INVESTMENT SERVICES: MIFID TO RESHAPE TRADING PRACTICES ON REGULATED MARKETS.

MiFID has the same basic purpose as the ISD it replaces, namely to harmonise conditions for operating in the investment services market throughout the EU. But it makes significant changes to the regulatory framework to reflect developments in financial services and markets since the ISD was implemented. It widens the range of core investment services and activities that can be provided throughout the EU under the 'single passport' system. In addition to the services covered by the ISD, MiFID upgrades advice that involves a personal recommendation to a core investment service in itself; introduces operating a multilateral trading facility (MTF) as a new core investment service covered by the single passport; and extends the scope of the passport to cover commodity derivatives, credit derivatives and financial contracts for differences for the first time.

The client.

Customers will be assigned a classification, which will serve to scale down information requirements for more expert clients. The new legislation classifies only the two higher levels of expertise and puts all those not listed in the Directive in the retail category. Professionals are granted the second level of expertise that includes investment firms, credit institutions, and institutional investors. The highest level of expertise is defined as oeligible counterpartyo which is a sub-division of the professional category and can only be granted to firms who apply and meet specific criteria.

Investment firms.

Customers will receive detailed information about the firm, its services, its products and its prices on paper as the Directive prohibits them from advertising their services on the Internet. They can only publish information on the Internet as an addition to the hard copy already given to the client.

Once a customer starts investing, the firm will have to carry out several tests to protect its client from making the wrong investment decision. This so-called osuitability testo will involve investment firms knowing their customers' financial situation and investment targets. In other words, once the firm knows its customer, it will ensure that all decisions are made in accordance with his or her needs.

On the other hand, the oappropriateness testo will ensure that clients have knowledge and the experience necessary to understand the risks associated with the type of product in which they are investing. Customers will be able to skip this test only if they explicitly ask the...