MiFID II: More Investor Protection Means New Communications Solutions

I hope you enjoyed reading Part 1 of the series on MiFID II for ManCos. Now it is time for Part 2. In this article, we will dig deeper into the world of markets for financial instruments with a focus on investor protection.

Investor protection: pile it on

Even more investor protection... you might be wondering if there isn't enough protection already for all the investors out there? After all, we have prospectuses, KIIDS, and extra laws and regulations to ensure ongoing compliance. There are also auditors like me, plus regulators, plus AIFMs, plus PRIIPs KIDs coming soon (assuming no further delay).

But it's still not enough!

...is the point of view of the European Union, as we can see with MiFID II and the requirement of defining a "target market" (more info on that in the next section).

What we currently have are regulatory items of increased complexity, coming from different sources of regulation, and often governing the same product. In a perfect world, we might have one single source of regulation, like a rulebook on investor protection. But this is simply not going to happen anytime soon—just the opposite, as complexity seems to be on the rise.

PRIIPs for example will be applicable for investment funds sold to private investors only (the "R" in PRIIPs standing for "retail").1 MiFID II, on the other hand will protect all investors, private and institutional, regardless of whether it's wanted or not.

Target market

The new aspect of investor protection introduced by MiFID II is that you must define what your target market is. From my point of view, however, the expression "target market" could be a little bit misleading. What you're meant to ask yourself is actually whether your investment fund is suitable to be sold to a certain type of investor—thus, a clearer expression might be "target investor".

No matter what your preferred expression is, your definition will have to be ready by the start of 2018.

ESMA has come up with six categories to consider when defining the target market—check out the list here.

Coming back to the scope of MiFID II: let's assume your ManCo has no additional MiFID license as will probably be the case for many Luxembourg ManCos. Who is ultimately responsible for defining the target market? Probably the distributor, as he/she is in scope of MiFID II.

Information asymmetry

However... if the distributor is meant to define the target market, then it begs another question: does he or she have all the necessary...