The Markets in Financial Instruments Directive, better known as MiFID, has prompted sleepless nights across the financial sector. And for good reason.
The intention is to standardise the rules and regulations governing securities trading (which includes fund management and retail unit trust and share trading) across Europe in order to create a level playing field. It is hoped that it will make it easier for businesses operating in more than one country, and to provide customers the same protection from Brussels to Barcelona.
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In practice, MiFID is likely to present one of the largest challenges the securities sector has seen in recent years, demanding large chunks of the industry be reassessed and redocumented, at significant cost. The demands will put a huge strain on IT and compliance departments, possibly requiring systems to store and process four times as much market and execution data as is currently available.
Furthermore, it is still not clear how the Financial Services Authority (FSA), the UK’s industry watchdog, will interpret the directive, even though we are barely a year from the compliance deadline of November 2007.
But the story is not uniformly scary.
British firms licensed by the FSA will be able to sell their services more easily abroad under a passporting system. New potential markets will be opened up. An independent advisor from the UK whose client has moved to Spain will be able to continue providing advice and selling unit trust and equity products to that client from his base in the UK. Previously that was not possible under FSA rules.
Equally, it means that Dutch fund managers operating under Dutch licence, for instance, will be able to sell their services in the UK under the rules of their home country. Because those rules will not always be consistent with the FSA’s rules, those firms might even be able to offer hedge funds to British retail investors for the first time, while their counterparts in the UK are prevented by the FSA from doing so.
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Quite clearly, the playing field will not be level and there will be some big opportunities for all financial services companies to examine and take advantage of regulatory arbitrage, where different local rules offer a more liberal (or lower cost) environment in which to do business. The full scope of this arbitrage opportunity is not yet known but it appears that it will go against firms in the UK as the FSA grapples with its retail objective, to ensure consumers get a fair deal.
Recent financial scandals involving splits, precipice bonds and mortgage endowments mean the regulator is unlikely to want to relax its relatively robust consumer protection rules, even where they go beyond and above what is demanded by MiFID from Brussels. And despite the limits on doing this, FSA seems set on “gold plating” some requirements.
MiFID will also generate change at the “big picture” level. As firms find it easier to do business across borders, more efficient operators may expand into new markets at the expense of local firms. (They will be at an advantage if based in a state that hasn’t gilded the rules.) Even exchanges may be under threat — with new rights of access to national securities exchanges and increased transparency one wonders how long 25 member states can support more than six dozen independent Bourses.
Simon Morris, a partner in the financial services division at CMS Cameron McKenna, was one of the guest speakers at LexisNexis Butterworths conference “MiFID: A Survival Strategy” on September 26