The regulatory framework: MiFID II suitability and appropriateness tests, product intervention, prospectus duties and the grey capital market

What you will learn

• The difference between a suitability test and an appropriateness test, and when a firm may skip both.
• What product intervention is and which retail bans and limits exist in the EU and Germany.
• What a prospectus or information sheet does and does not certify.
• How to recognise a grey-capital-market offer and price its subordination risk.

Explanation

MiFID II: three service levels, three sets of duties

The EU Markets in Financial Instruments Directive II (MiFID II), implemented in Germany in the Securities Trading Act (Wertpapierhandelsgesetz, WpHG), ties a firm's duties to the service it provides:

1. Investment advice or portfolio management: the firm must run a suitability test (Geeignetheitsprüfung) covering your knowledge and experience, your financial situation including loss-bearing capacity, and your objectives including risk tolerance. In Germany you receive a written suitability report (Geeignetheitserklärung) before execution.
2. Execution without advice: the firm runs an appropriateness test (Angemessenheitsprüfung) on knowledge and experience only. If the product exceeds your experience it must warn you, but may execute if you insist.
3. Execution-only with no test is allowed only for non-complex instruments (listed shares, plain bonds, UCITS funds) at your own initiative. Contracts for difference (CFDs), warrants, knock-out certificates, options and most structured products are complex.

The pop-up asking about your derivatives experience is therefore not a formality: if you tick boxes you cannot justify, you remove your own protection and a later complaint fails. MiFID II also requires a defined target market (Zielmarkt) per product and an ex-ante estimate of all costs in euros and percent before you buy.

Product intervention

Articles 40 and 42 of the Markets in Financial Instruments Regulation (MiFIR) allow the European Securities and Markets Authority (ESMA) and national supervisors to restrict or ban products for retail clients. ESMA used this in 2018: binary options were banned for retail clients from 2 July 2018, and from 1 August 2018 CFDs were restricted with leverage caps (30:1 major currency pairs, 20:1 gold and major indices, 10:1 other commodities, 5:1 single shares, 2:1 crypto), a 50 % margin close-out rule, negative balance protection and a standardised risk warning stating the share of losing retail accounts. BaFin made both permanent for Germany by general administrative act (Allgemeinverfügung) in 2019 and since 2023 also bans marketing futures with an additional payment obligation (Nachschusspflicht) to retail clients (CFD costs: Derivatives course, lesson der09). The legal lever matters: a provider offering 500:1 leverage or no negative balance protection is not an EU-licensed firm acting lawfully.

Prospectus duties: approval is not endorsement

A public offer of securities normally requires a prospectus approved by BaFin under the EU Prospectus Regulation. Smaller offers are exempt: Germany applied an €8 million threshold, and the EU Listing Act raises the EU-wide small-offer exemption to €12 million from 5 June 2026 (member states may set a lower level); check the current German figure. Below the threshold a three-page securities information sheet (Wertpapier-Informationsblatt, WIB) must still be filed, and retail investors are capped per offer (€1,000 freely, up to €10,000 subject to wealth or income tests). BaFin checks a prospectus for completeness, coherence and comprehensibility, not for whether the business is sound, the people honest or the return realistic.

The grey capital market

The grey capital market (grauer Kapitalmarkt) consists of legal products that are neither securities nor funds: subordinated loans (Nachrangdarlehen), profit-participation rights (Genussrechte), silent partnerships and direct investments in containers, trees or metals under the Asset Investment Act (Vermögensanlagengesetz, VermAnlG). Providers need no BaFin licence; they must publish a prospectus or a three-page asset investment information sheet (Vermögensanlagen-Informationsblatt, VIB) with a prescribed total-loss warning, and since 2021 "blind pool" offers without a defined use of funds are banned. The structural problem is the qualified subordination clause: your claim ranks behind every other creditor, and the issuer may refuse interest payments if paying would cause its insolvency. Deposit guarantee and investor compensation do not apply.

Worked example

Hypothetical example: Two offers reach Murat. Fees, spreads and taxes are ignored.

Offer A: a bank advisor recommends a structured certificate; the ex-ante cost sheet shows 2.0 % entry costs and 1.2 % per year product costs. Investment €10,000 for three years.

• Entry costs: 2.0 % × €10,000 = €200. Running costs: 3 × 1.2 % × €10,000 = €360. Total €560 = 5.6 %, so the certificate must earn about 1.83 % per year (1.056 to the power of one third, minus one) before Murat earns anything.
• Because advice was given, he receives a suitability report and can check whether his stated objective ("capital preservation") matches a product with issuer risk.

Offer B: a platform offers a Nachrangdarlehen in a solar project paying 7 % per year for five years, VIB attached, qualified subordination. Murat estimates a 30 % probability of failure with zero recovery.

• Payoff if it works: €100 + 5 × €7 = €135 per €100.
• Expected value: 0.7 × €135 + 0.3 × €0 = €94.50, an expected loss of 5.5 % over five years despite a "7 % yield".
• Break-even failure probability p: (1 − p) × 135 = 100 gives p ≈ 25.9 %. Only below that failure risk does the offer have a positive expectation, and total-loss risk remains without any safety net.

Common mistake

Practice activity

On paper, name the test the firm must run in three hypothetical situations: (1) you buy a UCITS ETF through your broker app on your own initiative; (2) you buy a knock-out certificate through the same app; (3) a bank advisor recommends a corporate bond. Then price this: a Genussrecht promises 9 % per year for four years with qualified subordination; you assume a 35 % failure probability with 10 % recovery. Calculate the expected value per €100 and the break-even failure probability at zero recovery.

Key takeaways

• Advice: suitability test and written report; complex products without advice: appropriateness test and warning; only non-complex products may be sold untested.
• Product intervention fixed EU retail rules for CFDs and banned binary options; a provider ignoring them is not a licensed EU firm.
• A prospectus or information sheet is checked for completeness, never for quality.
• Grey-market products with qualified subordination need a high promised return just to break even on expectation, and carry total-loss risk with no safety net.

Next step

If the worst has already happened, speed matters: the next lesson walks through the first hours and weeks after a fraud, from payment recalls to the criminal complaint.