MiFID allows firms to set up in one EU country and do business anywhere regardless of the rules in each jurisdiction. Jules Stewart explains how this could attract new investment into Europe.
Europe has taken a decisive step towards fulfiling its ambition to become a single market in financial services. MiFID, the EU’s Market in Financial Instruments Directive, came into force on November 1, ushering in a pan-European capital market that should boost investment inflows, with London tipped to be the chief beneficiary. The initiative is hailed as the most significant shake-up on the European financial scene since London’s ‘Big Bang’ in 1986, which brought about the deregulation of the financial markets.
The fundamental idea of MiFID is to promote more pan-European business by allowing investors to buy shares listed in particular countries other than in those countries’ stock exchanges. Some of these shares are held by banks, others are traded on alternative platforms. The aim of the directive is to create total neutrality in the shares of any listed company, be it Belgian, French, Slovenian or Hungarian.
Banks and brokers see this as a cost savings opportunity, since it eliminates the need to pay hefty fees to national stock exchanges, pre- and post-trade. The European Commission (EC) wants to ensure a level playing field in the rules on dealing in all markets. The EC sees the need to remove all artificial barriers to open market competition and harmonise standards in which participants can operate on equal terms across Europe.
“You can buy Belgian shares directly from an investment bank in London and the trade can be matched up with a seller by that same investment bank without going through the Belgian Stock Exchange,” says John Tattersall, head of financial services regulatory practice at PricewaterhouseCoopers (PwC).
Mr Tattersall believes that the implementation of MiFID should boost inflows of capital investment into the European market. “The directive makes markets more transparent and provides a better spread of risk,” he says. “The downside is that it could make matters more complicated by introducing another layer of bureaucracy and the need to disclose conflicts of interest could act as a deterrent for some investors. This would be a concern for investors in some continental European countries rather than in the UK market.”
Business benefits
The wealth management business is also likely to get a boost from MiFID, but more on the second-tier level than at the top of the high net worth individual (HNWI) segment. “People at the very top level always spread their portfolios across various jurisdictions,” says Mr Tattersall. “Those lower down the scale will find it easier under MiFID to spread the risk and invest outside of their home territory, with lower dealing costs.” MiFID opens up a wider universe of investments for investors and wealth managers, who will be able to access offerings from any EU member state. But stricter rules on which clients can be sold more complex investments such as hedge funds, derivatives and unregulated property schemes means wealth managers will find it difficult to market investments such as hedge funds to retail investors. Investors were previously classified as private clients, intermediate clients or market counterparties. MiFID requires them to be reclassified as retail, professional or eligible counterparties, with retail investors gaining the highest regulatory protection. Most high net worth investors are retail investors, and could find that some sophisticated investments are off-limits.
Moreover, the problem with wealth management is that much of it is done face-to-face, and when business relies on a relationship with an adviser, it is more difficult to operate on a pan-European basis.
Most analysts are confident that harmonisation of the European market will enhance rather than endanger London’s position as the prime investment centre. The market has shown extraordinary resilience in the face of growing competition from other centres, such as Frankfurt and Paris.
The London Stock Exchange has been under attack for years from predators, from Sweden to Germany to New York. But in the end it was the pan-European market Euronext that went to the New York Stock Exchange, while Frankfurt’s failed bid for the London exchange drove it into a joint venture with the US International Securities Exchange, and London not only survived but went on to acquire Borsa Italiana.
London’s position is viewed as virtually unassailable, with a two-thirds share of the EU’s foreign exchange and derivatives business and more than 40% of share trading.
“Others might suffer from MiFID, but not London,” says Mr Tattersall.
In fact, it is the UK that is throwing a lifeline to other EU member states, such as the Netherlands, that are likely to be late in introducing MiFID. The UK’s Financial Services Authority (FSA) has said it will allow firms from countries late in implementing MiFID to briefly continue operating in the UK. “We shall be undertaking a consultation to put in place a temporary rule that will cover the gap and say that provided firms from such jurisdictions are complying with key elements of MiFID, we are happy to see them continuing to do business here,” says Michael Folger, the FSA’s director of wholesale and prudential policy.
Regional variations
Ash Saluja, a partner at law firm CMS Cameron McKenna, explains that while the rationale behind MiFID is the harmonisation of the European financial services market and to ensure that the burden of regulation is more evenly spread, there is still the view at the moment that some jurisdictions are more onerous than others. “For instance, the UK Financial Services Authority is a very vigorous regulator while the Spanish regulator operates a much lighter touch,” he says.
“The rules are being harmonised, but the enforcement approach by the different regulators is likely to remain pretty much the same, and not all regulators are going to suddenly throw a lot of resources at enforcement.”
Mr Saluja believes those jurisdictions that historically have operated with a lighter touch will continue to attract investment and that people setting up funds will continue to favour jurisdictions such as Luxembourg and Ireland. “For others, such as broker-dealers operating on a remote or electronic basis with their clients, MiFID gives them the opportunity to set up in one country in Europe and do business anywhere without having to worry about separate rules in each jurisdiction,” he says.
“This could attract additional investment into Europe. A number of US clients when talking about setting up a European subsidiary are still thinking about different sets of rules, which will no longer be the case post-MiFID. When you tie that in to the different enforcement approaches, the possibilities are even greater, as a firm can choose to set up in a jurisdiction with the softest approach to enforcement and operate on a lower cost basis.”
Another development in European financial market regulation is the changes taking place in the Undertakings for Collective Investment in Transferable Securities directive, known as Ucits. This was established to bring about convergence of traditional asset managers and hedge funds, giving mutual fund managers the power to use derivatives to generate higher returns, rather than simply to reduce risk. The basic objective is to create a pan-European harmonised fund structure. By next year the EU aims to modify the directive to improve efficiency in cross-border trade and fund mergers.
“As it stands now, funds need to give two months’ notification if they want to operate outside their home jurisdiction,” says an FSA spokesman. “They are looking to shorten this period. Also, funds need to lodge an application with each national regulator, a procedure that will be changed to allow for regulator-to-regulator notification.”
