City regulators yesterday put a figure on the cost to City firms of implementing the latest reforms from Brussels — an upfront hit of about £1 billion plus continuing expenses of about £100 million a year.
The benefits of the Markets in Financial Instruments Directive (MiFID) were much harder to quantify but could amount to £200 million a year, according to the Financial Services Authority.
However, it conceded that more than half of the City firms it polled said they could see no obvious benefits to themselves.
The FSA’s long-awaited cost-benefit analysis came too late to shape the unloved MiFID, which has already been fully agreed by EU governments and comes into force in 11 months’ time.
Angela Knight, chief executive of the Association of Private Client Brokers and Investment Managers, said the report confirmed what the City had long suspected: “For many firms, this is going to be an expensive nonsense. It’s the European way of doing things — just go ahead with policy and don’t think about the cost.”
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MiFID is part of an EU plan to create a single pan-European market in financial services by removing national barriers to competition and forcing financial institutions to adopt more pro-consumer systems.
The biggest City banks are budgeting to spend as much as £50 million on computer systems, consultancy and extra compliance staff to meet the new regime. But smaller UK- focused firms feel disproportionately hit because they see no benefit.
Hector Sants, managing director of wholesale markets at the FSA, gave a lukewarm verdict on MiFID yesterday: “It is in the nature of regulation that costs are relatively easier to define and quantify for firms, while benefits can be harder to pin down.
“It is clear that implementation of MiFID represents a substantial cost to industry, particularly in the upfront years, but it does create the potential for revenue opportunities over the longer term.”
These benefits would be achieved through reductions in compliance costs and transaction costs, the FSA said. There might also be another £240 million in “second-round” benefits to the British economy because of better value financial products and a cheaper cost of capital for business.
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Experts cast doubt on the estimate of £200 million a year in benefits to City firms. Jonathan Jesty, a MiFID expert with KPMG, said reductions in transaction costs would be passed on to clients and he was sceptical that compliance costs would come down, especially for firms selling only in the UK.
He also questioned some of the FSA’s estimates of costs. The requirement for firms to categorise customers in a new way would cost much more than the FSA estimate of between £84 million and £105 million, he said. It had also underestimated likely training costs.
In a range of estimates, the FSA said that the upfront cost would be between £877 million and £1.17 billion and the continuing annual cost would be £88 million to £117 million.
The FSA said some of the biggest costs would come because of the new regime under which firms must only sell “appropriate” products to certain categories of investors.
Categorising investors, proving trades are executed at the best price and instantly publishing information on equity trade volumes and prices would also load heavy upfront costs on some firms.