Client Categorization and Investor Protection under MiFID IISalvus Team
Who are the recipients of the investment services, what are their eligibility criteria and how do firms ensure they achieve investor protection under MiFIDII requirements?
Following our previous articles, in this commentary, we discuss how firms categorize their clients and what are the requirements to ensure investor protection.
Under the new regulation of MiFID II, investment firms must define and categorize their clients – natural or legal persons – to one of the three categories below;
1. Eligible Counterparties are clients such as;
– investment firms,
– credit institutions,
– insurance companies,
– collective investment schemes and their management companies,
– pension funds and their management companies,
– national government,
– a public body that deals with public debt at a national level,
– a central bank, and
– another financial institution authorized or regulated under EU legislation.
2. A Professional client is a client who has adequate knowledge and experience to assess the risks involved and decide for its own investment activity. For this, they are due to a lower level of protection than retail clients. Professional clients are either;
a) large undertakings meeting two of the following requirements:
– a balance sheet of 20 000 000 EUR,
– net turnover of 40 000 000 EUR,
– own funds of 2 000 000 EUR.
b) clients that request to be treated as professional and meet two of the following requirements:
– they have conducted on average 10 significantly sized leverage transactions per quarter and over the last 4 quarters,
– they have a financial instrument portfolio over €500,000 (including cash deposits),
– they work or have worked in the financial sector in a professional position, for at least a year.
3. A Retail client is a client who is not a professional client.
A rule of thumb for the firms providing investment services to clients is that ‘’they shall act, at all times, honestly, fairly and professionally for the best interest of their clients.’’
The competent authorities now pay particular attention to the firms’ marketing communications to ensure that it is fair, clear and not misleading.
Further, appropriate information shall be disclosed in advance to help clients understand the nature, risks, costs, potential gains and losses of the investment products about to purchase. All public documents related to execution, including;
– the order execution policy,
– the RTS 27, and
– the RTS 28
must reveal precise and clear information on how the firm executes client orders, the execution venues offered by the firm and the quality of execution in the past quarters.
Finally, clients must receive a notification (ie. via an email) with all ex-post trade on costs and charges related to their trading activity. In our ‘MiFID II Ex-Post Information on Costs and Charges’ article, we elaborated on what information is needed, how often it is needed and when it is needed.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.