Investor protection rules
The client categorisation explained previously serves to tailor the specific rules by which the investment firm is bound when offering its services to its clientele. These rules of conduct can generally be classified as duties of information, reporting and execution. Irrespective of the categorisation of the client, Art.
24(1) MiFID II requires that the investment firm act “honestly, fairly and professionally in accordance with the best interests of its clients”.
Besides the distinctions between client categories, the MiFID rules of conduct are tailored to the type of investment service provided. In other words, the general duty to act honestly, fairly and professionally is contextualised for the three specific types of investment services introduced earlier: (i) duties imposed upon “execution-only” services; (ii) duties upon the provision of investment advice; and (iii) duties imposed upon the provision of portfolio management. Understandably, the duties on the investment firm and the corresponding level of investor protection are least extensive where it regards execution-only, and most extensive where it regards portfolio management.
More specifically, Art. 27 MiFID II provides that in respect of execution-only services, an investment firm’s obligation is to obtain
the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, where there is a specific instruction from the client the investment firm shall execute the order following the specific instruction.
Pursuant to Art. 25(3) MiFID II, when providing execution-only services, investment firms must “ask the client or potential client to provide information regarding that person’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the investment firm to assess whether the investment service or product envisaged is appropriate [emphasis added] for the client. [. . .] Where the investment firm considers, on the basis of the information received [. . .], that the product or service is not appropriate to the client or potential client, the investment firm shall warn the client or potential client”.
Art. 25(2) MiFID II provides that in respect of both investment advice and portfolio management, the investment firm must
obtain the necessary information regarding the client's or potential client's knowledge and experience in the investment field relevant to the specific type of product or service, that person's financial situation including his ability to bear losses, and his investment objectives including his risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and ability to bear losses.
This duty' is commonly referred to as the Know-Your-Customer (KYC) duty. Ultimately, the client must understand the risks, the transaction must satisfy the investment objectives of the client, and the client must be in a position to bear the financial risks implied in the transaction.
Art. 25(1) MiFID II specifies that
Member States shall require investment firms to ensure and demonstrate to competent authorities on request that natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of investment firms possess the necessary knowledge and competence to fulfil their obligations.
As a matter of principle, the MiFID obligations that aim to protect investors as just discussed are enforced by national supervisory authorities through administrative sanctions (Art. 70(1) MiFID II). In several Member States, however, the last decade has witnessed a host of civil law litigation, in which investors held their investment firms liable for financial losses. In these cases, reference is oftentimes made to MiFID obligations that may or may not have been violated. Until now, the CJEU has been restrictive and held that it is for the Member States to determine what the consequences of MiFID are under their private laws. See, e.g., C-51/13 (Nationale Nederlanden/Van Leeuwen), C-604/11 (Genii 48/ Bankinter) and C-174/12 (Hermann/Immofinanz).
Another important duty’ which rests upon investment firms, is the obligation to identify' conflicts of interest. Under MiFID, the relevant rules in this context apply to all types of investment firms, and their focus is on the firm’s internal structure and procedures. More in detail, Art. 23(1) MiFID II provides that investment firms must
take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, emselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof.
The investment firm should therefore put in place the measures detailed in Art. 16(3) MiFID II, which aim to prevent the adverse consequences of such conflicts.