execution only. The adoption and implementation by the investment firm of an execution policy (execution strategy), which, taking into
account the category of the client and the objective of achieving the best possible result, indicates, for each type of instrument, the execution venues on which the buy or sell orders will be executed and the factors that will be evaluated for the purposes of the choice of venue.
The fourth safeguard is the centrality of the internal control function within each investment firm. The compliance function is responsible for monitoring compliance with fairness and transparency obligations, and must therefore be guaranteed effective operational independence, adequate equipment and full autonomous access to all activities of the intermediary: from the production chain to the distribution of financial products and services.
The effectiveness of internal controls is linked to the intermediary’s ability to demonstrate that its production organisation is consistent with MiFID regula-tions (and thus to claim exemption from legal corporate liability, e.g. in the case of misselling) (2). Therefore, the Directive also entrusts the compliance function with responsibilities related to the preparation and/or sharing of corporate mod-els of organisation, management and control (hereinafter referred to as MOG for brevity), which must specify the tasks and responsibilities of bodies and per-sons operating within the company (3). They include regulation of the entire in-ternal communication chain, with provision for record-keeping of activities car-ried out and arrangements for the prevention and management of possible con-flicts of interest (4). Intermediaries must act in such a way as to minimise conflicts of interest. If such conflicts cannot be avoided, the firm must in any case inform the client of the existence of the conflict before acting and must keep a record of such situations.
The application of the Directive, in the years following its introduction, has been partial and deficient, as well as uneven across the Union. The financial crises and certain application practices that are at variance with the guiding principles of the MiFID, in addition to having led in some cases to scandals, including in the media, have undermined the credibility of the financial system as a whole, calling into question the question of confidence in savings and the cogency, prescrip-tiveness and pervasiveness of the rules introduced at various levels by the
(2) Misselling is the deliberate, reckless or negligent selling of financial/insurance products or services in circumstances where the contract is misrepresented or the product or service is unsuitable for the customer’s needs.
(3) These are real endo-company regulatory systems, complex and structured, with a view to prevention, management and control, aimed at developing in directors, managers, employees and collaborators, the awareness of the risk of violations and regulations; their formal adop-tion and substantial effectiveness exclude the criminal liability of the legal person (the finan-cial intermediary).
(4) Conflicts of interest are relevant when they involve a gain for the firm to the detriment of the client, when they concern the conduct of the client’s own business or when they involve the payment of an incentive to parties other than the client.
European legislator. These are the premises of a new all-encompassing regula-tory intervention, which is called MiFID II.
1.3. The European Union Directive 2014/65/EU (so-called ‘MiFID II’)