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How new regulatory changes affect you

24 October 2017

New rules due to come into effect in January 2018 should provide greater protection for investors. Here, we explain what MiFID II is, and how it will affect the way your investments are managed.

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What MiFID II stands for.
  • How the rules affect investors.
  • What action you need to take.

MiFID II is an acronym for the second ‘Markets in Financial Instruments Directive’, which are regulations due to be introduced next year to help increase transparency and protection for investors.

The European Union (EU) directive, which comes into effect on 3 January 2018, affects British investors even though Britain is leaving the EU.

Here, we explain what MiFID II is, and how it will affect the way your investments are managed.

How does MiFID II differ from MiFID?

MiFID II builds on the original MiFID which was introduced in November 2007. This created a single robust regulatory framework for all EU members. The aim was to provide greater protection for investors and to increase transparency, with regulation for investment services harmonised across all EU member states.

MiFID II is essentially an updated version of MiFID, and expands the scope of the original directive to include a larger range of products and companies.

Whereas the original MiFID largely focused on equities, MiFID II covers a range of other asset classes, including fixed income, commodities, currencies, Exchange-Traded Funds, and retail derivatives such as contracts-for-difference.

What does MiFID II mean for investors?

The introduction of MiFID II not only affects how products are sold and regulated, but also investment advice, information, and costs, with the aim of making everything clearer for investors. According to the EU regulator the European Securities and Markets Authority, the over-riding aim of the rules is to “enhance protection” for retail investors.1

Under MiFID II, investment services must provide clear information on all costs and charges. These include the cost of providing the investment service and any costs and charges associated with the financial instruments themselves.

Our costs and charges will be clearly shown whenever a customer opens an account, and then again at the point a transaction is made, so that costs are always explained fully before you make a transaction. Costs and charges must be expressed both as a percentage and in pounds and pence.

Any third-party payments received by investment firms in connection with the investment service must be itemised separately.2 Firms will be legally obliged to notify customers about the costs incurred at least once a year.

Asset managers will also have to make it clear to investors how much they are being charged for analyst research, and how much of this cost is passed onto clients.

Appropriateness tests

Under MiFID II rules, some types of complex investments require investment services to ask customers additional questions before they can invest in them, to ensure that the product is appropriate for them and that they fully understand how the investment works. This is known as an ‘appropriateness test.’

Appropriateness tests are already currently applied to many complex products such as bonds that embed derivatives, a type of financial product that tracks the performance of an asset, and spread bets, whereby you take a position based on whether you expect the price of a financial instrument to rise or fall in value. They also apply to contracts-for-difference, which let investors speculate on rising and falling markets.

MiFID II treats a wider range of products as complex, such as non-UCITs (undertaking for collective investment in transferable securities) schemes, often referred to as NURS in the UK, for example, property funds.3 A NURS is a scheme which does not comply with the requirements of the UCITs Directive, which is an EU Directive that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. NURS are, however, subject to the same level of investor protection and can be marketed within the UK to retail investors.

What investors need to do

Financial regulations require us to report each time you buy and sell an investment on Smart Investor.

In order to comply with MiFID II rules, we, along with all other investment service providers, must ask you to confirm your nationality and to provide us with what is known as a ‘national client identifier’, usually your National Insurance number.

If we don’t have this information by 29 December 2017, you won’t be able to trade shares, Exchange-Traded Funds (ETFs), investment trusts, bonds, and other stock market-listed securities.

We are writing to all our customers to explain how to submit this information so that there shouldn’t be any disruption to the way you invest once MiFID II comes into effect.

Once you’ve confirmed your identity, you can then choose assets as normal. At this point, depending on whether the investment you’ve chosen is complex or not, you may then need to complete an appropriateness test. After you’ve completed the test, where applicable, you will then be able to place a trade and will be notified of any costs and charges that apply before you make the transaction.

Services which provide you with advice

Investment services which provide you with investment advice must provide you with a ‘suitability report’ each time they give you advice, regardless of whether or not you decide to act on it.

Barclays Smart Investor is an execution-only service, which means we do not offer advice and therefore do not have to provide a suitability report when you invest. If you’re unsure where to invest, seek professional financial advice.

What is MIFID II?

New industry-wide legislation was introduced on 3 January 2018 that may affect your ability to trade on Smart Investor. If you’re confused by the changes, we explain everything you need to know below.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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