Investment services firms have barely 18 months to prepare for MiFID so it is imperative they understand the impact it is likely to have on their business and react accordingly. By Alan Jenkins.
In the evolving political landscape of the EU’s Financial Services Action Plan, the clock is ticking on the ‘biggest and most far-reaching’ directive of them all – the Markets in Financial Instruments Directive (MiFID).
Previously also known as ISD2, MiFID will replace the current Investment Services Directive, with a live date already postponed twice to November 1, 2007. So there are barely 18 months remaining for investment services firms across Europe to prepare themselves.
It was the 1993 Investment Services Directive that created the ‘passport’ whereby authorised investment firms and banks can provide services or establish branches in other EU member states on the basis of home country authorisation and supervision. This entailed the harmonisation of operating requirements, conduct of business regulation, and conditions governing the operation of regulated markets.
Raising the regulatory bar
Since 1993, the financial markets have evolved to offer more complex and wide-ranging services and financial instruments, with investors becoming more active in these markets, and MiFID aims to recognise this. It is raising the regulatory bar by increasing the product coverage and services scope, recognising the evolution of new trading platforms and venues. It is also establishing a comprehensive regulatory regime surrounding the execution of transactions and the provision of financial services with integrity, efficiency and risk management representing key elements of this framework.
MiFID has been on the European statute book for almost two years, since April 21, 2004, and is following the innovative Lamfalussy approach, whereby the directive operates as a framework (known as Level 1) and more detailed rules are established through a process known as Level 2.
These detailed measures can be summarised in four main areas:
- organisational requirements;
- conduct of business;
- pre and post-trade transparency (particularly for the most liquid equities);
- and transaction reporting (for all financial instruments).
Following a year of consultation led by the Committee of European Securities Regulators (CESR), the European Commission has undertaken a further nine months’ consultation before it issued the formal drafts of the Level 2 Implementing Measures in February 2006. These measures are due to be adopted by summer 2006 so investment firms must get started in understanding the impact on their business.
MiFID primarily is focusing on two objectives: market transparency and protection for retail investors.
On one hand, the scope is broadened to include a wider range of instruments than were covered by the original Investment Services Directive, as well as new services such as investment advice within the definition of ‘investment services’.
On the other hand, the one significant simplification of MiFID is in relation to ‘passporting’, and investment firms that do not already operate on a pan-European basis will need to consider both the opportunities and the threats implied by cross-border trading.
Different impacts
The impact of MiFID will vary:
- between firms (depending how well prepared they are);
- between lines of business (some more affected than others);
- and between EU member states (depending on current national market practice, relative to the more level playing field of MiFID).
Besides the 25 existing EU member states, MiFID will also be adopted by the European Economic Area (EEA), bringing in Norway, Iceland and Lichtenstein, and is relevant to the accession states of Romania and Bulgaria. Firms outside the EU/EEA will also need to consider the competitive impact, as the new regime is designed to be attractive to investors worldwide.
Comprehending MiFID
It is important for all firms to understand MiFID’s impact as soon as possible, in order to anticipate the requirements and to plan and budget for the expected changes required.
It is important to identify whether MiFID brings additional competitive advantage as well as further cost savings and efficiency opportunities to an organisation, rather than seeing it purely as a compliance burden.
Initially, all firms should be finding out what MiFID is all about. National trade associations have already been lobbying, so they are a valuable source, as are national regulatory bodies. There is also the pan-European ‘Joint Working Group’ (www.mifid.com), established in May 2005 by four key industry associations: ISITC, FISD/SIIA, RDUG, and FIX.
Firms should then focus on mobilisation and impact assessment. The BearingPoint White Paper ‘Preparing for MiFID’ provides further details (www.bearingpoint.com/mifid).
Alan Jenkins is European head of MiFID at BearingPoint.
