Although no-one can accurately estimate what MiFID will cost
individual firms or the industry as a whole, everyone agrees on one thing – it will cost a lot. By Michael Imeson.
MiFID is undoubtedly going to be costly for investment firms. Consultants have produced a range of estimates, one of the most widely quoted being that, in the UK alone, the directive will cost the industry more than £1.5bn to adapt its business structures, technology and compliance procedures, and much more than that in lost business and opportunity costs.
Since the draft Level 2 technical implementing measures were published in February, those estimates have hardly changed. Although some requirements that appeared in early drafts, such as voice recording of deals, are no longer in the current draft, the view of consultants who are prepared to hazard a guess is that the potential costs for the UK investment industry alone will remain more than £1bn.
For individual firms, estimates range from £2.5m to £25m. However, until the European Parliament approves the draft measures this summer, no-one can make any accurate predictions.
What the EC says
Unsurprisingly, the European Commission is downplaying the issue. It addressed the subject in a Frequently Asked Questions document released in February at the same time as the draft measures. It says that all estimates of costs published so far “must be treated with some caution”, not least because none were based on the (previously unreleased) draft measures.
The costs will also depend on the commercial decisions taken by each firm, says the commission. For example, those opting to become systematic internalisers or to run a multi-lateral trading facility will have to make large investments in appropriate technology and new staff, but others won’t.
What the industry says
The various UK trade associations are non-committal and warn of the dangers of scaremongering. The International Capital Market Association says estimates are far too speculative at this stage. It believes consultants and software providers are “whipping up panic among potential clients” to help sell expensive advice and upgrades.
The British Bankers’ Association (BBA) agrees that it is too early to say anything meaningful. Michael McKee, the BBA’s executive director with specific responsibility for MiFID, says: “There are a lot of figures coming from consultants which seem to us to be significantly overstated. But it is difficult to predict what the precise costs will be, given that it will be operated on a pan-European basis.”
Richard Britton, a regulatory expert at the International Capital Market Association, adds: “Anything a consultant tells you about costs, you have to take with a large pinch of salt. They’re in the business of scaring the pants off the IT and compliance people because this is going to be their biggest payout since euro conversion and Y2K. I don’t want to downplay the cost implications but one needs to be aware of the tendency for exaggeration.”
The main costs
Money will be spent on business transformation, IT and compliance. For systematic internalisers, for example, their entire business processes will have to change to meet best execution and other requirements; large investments will have to be made in technology, such as data storage and retrieval, internet protocol technologies, algorithmic trading and order management applications to improve straight-through processing; and compliance departments will need to be expanded, with existing staff retrained to understand the new regulations and cope with the new business models.
All securities firms will be affected, not just systematic internalisers. They will, for example, have to invest in more efficient networking and replace fixed and leased lines with internet protocol networking.
Opportunity knocks
As the EC says: “Making the technology investment to become compliant with MiFID need not be a compliance burden but, if managed strategically, should help firms gain competitive advantage – including trading a much wider range of products”.
It adds that “the first movers and the better prepared will be the winners”.
The converse of this is that there will also be losers. If the big investment firms go on a spending spree to grab significant volume and liquidity, then slow or second-tier institutions will lose significant business and may even be forced out of the market.
Firms should therefore be making strategic decisions now, and setting their overall budgets. Some key projects will have long lead times, so these will need to be started straight away, despite the remaining uncertainties. Less critical projects can be planned to start after the summer.
Michael Imeson is a contributing editor to The Banker.
