Since 1999, the EU has been working on its plan for an integrated market system. MiFID, a key part of the Financial Services Action Plan, is another step in the right direction.
In less than six months’ time, another key building block in the EU’s drive to create a single market for financial services will have been put in place.
The Markets in Financial Instruments Directive (MiFID), due to come into force on 1 November, will make it possible for investors to trade shares that are listed on any of the EU member states’ exchanges.
The basic thrust of MiFID, as with all the financial services directives that Brussels has been working on since 1999, is to bring about an integrated market system that will reduce the cost of raising capital and provide a level playing field for firms and clients across Europe.
EU action plan
Within the EU, most of its ongoing regulatory work is based on implementing the Financial Services Action Plan (FSAP). Comprising of 42 measures that have been designed to create one regime for all 27 members of the EU, this self-regulatory initiative was designed to provide greater harmony between Europe’s regulatory frameworks and to create a framework based on common objectives implemented through the use of rules based on principles.
“You could compare the benefits to the wider economy of the FSAP to those one might get from the construction of a motorway, in the sense that it is only when the last bit of a motorway has been built and people can drive from, say, London to Birmingham that the full benefits are seen,” says Peter Parker, manager of the EU team international strategy and policy co-ordination at the UK’s Financial Services Authority (FSA). “In the case of European directives, this will happen once the last bit of the jigsaw is slotted into place in the shape of MiFID.
“There is, of course, a difference between their being transposed into national binding requirements, which we did on time in January, and their coming into operation on November 1. This staggered implementation was designed to give firms time to adapt their systems to the new requirements. Once the FSAP measures are in operation in the larger member states, one ought to see significant downward pressure on costs. This will presumably be translated into lower costs for those wanting to raise capital.”
Designed to harmonise
Oliver Drewes, spokesman for Charlie McCreevy, the European Commissioner for the Internal Market and Services, says the objective of financial integration is to make it easier for businesses to carry out financial transactions and decrease the regulatory burdens and hurdles, primarily by harmonising legislation. By using regulation to encourage greater coherence, transparency, lower costs and a more open financial services sector, it will, in turn, help to generate increased economic growth. At the moment, significant differences remain between Europe’s banking systems and, as a result, few institutions are benefiting from economies of scale.
So, according to Mr Drewes, this is not regulation for regulation’s sake. “Put simply, it is easier to deal with one set of rules than with the current list of at least 27 different sets of regulations. But it is also important to make sure that you don’t come forward with directives that add more complexity to the industry,” he says.
Integration efforts
EU financial services firms and foreign banks with large operations in Europe have been committing significant resources to the development of a single integrated market. They have had projects running for a year or more and estimates on money invested to gear up their systems are in the £30m-£50m range. Banks are also conducting impact assessments in areas such as best execution, pre-trade and post-trade transparency, client classification, transaction reporting and record keeping.
However, there are wider business benefits for banks and corporates to gain from compliance with these new regulatory requirements. There are a host of opportunities that they can take advantage of as new regulations come into force.
For example, under the recently adopted Single Euro Payments Area (Sepa), EU citizens will now be able to pay bills anywhere in the 27-country bloc using cards and credit transfers from a single bank account. The effective implementation of Sepa will require close co-operation between banks, regulators, corporations and national public sector institutions.
Common rules
The introduction of MiFID will result in a common set of rules and will help to increase the number of investment services that can then be ‘passported’ by firms, making it easier for them to conduct cross-border business.
TARGET2-Securities (T2S) will create a single engine for the settlement of trades that will simplify clearing and settlement with the goal of better pricing, increased transparency and a more competitive clearing and settlement landscape across Europe.
And, as part of a trans-Atlantic financial integration process, US and European leaders reached agreement in April to increase regulatory co-operation, and implement pending banking and accounting proposals that are aimed at reducing costs for industry and consumers. This comes after the US markets watchdog, the Securities and Exchange Commission, announced it had reached a series of arrangements with European counterparts to work together more closely.
Competitive advantages
However, the FSA’s Mr Parker says that, in understanding the impact of regulation, it is important to distinguish between different sorts of financial services firms. Highly sophisticated entities such as global investment banks will want to have efficient, non-duplicative regulatory relationships because they are active in a number of marketplaces and will seek competitive advantages from these regulations. “They may find that the cost of a modest increase in regulatory requirements in some areas would be more than offset by the fact that they did not have to have separate systems, for example reporting requirements for each member state,” he says.
“A local building society, on the other hand, will not generally care about cross-border business to any significant extent and therefore its relationship will be with its domestic regulator, and it will probably be concerned far more with the burden of local requirements than the potential benefits of requirements that are harmonised across the EU at a more costly level,” adds Mr Parker.
The current wave of regulation in the EU has been designed to create a single financial services market. Because they are designed to provide banks with new revenue and business opportunities, these kinds of regulatory changes are likely to be embraced in other regions in the future as banks seek to provide a much wider range of products and services, at more competitive prices, to meet the needs of both customers and businesses alike.
Jules Stewart
