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MiFID 2, CORPORATE GOVERNANCE AND BOARD OF DIRECTORS

"On January 3, the reform of the Financial Markets and Instruments Directive, better known as MiFID 2, came into force"
Galo Juan Sastre Corchado. Director of Andbank Spain

On January 3, the reform of the Financial Markets and Instruments Directive, better known as MiFID 2, came into force. The financial crisis revealed the need to undertake a profound reform of the regulatory framework that regulates the financial sector in order to provide it with a higher level of transparency and greater protection of its participants, especially the small investor.

MIFID 2 includes an important set of measures aimed at improving both the functioning of the securities markets and the provision of financial services.

As regards securities markets, the new regulation seeks to adapt them to new technological developments and a higher level of transparency, expanding the set of financial products to which the new standard applies. Regarding the provision of investment services, investor protection is reinforced, among other measures, through a clearer definition of the different investment services that can be provided and better governance in terms of the design and distribution of financial products.

To avoid mistakes made in the past, the MiFID 2 places a premium on the organizational measures that financial institutions must comply with. The rules of conduct that govern the operation of entities are the object of special attention by the new directive. Good governance is, increasingly, a determining factor for financial institutions to provide their financial services in a more transparent way and always in the best interest of the client. Among other relevant aspects, internal control functions are reinforced and more prudent management is required by senior management. In this last section, the coordination of MiFID 2 and CRD IV is essential to achieve an organization where the functions are perfectly defined and delimited, avoiding possible conflicts of interest.

In recent years, financial institutions have undertaken ambitious projects to adapt to MiFID 2 and respond in the most effective way possible to the new requirements of the European Union. The entities would commit a serious error if in this adaptation process their objective was exclusively a formal compliance with the norm. The experience of recent years has taught us to consider regulation as something strategic for an entity, which requires more proactive management to achieve a competitive advantage, especially necessary in such a regulated and competitive sector.

However the work is not finished, nor is everything done. Although it may seem obvious, MiFID 2 has just come into force and there are still many aspects that the regulator has not clearly defined. Consideration of when independent advice is provided, the possibility of charging incentives, what is understood as the best interest of the client, the remuneration of the advisory service to clients, the new requirements for the design of financial products and their adaptation to the needs of the different investment profiles, are some of the issues on which the sector expects further clarification from the supervisory bodies. It is true that ESMA has published a wide range of technical standards as a development of the new directive, but the aforementioned issues still generate many doubts in our financial sector. It is also true that financial institutions have to be aware that the rules of the game have changed in crucial aspects and that there is no going back. It is one thing for the regulator to clarify certain aspects for a better interpretation of the norm and another is for entities to "refuse" to see this new reality.

What the MiFID came into force in 2007 comes to mind. At first, investment services companies were not very clear about how to define their suitability and convenience tests and how to really assess the suitability and convenience of financial products taking into account the investment profile of their clients. Even the regulator took more than 2 years to provide very useful criteria for better definition. Some entities when distributing their financial products, unfortunately, chose to generalize the use of disclaimers when that measure should have an exceptional nature and the consequences are known to all.

Good governance of financial institutions requires exhaustive monitoring of the agreed action plans, as well as a critical assessment of their adequacy. One of the most significant novelties is the new process for the design and approval of financial instruments. The standard obliges entities not only to distinguish between retail and professional clients, but also to establish additional criteria that allow them to direct each of the financial products designed to the most appropriate clients. Compliance with this standard will require customer segmentation based on that potential distribution of investment products, a task that in the short term will not be easy, although in the medium term it will involve more and better information on the different investment profiles. .

Investment services firms have also had to make decisions thinking about how your customers might react, for example in the design of an independent advisory model. It is foreseeable that their response will not be in all cases the one foreseen by the entity and it is necessary to adapt its strategy and its proposals to the true demands and needs of its clients, avoiding making the mistakes of the past, especially in everything related to the use of generalized measures that the norm considers as exceptional.

It is clear that the MiFID 2 reinforces the responsibilities of senior management established by the previous board of directors in matters of strategy, business plans, supervision of the executive line, independence of internal control functions and remuneration. As stated in article 9, the board of directors is responsible for defining the master lines in terms of strategy and internal organization.

The board of directors must effectively supervise the implementation of the agreed action plans and review their suitability with the executive management, adopting all the necessary measures, not only to comply with the standard, but all those that may result in the best interest of the client and the entity itself. Internally, it must periodically review the operation of the control departments; the technical means available to the entity, especially relevant due to the increase in periodic reports to the regulator; compliance with ethical codes; governance in the design and distribution of financial products or remuneration policy.

 MiFID 2 implies important changes in the way financial services are provided, but the sector still does not have sufficient experience in how to implement some of the new requirements, which will require a supervision and a critical assessment of the measures adopted and their correction when the business reality so advise.

At this time, it is good to remember, even if it is obvious, that entities have started to provide their services in accordance with the new MiFID 2 criteria just a few days ago. It is from now on when you will see its effective implementation and the effectiveness of its action plans. Experience shows us that our guard must not be lowered. Financial entities have worked hard and well in recent years to get to the starting gun, they have prepared and trained well, but let's not forget that "The race begins now."

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About the Blog

Blog Tribute Antonio Moreno

Blog Tribute Antonio Moreno

Blog tribute to Antonio Moreno Espejo, who was Director of Authorizations and Registrations, National Securities Market Commission (CNMV), co-director of the Financial Markets Forum of Fide and Member of the Academic Council of FIDE. This collective blog contains articles and reflections generated by people who regularly participate in the Financial Markets Forum of Fide.

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