MiFID & Preference Shares

Roger Menéndez

MiFID
Preference shares

MiFID. Markets in Financial Instruments Directive

http://ec.europa.eu/internal_market/securities/isd/mifid/index_en.htm

Preference shares: shares that receive a dividend at a stated

rate prior to the paying out of any dividend on the firm’s
common shares.

1
 MiFID

A consumer’s guide to MiFID, - Investing in financial products. March 2008. The Committee of European Securities Regulartors (CESR).

MiFID

Service 2. Buy&Sell
request:

It is a
“complex” YES
1.Investment advice financial
3.Investment management product?

NO
Suitability test
Are you
responding to YES Appropriateness FAILED
a personalised
approach from test
the firm?

OK Warning
NO
Execution only
Service Buy & Sell
AT YOUR OWN RISK

2
 MiFID
1.- Investment Advice
MiFID requires a process called the Suitability test,
where the firm asks you some questions to reach
an understanding of the types of investments that
will be suitable for you.
• Investment objectives (length of time to hold the
investment, risk, profile, for income or growth)
• Financial situation (regular income, assets, real estate
property, debts & other financial commintments)
• Knowledge and experience (types of services & products
you are familiar with, nature, volume & frequency of your past
transactions, level of education

MiFID
1.- Investment Advice
If a firm does not, or cannot, obtain the necessary
information to assess Suitability, then it can not
make a recommendation.

3
 MiFID
2.- Trading in products without investment advice

MiFID requires the Appropriateness test

Non complex financial products:
• Shares admitted to trading on a regulated market
• Money market instruments
• Many types of bonds
• Units in certain investment funds
Complex financial products:
• Options, futures, swaps & other derivatives
• Financial contracts for differences
• Convertible bonds
• Warrants

MiFID

Service 2. Buy&Sell
request:

It is a
“complex” YES
1.Investment advice financial
3.Investment management product?

NO
Suitability test
Are you
responding to YES Appropriateness FAILED
a personalised
approach from test
the firm?

OK Warning
NO
Execution only
Service Buy & Sell
AT YOUR OWN RISK

4
 MiFID
2.- Trading in products without investment advice

The Appropriateness test does not apply in the case of

some kinds of “non-advised” transactions. This service
can be described as Execution-only. The circumstances
where the test does not apply are:
 The product involved in the proposed transaction is what MiFID
calls “non-complex”; and
You have chosen to contact the firm to carry out your
transaction. This means that you are not responding to a
personalised approach to you from the firm which was intended
to influence you in respect of a specific product or transaction (for
example in certain situations when you are buying shares on line).

MiFID
2.- Trading in products without investment advice

If the firm concludes that you do not have the

necessary knowledge and experience (or you have
not supplied enough information to enable it to
reach a view), then you will receive a warning from
the firm. If you insist on going ahead with the
transaction, you must accept the risk.

5
 MiFID
3.- Investment management

When your investments are managed by a firm, you

are reliant on the firm’s decisions and choices.
MiFID requires a Suitability test

MiFID

Service 2. Buy&Sell
request:

It is a
“complex” YES
1.Investment advice financial
3.Investment management product?

NO
Suitability test
Are you
responding to YES Appropriateness FAILED
a personalised
approach from test
the firm?

OK Warning
NO
Execution only
Service Buy & Sell
AT YOUR OWN RISK

6
 Credit priority
The difference between junior (or subordinated)
Senior (wages, loans debt and senior debt is the priority in which a firm
with collateral such in bankruptcy pays the debt claims.
as mortgages,
taxation The subordinated debt will be paid back only after
authorities,…) the senior debt is fully debt, (if the company has
still funds).

Junior

MiFID
References
-A consumer’s guide to MiFID. Investing in financial products.
March, 2008. CESR (The Committee of European Securities
Regulators)
- Consolidated text of the Directive 2004/39/EC of the
European Parliament and of the Council on Markets in
Financial Instruments. http://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1398325978410&uri=CELEX:02004L0039-20110104
-Guide to investing, ESMA. 19th October 2012