MiFID III on the Horizon: Key Proposals and Their Market Impact

The European Commission is preparing MiFID III reforms targeting market transparency and investor protection. We break down the proposals and their implications for UK and EU practitioners.

The European Commission is preparing a comprehensive review of the Markets in Financial Instruments Directive (MiFID), with MiFID III expected to introduce significant changes to market structure, transparency requirements, and investor protection rules. For finance professionals operating in European markets, understanding these proposals is essential.

The current MiFID II framework, which came into force in January 2018, introduced sweeping changes to European financial markets, including enhanced pre- and post-trade transparency requirements, the unbundling of research from execution services, and strengthened investor protection rules. While MiFID II has achieved many of its objectives, regulators have identified areas where the framework can be improved.

Key proposals under consideration for MiFID III include reforms to the consolidated tape — a centralised system for publishing trade data across European markets. The current fragmented market data landscape makes it difficult for investors to obtain a comprehensive view of market activity, and a consolidated tape is seen as essential for improving market transparency and efficiency.

The treatment of research under MiFID III is also under review. The MiFID II unbundling rules, which required asset managers to pay for research separately from execution services, have had mixed results. While they have improved transparency around research costs, they have also led to a significant reduction in research coverage, particularly for smaller companies. MiFID III may introduce more flexibility in how research is paid for.

Investor protection rules are likely to be strengthened under MiFID III, with particular focus on the suitability and appropriateness assessments that firms must conduct before recommending investment products to clients. The increasing complexity of financial products and the growing use of digital distribution channels are driving regulators to update these requirements.

For UK professionals, the relationship between MiFID III and the UK's post-Brexit regulatory framework is an important consideration. The UK has retained much of the MiFID II framework in its domestic regulations, but has also begun to diverge in certain areas. Understanding both the EU and UK regulatory frameworks, and the areas of convergence and divergence between them, is increasingly important for professionals working in cross-border financial services.