Will this become the European Union’s version of our DOL Fiasco?
As we ring in 2018 chaos looms in the financial services industry in the EU as they roll out regulatory changes that are believed to be the most dramatic in more than 10 years. The legislation has been evolving since its introduction in 2007 and is slated for roll out January 3, 2018.
Markets in Financial Instruments Directive, known as MIFID II, is a massive set of rule changes affecting the European financial exchanges, institutional and retail investors, banks traders, brokers and pension funds. Its main goals are to improve investor protection and restore public confidence. It hopes to achieve this by significantly increasing transparency, technological modernization and moving much of the over the counter trading to regulated venues.
There are parallels to U.S. reform
Not unlike our path to regulatory reform, prompted by Dodd-Frank, the original MIFID was introduced 10 years ago and has gone through a slow and challenging evolution. After significant push back from the industry, when introduced in late 2007, MIFID underwent considerable review and revision until formally adopted in 2014.
European Securities and Markets Authority (ESMA) is the European counterpart of FINRA. In a paper to be released soon I will be expanding on a comparison of ESMA and FINRA. For the moment, suffice it to say that ESMA is an independent regulator that answers to the European Parliament whose mission is to enhance investor protection and promote stable and orderly financial markets. In that paper, I will be exploring global efforts to harmonize international financial markets and more closely examine the details and impact of MIFID II.
In the fall of 2015, ESMA proposed adoption of the new laws into working technical standards. Almost simultaneously, they warned that it was unlikely that full implementation would be achieved by the January 2017 deadline. In February 2016 the EU delayed introduction of MIFID II by one year which brings us to now, January 2018.
So, very much like our own experience with the DOL Rule, our European brethren are experiencing similar chaos and uncertainty as implementation occurs.
There are aspects of the new rules that will, doubtless, create competitive advantages for the large financial institutions and likewise, negatively impact smaller players. MIFID is attempting to push trading away from traditional telephone methods and towards electronic venues. This will, of course, improve audit trails, surveillance and efficiency. However, it will also create reporting requirements that may be difficult or impossible for any but the largest of financial institutions. Like our experience with DOL, small and mid-sized EU actors in the industry are concerned that the new rules may be unworkable.
At any rate, it will be worth watching as the saga of regulatory reform unfolds in Europe. On a positive note, MIFID II probably does move the entire financial services industry toward regulatory harmonization resulting in more efficient global markets. Hopefully, the investing public will benefit by increased transparency, improved reporting and lower fees.
Vince Micciche CRCP, GFS January 2018