MiFID II — the EU broker regulation in force since 2018

On 3 January 2018, the MiFID II directive came into force — the most important reform of the European Union's financial markets since the 2008 crisis. For an ordinary retail investor it marked the end of an era in which a broker could dangle 1:500 leverage, bury half the cost inside the spread and answer to no one for the quality of order execution. Six months later, ESMA added hard leverage limits on top. This article explains what MiFID II actually changed, how it differs from its predecessor and what it means for a European retail trader in practice.

What MiFID II actually is

MiFID II stands for the Markets in Financial Instruments Directive II. Its formal legal name is Directive 2014/65/EU of the European Parliament and of the Council; it was adopted in 2014 and has applied since 3 January 2018. It is an EU act that sets common rules for every investment firm — brokerages, dealers and banks offering investment services — operating across the European Economic Area.

The key word is "directive". Unlike a regulation, which applies directly, a directive has to be transposed into each member state's own law. In Poland that was done through an amendment to the Act on Trading in Financial Instruments, with the Polish Financial Supervision Authority (KNF) overseeing compliance; in Germany it is BaFin, in Cyprus CySEC. In other words, when a broker advertises that it is "regulated by KNF" or another national authority, it is in practice declaring that it meets the MiFID II requirements in that country's implementation. These are not two separate regimes — it is the same EU standard, enforced by a national body.

MiFID I versus MiFID II — what changed

To understand why the second directive mattered so much, it helps to go back to the first. MiFID I, Directive 2004/39/EC, took effect on 1 November 2007 and replaced the older Investment Services Directive. Its main goal was to open up competition between exchanges and trading venues across the Union. From the retail client's point of view, however, it was fairly general — it said a firm had to act in the client's best interest, but it did not spell out how to prove it.

Then the 2008–2009 financial crisis exposed the gaps. Clients were buying complex products they did not understand, costs were often opaque and over-the-counter trading was poorly monitored. MiFID II was the response. Where the first directive set out broad principles, the second introduced concrete, measurable obligations: full disclosure of costs both before and after a trade, reporting on execution quality, supervision of who is allowed to be sold a given product, and limits on the financial inducements that could skew advice.

Best execution and cost transparency

The first pillar of the new directive is the best execution obligation. A broker can no longer simply promise it is doing its best for the client — it has to demonstrate it with data. To that end MiFID II imposed two kinds of report, known in the industry as RTS 27 and RTS 28. The first covered execution quality at individual venues; the second required firms to publish annually the top five venues where they executed client orders. It is worth knowing that the RTS 27 and RTS 28 reporting obligations were later suspended by a 2021 amendment (Directive 2021/338) as part of post-pandemic simplification — but the best execution principle itself remained in force.

The second pillar is cost transparency, and this is where retail clients felt the change most. Since 2018 a broker has to show the client the full cost of the service at two points. First, before the trade is placed — the so-called ex-ante information, an estimate of every charge you will incur. Then, once a year, an ex-post statement: the actual costs that hit the account, expressed both in money and as a percentage of the amount invested. As a result the spread, the commission, the overnight financing charge (swap), the inactivity fee and the currency-conversion cost stopped being a hidden puzzle.

Client classification and product governance

MiFID II places every client in one of three categories, and the level of protection depends on it. By default you are a retail client — and that is good news, because this group has the most safeguards. The second category is the professional client, who voluntarily gives up part of that protection in exchange for higher leverage but must meet at least two of three conditions: hold a financial-instrument portfolio above 500,000 euros, have worked in the financial sector for at least a year in a role requiring such knowledge, or carry out on average at least ten large transactions per quarter. A detailed comparison of all three categories — what each one gains and loses — is in the article on retail, experienced and professional clients. The third category, the eligible counterparty, is the domain of financial institutions.

Tied to classification is the appropriateness test. Before a broker gives you access to a complex product such as a CFD, it has to check through a short questionnaire whether you understand the risk involved. This is not a box-ticking formality — it is part of the wider principle of product governance, under which a firm must define the target market for each instrument and not sell it to people for whom it is plainly unsuitable. If you want to understand the instrument the test is meant to guard against, I cover it separately in the article on what a CFD is.

"The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors." — Steven Maijoor, Chair of ESMA, ESMA press statement, 2018.

The link to ESMA leverage limits

MiFID II gave the European Securities and Markets Authority (ESMA) a new tool: the power of product intervention, that is, the ability to temporarily restrict or ban the sale of products that threaten investors. It was used almost immediately. From 1 August 2018 ESMA introduced hard leverage limits for retail clients trading CFDs, and it was that decision which ended the era of 1:500 leverage in European retail.

The limits are graded by the volatility of the instrument. On major currency pairs such as EUR/USD or GBP/USD the maximum leverage is 1:30. On minor pairs, gold and major indices it is 1:20. On other commodities and less liquid indices, 1:10. On individual company shares, 1:5. On cryptocurrencies, the most volatile of all, just 1:2. Alongside this came negative balance protection, which means a retail client cannot lose more than they deposited, and a margin close-out mechanism that shuts positions when the deposit falls to half the required level. Why high leverage is more of a trap than a gift I explain in detail in the article on the 1:500 leverage trap.

The most common misconceptions

The first misconception concerns the scope of MiFID II. It is a European Economic Area regulation, so a broker registered in Vanuatu, Saint Vincent or the Seychelles is simply not subject to it. When such a firm tempts you with 1:500 leverage, it is not breaking European law — it is operating outside it, and along with the leverage go negative balance protection and the cost-transparency duty; what actually happens to client funds when a broker fails or turns fraudulent is covered in detail in the article on what happens to your money if a broker fails. That is not a better offer, just a far higher level of risk.

The second misconception is confusing client protection with a guarantee of profit. MiFID II tidies up the rules of the game, but it does not make trading safe — according to ESMA data, the majority of retail accounts lose money, even at the best-regulated broker. The third misconception concerns professional status: some traders switch to it for higher leverage without realising they forfeit negative balance protection. For the vast majority of retail investors, staying in the retail category is simply the more sensible choice.

What to do with what you now know about MiFID II

1. Check who actually supervises your broker. Go to the footer of its website and find the name of the authority and the licence number. If it shows KNF, CySEC, BaFin or another European Economic Area body, the broker is subject to MiFID II. If it shows Vanuatu, Saint Vincent or the Seychelles, it operates outside that regime and neither negative balance protection nor leverage limits cover you.
2. Open your annual ex-post cost statement. Every broker under MiFID II sends, once a year, a statement of the actual charges your account incurred. Open it and add up what you paid in total in spread, commission and overnight financing. For many people that number is the first true picture of what their trading costs.
3. Verify your client category. Log in to your broker panel and check whether you hold retail or professional status. If you once switched to professional for higher leverage, make sure you knowingly gave up negative balance protection — and if in doubt, switch back to retail.
4. Compare a local broker with a foreign one on supervision. Before you choose a brokerage, weigh the two options by who regulates them and how you will settle tax. My piece on a local versus foreign broker helps, as does the ForexMechanics section on market regulation and client protection.