The world can learn from EU’s regulatory shake-up mistakes
The European Union is in the midst of a massive regulatory upheaval in an attempt to realise its goal of a single market in financial services.
As with all regulatory initiatives, not all the outcomes are exactly what the policymakers intended and The Banker has reported faithfully on a number of significant deviations. There are lessons to be learned from these failures as, no doubt, other parts of the world are planning to adapt the European model for their own uses.
First, there is the Markets in Financial Instruments Directive (MiFID), which was launched last November but – as we reported in last month’s cover story – is not producing the kind of transparent and liquid markets as intended. One failing is that “best execution”, a cornerstone of the project, has been given no regulatory definition and there is no onus on brokers to connect to new platforms or to offer a choice of execution venues.
The upshot is that investors are complaining that they have no idea where their trades are being directed and that liquidity is too thinly spread.
More problems
Other problems occur in the clearing and settlement space, and a Code of Conduct designed to inject more competition is a long way from achieving the desired aim. In the settlement area, the European Central Bank’s Target 2 Securities project for making settlement more efficient doesn’t happen until 2013. At least it has a date, however – or, at least, a launch date.
With the Single Euro Payments Area (Sepa), the European Commission has yet to set an end date for the project, which has the effect of removing the impetus to get things moving. On top of that, implementation has been left to the banks whose immediate self-interest – in charging higher amounts for cross-border payments – is to resist the measure and preserve the status quo. As a result consumers and corporates feel left out of the process and the pace at which things are happening is much slower than is desirable.
But for all the misgivings (which will doubtless be discussed at length at this month’s Sibos annual meeting in Vienna) the EU is still ahead of many parts of the world in forging ahead with these types of projects.
The US has for long enjoyed an advantage in being a continental nation with, in some cases, more efficient national systems that reap the benefits of economies of scale. A lot of EU policy in all kinds of areas has been driven by a desire to emulate this advantage.
Infrastructure lags
In most other parts of the world, the national border and different financial structures are an impediment to the forces of globalisation and make cross-border business slow, inefficient and costly. The market infrastructure is languishing way behind the dynamics of business and makes inward investment less attractive.
The EC is ahead in trying to resolve this situation, even if much of its work is being done the hard way. Some of it will eventually come out right and Europe will be left with a half-fixed system. The rest of the world can benefit from designing its own transition better, giving it the opportunity to forge ahead.
