Published on 08.12.2020

MiFID II vs MiFIR – What’s the Difference?

Introduction to MiFID II and MiFIR

The Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR) are two pieces of EU legislation used to regulate EU and UK financial markets and the firms working within them.

MiFID II came into effect for EU member states on the 3rd of January 2018, replacing MiFID. MiFIR was created alongside MiFID II and became effective on the same date to improve the regulatory framework for European financial markets. MiFID II and MiFIR are complementary to each other and while MiFID sets directives that are then transposed into member state’s law, MiFIR is regulatory and is therefore automatically legally binding in all member states.

MiFID II vs MiFIR: Directive vs Regulation

The key difference between directives and regulations is that directives specify certain results that must be achieved by member states. Directives are binding to member states but require transposition into each member states’ national law before they are applicable. This also means that directives give flexibility to member states to decide how they wish to reach the goal set out by the directive.

Conversely, regulations do not offer the same flexibility as directives and are legally binding to all member states on the date they are brought into force. Since directives provide some implementation flexibility, they often result in diverse applications across member states. In contrast, regulations provide a uniform framework for member states to comply with.

Scope of MiFID II and MiFIR

Both MiFID II and MiFIR apply to certain firms providing investment services or trading financial products within the EU financial markets, that fall within the scope of each. MiFID II and MiFIR requirements apply to any investment firms providing financial services and transacting in the following financial instruments:

Transferable Securities
Money-Market Instruments
Units in Collective Investment Undertakings (UCITs)
Options, Futures, Swaps, Forward-Rate Agreements or other Derivative Contracts
Derivative Instruments for the Transfer of Credit Risk
Financial Contracts for Differences

Subsequently, the following types of firms would fall under the requirements of MiFID II and MiFIR:

Credit Institutions
Investment Firms
Trading Venues like regulated markets, Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF)
Data Reporting Service Providers (DRSPs) including Approved Reporting Mechanisms (ARM), Approved Publication Arrangements (APA) and Consolidated Tape Provider (CTP)

While MiFID II and MiFIR’s territorial reach only extend to EU and UK financial markets, any firm offering products or services within these markets is required to be compliant. A firm will be considered as operating within these markets if it has an established branch in the region. Non-EU and non-UK entities will not be subject to the obligations of MiFID II and MiFIR unless they do business through a branch located in one of these regions.

Investor Benefits of MiFID II

The core purpose of MiFID II is to improve key aspects of the financial markets such as transparency, resilience and competitiveness. This brings some key benefits for investors:

Investor Protection and Best Execution

- Firms are required to “take all sufficient steps” relevant to the execution of the order to ensure the best possible outcome for their clients when placing orders
- Firms are required to provide fair execution to their client even if it is not in the best interests of other clients or the firm – “Member states shall require that investment firms authorised to execute orders on behalf of clients implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other client orders or the trading interests of the investment firm”

Product Governance

- Firms must provide products that are designed to fit the needs of specific end users
- This is subject to regular review and firms must be able to prove that their products remain relevant and suitable for their target audience
- The protections of product governance mean that firms cannot design high-risk, inappropriate products and offer them to unsophisticated investors

Suitability and Appropriateness

- Firms must demonstrate that they have assessed whether a particular product is suitable for each client based on their individual financial goals, understanding of financial instruments and risk tolerance
- The protections of suitability and appropriateness keep customers safe from predatory advisory practices, ensuring all investors have a strategy suitable for their level of risk tolerance and knowledge

Costs and Charges Transparency

- Firms are required to provide full transparency over any costs and charges associated with any financial products
- This level of transparency helps investors avoid hidden costs and improves their ability to compare products effectively

Inducements and Business Conduct

- Firms are not allowed to retain inducements unless they directly improve the quality of the service for the client and do not prevent compliance with “best execution” obligations
- Investment and portfolio managers advising clients on an individual basis must pay all inducements received to the client to ensure compliance

Investor Benefits of MiFIR

There are several key investor benefits with MiFIR also:

Pre-Trade and Post-Trade Transparency

- For equity and “equity-like instruments, MiFIR requires that operators of both Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) abide by transparency requirements
- These requirements also apply to Investment Firms and Systematic Internalisers (SIs)

Trade and Transaction Reporting

- Authorised financial services firms are required to send certain trade data within a defined reporting structure by the end of the following trading day after execution
- This data can be sent to an Approved Reporting Mechanism (ARM) or directly to the NCA

Impact of MiFID II and MiFIR Amendments

MiFID II and MiFIR brought many new requirements to financial services firms. To adequately conform to the new recommendations, new technology was required to ensure that the required reporting and transparency standards were met.

Research from the University of Bath has shown that MiFID II’s financial market reforms unintentionally reduced research activity and negatively affected liquidity in London’s Stock Exchange main market. This was due to the controversial “Research Unbundling” requirement under MiFID II.

Many brokers were forced to absorb the costs associated with improving transparency for clients rather than passing them on, and the FCA (Financial Conduct Authority) found that buy-side budgets for equity research fell by 20-30% during that time. This requirement has now been reversed in the UK regulations for some cases, but the EU requirement still remains.

Brexit and MiFID II/MiFIR

Before the UK left the EU the British government passed laws that transposed almost all aspects of MiFID II and MiFIR into British law. This means that despite the Brexit transition period drawing to a close on the 31st of December 2020, British firms trading financial products or providing investment services within the EU or UK financial markets will still need to comply with the transposed requirements for MiFID II and MiFIR.

On the same date, the FCA inherited the European Securities Markets Authority’s (ESMA’s) role as the regulator of MiFID II and MiFIR within the UK financial markets, while the ESMA continues to regulate European markets.

The Financial Services and Markets Act 2023 (FSMA23) was introduced by the UK government on the 29th of June 2024. This new regulatory framework gives the UK the ability to amend or replace retained EU regulations, so further divergence is likely to appear between EU MiFID II and MiFIR and the UK’s legislation.

Future of MiFID II and MiFIR

The European Commission announced its intentions to amend the MiFID II and the MiFIR in a process known as the MiFIR Review and the MiFID Review. These amendments have a transposition deadline of September 2025.

Despite having the regulatory framework required to do so, MiFID II and MiFIR have not yet produced a Consolidated Tape Provider (CTP). A Consolidated Tape Provider will provide a single point for market data access for investors, providing all market data from the entire Capital Markets Union for each asset class. There will also be further updates to the new Regulatory Technical Standards (RTS), especially the amended RTS22 which is related to transaction reporting.