Whatever the prospects of deferment of MiFID transposition dates, for the moment they stand. This means firms must develop their implementation strategy and, where possible, start the process, says Anthony Belchambers.
By November 1, 2007, thousands of EU financial institutions ranging from the largest banks and asset managers through to the smallest stockbrokers will have to comply with the Markets in Financial Instruments Directive (MiFID), which means that waiting for regulatory certainty – not due until the transposition date of January 31, 2007 – is simply not an option.
MiFID is a major plank in the establishment of a single market in financial services in the EU and its impact will be deep and wide. Deep because it affects all the internal processes and procedures of every financial institution to a greater or lesser extent – IT, documentation, outsourcing, order handling and execution, conflicts of interest management, customer-facing disclosure and classification, transaction reporting, record-keeping and marketing and promotion.
Its impact will be wide because all categories of markets, products and services are affected and the scope of the directive has been broadened to include investment advice and commodity derivatives.
Costly business
The burden of compliance will be considerable and, while the more extreme forecasts can be safely discounted, it will not come cheap. Costs are estimated to be between £2.5m and £25m per firm with an overall cost to the industry of £1.5bn. There is little hope of recovering the design costs of the single market in financial services, but there will be some prospect of an operating profit, principally for the pan-EU business of the larger firms.
For the suppliers of financial services, market deconcentration and the freedom given to firms to internalise customer dealings will bring greater competition among execution methodologies and venues. However, the additional regulatory burden on internalisers suggests that it will be a strategic opportunity that will be exercised only by the largest institutions.
For those intermediaries that do not engage in cross-border, pan-EU business, the new requirements will be a significant cost that will bring with it very little commensurate benefit. For those that undertake cross-border, pan-EU trading, greater competition will mean that their revenues may no longer be sufficient to justify the cost of the “passport” with the result that they may have to retreat to carrying on domestic business only or merge with other institutions.
Consumers may have the benefit of more choice in terms of products and services, but it is unlikely that the cost-efficiencies of greater regulatory harmonisation alone will generate any significant reduction in trading costs. This will be driven by the purchasing power of the consumer and the extent to which, and between whom, the single market in financial services actually facilitates greater competition.
Greater competitivity
The impact on exchanges will be significant to the extent that there will be a new framework for markets, open rights of access, new trade reporting and transparency requirements and, of course, the creation of a much more competitive environment as a result of the deconcentration provisions of MiFID.
It will, of course, vary from exchange to exchange. Competition from multilateral trading facilities (MTFs) could grow significantly, but it is open to regulated markets to set up their own MTFs and wrestling liquidity away from existing exchanges has historically proven very difficult unless significant cost savings are at stake.
For existing EU financial services centres, the underlying question is whether the greater choice in location will lead to greater concentration in the larger EU financial services centres (which would benefit, for example, London) or a repatriation of the ‘engines’ of some major institutions (in the hunt, for example, for reduced location costs) back to their countries of origin.
While on the one hand regulatory harmonisation will highlight other differentials, for example, in employment and tax law and establishment costs, it may also encourage greater regulatory arbitrage by governments and authorities seeking to make their centres an EU location of choice for EU/international business. It is interesting to note that stamping out regulatory arbitrage was one of the reasons for the Commission seeking to establish a single market in the first place.
Continued slippage in the timetable is another problem. Already, it is becoming clear that some member states may miss the transposition date of January 31, 2007, in some cases by several months. This will eat significantly into the nine-month implementation period that has been promised to the industry by the Commission. Sustaining a political timetable may support the credibility of those responsible for setting it, but it will do little for the credibility of the single EU market, which depends rather more on coherent and collegiate transposition by member states and facilitating the ability of firms to come into proper compliance with the new requirements on the date of implementation.
It is equally important that firms and EU decision-makers are not seduced by the approach, albeit well-meaning, of some regulatory authorities that enforcement of breaches in implementation will be deferred until sometime after the date of implementation (such as where it is dependent on an external auditing process or because the authority ‘suspends’ its enforcement policy).
The fact is that firms will be liable and accountable for implementation failures in compliance as from the date of implementation and there will be no lessening in the consequential risk of civil suit or wider legal risk.
It is vital, therefore, that the Commission takes the pragmatic view that it will be wiser to defer the implementation date rather than allow the market, in its early days of integration, to lose credibility through fragmented implementation and widespread breaches in the new requirements because insufficient time was allocated to the firms to comply.
European policeman
The abiding question and challenge for the Commission will be how quickly and how ruthlessly it is prepared to act in putting right any areas where MiFID is found to be deficient or unduly burdensome or disproportionate. Much, too, will depend on how member states interpret the new requirements. Some may seek to gold-plate the provisions and so increase the regulatory burden on firms. Others will be selective about how they enforce the requirements. In some member states, retail protections may creep back into the regulation of wholesale business. In others, regulation will be used to protect national champions and/or prioritise domestic rights of access to home state markets and customers.
However, whatever the prospects of deferment of the transposition and/or implementation dates, for the moment they stand and firms must develop their strategy for implementation and, where possible, start the process now, even though there is no regulatory stability at this time and notwithstanding that the rest of the year will see a swathe of Financial Services Authority consultation papers on best execution, transaction reporting, systems and controls and major revisions to business conduct rules which will result in a series of adjustments in the implementation process. Unfortunately, waiting for regulatory certainty is a luxury (however logical) that no-one can afford.
Anthony Belchambers is chairman of MiFID Connect and chief executive of the Futures and Options Association (FOA).
