The European Commission has ended the debate about how MiFID should be implemented by opting for a mixture of regulation and directive – but confusion remains. By Michael Imeson.
Charlie McCreevy, the Internal Market and Services Commissioner, has a lot to answer for. He put the Brussels cat among the investment industry pigeons late last year with some controversial speeches saying that most of MiFID would be implemented as a regulation rather than as a directive.
He admitted that this “may prove controversial” but said it was necessary because a regulation has direct effect in member states, whereas a directive has to be transposed into national laws. There is often considerable variation in the way a directive is transposed, leading to market fragmentation, and Mr McCreevy said he wanted “to avoid imposing 25 different sets of rules on our firms, or require investors to understand 25 different sets of rules”.
Howls of protest
Investment firms and national regulators around Europe were dismayed. They preferred to have to swallow MiFID in directive form, precisely because it would give them some leeway in shaping it to suit industry and national preferences. They fought a fierce last-minute lobbying action to try to dissuade the European Commission from its plans.
Harald Noack, deputy general manager of the Association of German Banks, complained publicly in January that the commission’s intention to introduce major aspects of MiFID in the form of a regulation rather than a directive “will create legal uncertainty and competitive disadvantages for banks in Germany and in other countries”.
He added that it would be acceptable to enact clear-cut technical rules in a regulation but that rules with civil law implications should remain as a directive and be transposed into national laws that would allow problem areas to be identified and defused.
Winning ways
The draft technical implementing measures were published on February 6. So who won the argument? The answer is not straightforward. The commission asserts that as much as possible is being done by regulation, which is consistent with Mr McCreevy’s pronouncements.
Yet the Financial Times reported that Brussels had bowed to pressure from Germany to do more by directive. The British Bankers’ Association (BBA) chipped in, saying it had got what it wanted and had managed to shift the balance back more towards a directive, yet described the result as a compromise. An investment banking consultant told The Banker that he was confused – not suprisingly.
The true position is that Mr McCreevy did indeed lose the argument for pushing more measures through as a regulation, but that it was not much of a cave-in: first, because the split between the Implementing Regulation and the Implementing Directive, as they are called, is pretty much what the investment industry expected in the autumn; and second, because parts of the directive are so prescriptive that they might as well be a regulation.
In essence, the core issues relating to transparency and the functioning of markets are in the regulation, and those areas where there is a relationship between the firm and the client (which tend to impinge on national laws) are in the directive.
The Association of German Banks is happy. It believes the commission achieved the right mix between regulation and directive, with the regulation dealing with the technical matters and the directive dealing with more commercial matters, such as the conduct of business provisions that cover how firms deal with clients.
The BBA talks in terms of “winning the argument” over the conduct of business provisions. Because these provisions will be dealt with through a directive, the Financial Services Authority will have the flexibility in some areas to impose rules that are superequivalent to MiFID, which the BBA believes would be beneficial.
MiFID Connect, the umbrella group for most UK investment industry associations, is less optimistic about the outcome. It says that the European Commission has tried to make the directive read as if it were a regulation “by giving limited wriggle room to member states to depart from it”, and it would have preferred more measures to be dealt with by a directive.
Final analysis
It is important to realise that the measures published in February are still drafts and could change. They are now being scrutinised by the European Parliament and the European Securities Committee (ESC) until May.
Once the ESC has approved them, the European Parliament will have another month to check them before they are adopted by the commission, probably later this year. Although the measures could change between now and the summer, any alterations are likely to be minimal.
The directive will then have to be transposed into national laws and MiFID will come into effect in November 2007.
Michael Imeson is a contributing editor to The Banker.
