Son of MiFID – MiFID II

The European Commission’s proposal for MiFID II, published in October 2011, is the successor to the Investment Services Directive of 1993 and is the foundation of the EU regulatory framework for investment firms. Encompassing a wide range of activity such as global investment banks trading complex securities, fund managers investing pension funds, stockbroking firms and small high street financial advisers providing financial advice to the general public, it has the potential to cause another headache if not implemented in a timely and compliant manner throughout the industry.

Just like its predecessor MiFID, N2, Y2K bug and other regulatory upheavals, this Directive must be looked at in depth and given proper cognizance.

Speaking recently to the House of Lords’ inquiry into the European Union regulatory framework the Wealth Management Association described the Markets in Financial Instruments Directive II is ‘a particularly good example of ineffective legislative processes’.

Responding to a call for evidence by the House of Lords’ EU economic and financial affairs subcommittee, the Association criticised the size and time scale of the directive, expressing its concern that that consultation on MiFID II started at the end of 2010, but the legislation doesn’t become effective until 2017, by when it would be addressing “yesterday’s, not today’s problems.”

The association went on to say that this was a side effect of the size and breadth of issues covered, making agreement across member states extremely difficult, and it believes that the European Commission should propose a more targeted, less detailed legislation, and a narrower scope of proposals should be maintained during the legislative process.

The European parliament and council should not use amendments to extend or alter the scope and purpose of the original proposal which should allow targeted proposals to be agreed and implemented faster and more efficiently, it said.

The Commission’s objectives in terms of MiFID are to:-

  • Open up trading in securities to competition so as to reduce transaction costs for investors,
  • To apply equivalent regulatory rules to different market models which perform similar functions and,
  • To enhance, standardise and harmonise investor protection across the EU.

These objectives give effect to the broader EU Treaty objective of creating a single market in financial services in the EU. MiFID II aims to respond to deficiencies in the MiFID I regime exposed by the financial crisis, focusing in particular on addressing problems that have arisen from the expansion in over-the-counter (OTC) trading in comparison with trading on exchanges and the related issue of transparency of such trading.

David Lawton, the Financial Conduct Authority’s director of markets, warned UK firms against waiting to begin their implementation plans for the reformed MiFiD regime until every last detail of the new rules is clear. Speaking recently to an FCA conference on the re-cast Directive, he said firms must make appropriate internal changes as soon as they understood what was expected of them.

Fail to prepare – prepare to fail “Now is the right time to discuss the direction of travel on the final rules, and consider the path to implementation,” Lawton told them. “…failing to prepare will not be considered acceptable.” Mr Lawton warned the conference that there would be “a lot of heavy lifting” before the beginning of 2017 when the new requirements take effect.

MiFID II carries fundamental implications for the nature and shape of financial markets by shifting trading from the more opaque OTC market to more transparent organised markets.

However, legislative proposals in the new EU regulatory framework will not enable the EU to withstand further asymmetric shocks and future crises or have the flexibility to do so, and they reflect lessons learnt from the financial crisis rather than attempts to deal with the causes of the next.

“European institutions are notoriously inflexible and do not coordinate sufficiently among themselves.” Driving the point home, the FCA official said: “firms cannot hold back on developing their implementation plans until all the details are available. Efforts are required now, and firms must make sure they understand our expectations and are planning towards January 2017.

“While acknowledging that MiFID 2 is “a massive project”, and that a range of issues remain unresolved, including what he called “significant challenges” around developing metrics for measuring execution quality, Lawton urged firms and other market participants to remain engaged in the level 2 process, “especially given that we can expect a second large consultation from ESMA at the end of the year”. When ESMA’s consultation process on the “level 2″ secondary legislation is complete, it plans to publish detailed rules, called technical standards, in late 2015 or early 2016, at which point the FCA will consult on changes to its own rulebook.

Christian Krohn, managing director and head of equities at the Association for Financial Markets in Europe, said the industry well understood the need for a timely development and execution of implementation plans.” However, given the breadth and depth of implementing measures and the challenging time-line for developing them, the industry will need to work closely with the FCA and other regulators as they develop the detail to make the new legislation operational in time for January 2017″.

The Wealth Management Association believe that legislators have failed to consider whether improvements to supervision, rather than more legislation, would be a better approach, and that major costs were associated with the amount of new legislation. The association called for an appropriately targeted regulatory regime protecting retail clients on the basis of justifiable costs and focused proportionately on managing main risks, as more sustainable in the longer term.

The WMA believe that national competent authorities, not EU level organisations, were best placed to manage retail financial consumer protection. “Such consumers are more likely to be aware of their NCA than of remote EU bodies and to take them more seriously. NCAs are much better placed than European supervisory authorities to engage with small firms locally. Retail consumer protection issues that could be managed on an EU-wide basis should include such concerns as about cold-calling. European proposals for retail consumers to sign and return key information documents before investing in packaged retail investment products could have seriously damaged efficiency, and proposals to force all retail transactions in equities through a clearing house would have destroyed the retail service provider model that offers real protection to retail consumers. These protections were dropped, it said, only after significant effort by the financial sector, and many other reforms that had been passed had impact on the sector’s inefficiency, including excessive unwanted information from investment firms to retail clients.

The association said in its response that the reform process posed two main risks to retail financial consumer interests derived from failing to understand that excessive and ill targeted regulation did not benefit consumers. The first risk was a reduction in product range, limitation of competition and imposition of lower returns. The second was an increase in costs. “Tendencies to over-harmonise in retail financial legislation exacerbate, rather than alleviate, this situation. This reinforces the case for directives rather than regulations in the retail financial sector.”

The issues and noise being made around MIFID 2 are by no means unique to the UK either, with the body representing Germany’s banks warning that proposals requiring European banks to record most telephone conversations and electronic communications relating to their investment banking activities will clash with existing European data protection law. Furthermore, The European Securities and Markets Authority is being warned that unless it produces a single comprehensive list of financial instruments reportable under the Markets in Financial Instruments Regulation, firms will over-report their transactions. Over-reporting could be avoided if the rules that ESMA produce, known as regulatory technical standards clearly set out what ‘events’ are defined as transactions for the purposes of the transaction reporting regime. Both trade bodies suggested that the best way to avoid over-reporting was for industry and ESMA to work closely together to ensure that the RTS “clearly outline what events are deemed in and out of scope for reporting purposes”.

Timetable for implementation of MIFID II:

  • December 2010—European Commission issued initial consultation on revising MiFID.
  • February 2011—UK submitted consultation response to the European Commission.
  • October 2011—European Commission published proposals for a revised Markets in Financial Instruments Directive and a Markets in Financial Instruments Regulation (MiFID II).
  • November 2011-present—The proposals are now with the European Parliament and the Council of Ministers for discussion and final adoption of the text.
  • Late 2012—Expected agreement of the final Level I measures.
  • 2015—Implementation of MiFID II is not expected until at least 2015.

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