What is the Markets in Financial Instruments Directive?

John Lister

The Markets in Financial Instruments Directive is a piece of European Union legislation. It aims to make sure the same rules apply to investment service providers in all countries. In turn, this is designed to make it easier for providers from one country to compete in another country, thus increasing competition and providing better services.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Which companies come under the Markets in Financial Instruments Directive is a somewhat complicated distinction. The general principle is that it affects companies that carry out investment services as a core activity. Those companies for which investment services is merely a secondary or "ancillary" area of business are exempted from the directive's measures.

There is a range of requirements on companies affected by the directive. These include what information a company collects about a client, what information it makes available before and after carrying out a trade, and how it classifies clients. For example, business with retail clients, which effectively means the general public, comes under tighter regulation than that with businesses. The directive also requires companies to do everything they can to get the best possible result for a client when carrying out a trading order; this takes into account not only price, but also factors such as speed and transaction costs.

The directive operates a passport plan. This means that each company is regulated in the country where its main office is registered. Once authorized by that country's government, the company is automatically eligible to provide services in any of the other countries covered by the directive. It remains under the supervision of the regulators in its own country, regardless of where each particular trade takes place.

The way the European Union's lawmaking process works means that the Markets in Financial Instruments Directive is binding on all EU member states. In and of itself, the directive is not technically a "law" in itself. Instead, all member states are required to pass domestic laws containing all the measures within the directive. This contrasts to European Union regulations, which apply automatically in every member state.

As well as the 27 countries in the European Union, the Markets in Financial Instruments Directive applies in three other countries: Iceland, Norway, and Liechtenstein. These 30 countries as a whole make up the European Economic Area. This is a special arrangement by which Iceland, Norway, and Liechtenstein are covered by the free market arrangements of the European Union, but do not have to be formal members. In practice, the three countries follow all EU regulations and directives except for those related to farming and fishing.

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