Markets in Financial Instruments Directive – MiFID

The Markets in Financial Instruments Directive, consistent with conventional macroeconomic theory, seeks to unlock the savings accounts of retail investors and transfer them onto the financial markets. In other words to take assets stored in a relatively safe haven, though admittedly producing limited returns, and place them potentially, though perhaps unlikely, at 100% risk of loss. The savings accounts of the private sector in Europe amount to approximately 20% of GDP. Unlocking that treasure trove constitutes a substantial stimulus for the creation of an active financial market. This fundamental rationale of MiFID explains the extended scope of investor protection provisions contained in the Directive. However, the style of investor protection taken in the Directive is as likely to raise transaction costs and enrich investment firms as much as it may shield investors from risk. MiFID represents a paradigm shift in the EU process of building a securities market.
Capital markets and securities exchanges have undergone substantial changes in the last thirty years. Consolidated national exchanges have yielded to fragmentation, the rise of alternative trading systems, diversity of product, and the increasing participation of retail investors in the financial markets. Competition-driven innovation in the markets has brought benefits in terms of reduced transactions costs as the national exchanges have lost monopolistic control. The Investment Services Directive failed to envision these developments and served to impede rather than track or support market developments.

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Concurrently, this innovation and architectural restructuring of the financial markets has raised novel questions for legal systems, and MiFID raises clusters of issues. While it is beyond the scope of this brief to address developments on this scale, the following issues are addressed in this section: (1) best execution, (2) transparency, (3) access [linkages], drawing comparisons between the United States and the European Union. “With more market centres than ever before, transparency and linkages have become even more critical to providing those who act on behalf of investors the opportunity and tools to effectively serve their customers” (Arthur Levitt, Best Execution, Price Transparency, and Linkages: Protecting the Investor Interest, 78 Wash. U. L. Q. 513, 518 (2000)). “Client Classification” under MFID is addressed in the following section.