This is to inform you about changes that have taken place in connection with the implementation of the rules set out in the Markets in Financial Instruments Directive (2004/39/EC). The changes concern collective investment undertakings, investment securities, financial instruments, and derivatives.
MiFID (Markets in Financial Instruments Directive) refers to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments. MiFID and Commission Decision 20006/73/EC have been implemented into the legal system of the Czech Republic through national laws, particularly Act No. 256/2004 Coll. on Capital Market Undertakings.
One of the most important objectives of MiFID is to harmonize investor protection throughout Europe and to adapt client protection to the level of their investment-related knowledge and experience.
Rules for Providing Investment Services
MiFID proposes three main rules for providing investment services. These rules must be observed by securities traders:
- Acting honestly, fairly, and professionally in accordance with the client's interests.
- Providing the client with appropriate and complete information that is fair, clear, and not misleading.
- Providing the client with investment services that take into account his specific situation.
Categories of Clients
The rules for dealing with clients set out in the directive are much more extensive than in the past. MiFID introduces client categories and classifies clients as professional and retail. In line with this categorization, securities traders face stricter requirements for collecting information from clients - the directive describes in detail the methods for giving information to clients, handling and processing clients' instructions, etc.
Before providing an investment service to you, we are required under the law, specifically Act No. 256/2004 Coll. on Capital Market Undertakings, to classify you in one of the following categories:
- retail client
- professional client
- eligible counterparty
The objective of this categorization is to protect clients who have a lower level of investment knowledge and experience. The highest degree of protection is provided to retail clients. It means that clients in this category receive the largest amount of relevant information on investment products and services and, at the same time, are warned of the potential risks posed by a specific investment service. Most clients will be classified in the retail client category because this segment includes the majority of private individuals.
Eligible counterparties and professional clients mainly include banks, governments, pension funds, large corporations, and, exceptionally, private individuals. Clients in this segment are judged to be able to make their own investment decisions and to evaluate potential risks without needing such a high degree of protection as retail clients.
A client has the right to demand to be classified in a different category in accordance with the conditions set out in the applicable laws and regulations. If reclassified from the retail status to a different category, a client might be no longer entitled to compensation from the foreign guarantee system (its purpose is similar to the Securities Traders Guarantee Fund). In addition, some of the obligations securities traders have to retail clients may expire or be reduced following such reclassification.
Categories of Investment Services
MiFID also defines conditions for provision of investment services and classifies these services into three categories:
- Execution only trading - A trader completes only a transaction you request based on your initiative without carrying out any assessment of the transaction's suitability for you.
- Trading without investment consulting - Before signing a contract, a trader will ask you to complete an appropriateness test to evaluate your experience and knowledge of investment instruments. If the trader concludes that you have the necessary experience and knowledge to understand the relevant risks, he will complete the transaction. Otherwise, the trader will point out the unsuitability of the transaction and will carry it out only if you insist on its completion. However, the transaction will be completed at your risk.
- Investment consulting - In this case, the securities trader must determine your specific needs and situation and offer you an appropriate investment instrument. The trader must complete a suitability test during which you will be asked about your investment objectives, financial situation, and experience and knowledge. If you, as the client, do not provide the trader with information necessary for assessing the suitability of a transaction, the trader is unable to give you investment recommendations and, accordingly, to complete the applicable transaction.
LBBW Bank CZ a.s. will send all clients a letter informing them of the category in which they have been classified (retail client, professional client, or eligible counterparty). Together with this letter, clients will receive a new investment services agreement that includes the new requirements introduced by MiFID.
For more information about the obligations and benefits introduced by MiFID, visit the European Securities and Markets Authority website – MiFID: Consumer Guide – Investing in Financial Products.