MiFID: Årsag og virkning

Martin Hoffmann Pedersen

Student thesis: Master thesis


The Markets in Financial Instruments Directive was implemented in Danish law on the 20th of July, 2007. It seeks to protect investors against errors made by independent financial advisors. The market for investments has grown increasingly complex, and the number of investors and advisors has risen over the years as a result of later years growing prosperity. MiFID seeks to deal with the inherent risks that follow this development. The paper begins with an assessment of current Danish liability rules, in order to establish which types of losses are covered by law and which are not, in order to find out which losses are covered by the compulsory liability insurance in MiFID. In order to be held liable for an error, a financial advisor must be deemed to have acted differently than a different (average) advisor. It must also be shown that there is an actual quantifiable loss, and that the loss is the direct result of the advisors actions. Then the paper considers the intent of the MiFID rules, and finds that they seek to protect investors against bad financial advisors by imposing a compulsory liability insurance. The paper then goes on to determine the correct criteria for optimality, and finds that Kaldor-Hicks optimality will be best suited for the findings of the economic section of the thesis. The parties are then categorized by risk aversion, and it is determined that investors are risk averse, and advisors are risk neutral. Then the consequences of MiFID for investors are quantified by a utility function that shows low utility for any claims that lie beneath the net worth of the advisors, because those claims can be obtained through lawsuits. As the claims become greater than the net worth of the advisors, insurance becomes increasingly useful for investors, and thus their utility rises sharply. As the claims get even greater, less investors will need the coverage because the cover exceeds the amount invested, and so the rise in utility diminishes marginally until it flattens out. For financial advisors, their disutility is calculated on the same scale, as a function of the insurance premium in relation to the sum covered by the insurance. This curve is a straight line, increasing as a percentage of the sum. Then different parameters of the insurance are considered. First the mandatory run-off cover of five years is considered, and found to account for an added cost of about 27.5% of the original premium. Then the effect of the deductible is considered. MiFID allows a maximum deductible of 50.000 DKK, and the effect on the premium is found to right shift the curve by the amount of the deductible. The investors utility curve and the advisors disutility curve are then introduced in the same graph, showing that the optimal situation will be when the difference between the curves is the greatest. The different parameters are then changed, in order to show that it is possible to reach a more optimal situation than the one introduced by MiFID. This way, it is shown that an optimal minimal mandatory sum of insurance would be lower than the 1 million EURO, and that society as a whole would benefit if the size of the deductible could be set by the advisor and the insurance company by negotiation. The paper concludes that MiFID does not offer an efficient solution to the problem it seeks to solve.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2009
Number of pages117