The Markets in Financial Instruments Directive (MiFID) is the legislation used to regulate investment services within the European Economic Area. The rules outlined within MiFID (which was reformed in January 12018 under MiFID II) require investment services firms to assess the appropriateness of complex instruments for a client before providing the relevant service.
The appropriateness rules require a firm to assess its client’s knowledge and experience about a complex instrument (such as a non-reality realisable security, derivative or warrant) before undertaking a deal involving the complex instrument on behalf of its client. If the company believes the proposed investment is not appropriate for the client based on the client’s knowledge, then firms must warn the client.
Under MiFID II, complex instruments are those which ‘incorporates a structure which makes it difficult for the client to understand the risks involved’, including bonds and other securitised debt.