The Markets in Financial Instruments Directive (Mifid) was supposed to change the world. Well, the financial services world at any rate. But rather than bounding across Europe as planned, the directive all but limped into being last week (1 November).
Several years in the planning, the directive aims to enable European cross-border trading of securities, derivatives and financial services through uniformity of regulations. However, it stumbled at the final hurdle because so few EU member states were actually ready to put its requirements into practice.
It is a pointless framework, surely, if only a handful of the 27 countries covered by the directive met its official deadline. And, because of this, is almost undoubtedly useless.
Certainly, the delays that have dogged each stage of the Mifid process have not made for great headlines, with the UK the only country to hit the initial implementation deadline at the end of January.
Arguably the Brits did so well on this point because Mifid borrows liberally from rules already in place in the UK, while certain other countries have no existing framework to pin the legislation on. As Reed Smith Richards Butler financial services partner David Heard says: “Mifid is a blueprint based on UK regulatory law. That makes the implementation of it a slam dunk for the Brits, but not for the Continentals.”
However, it is precisely because the task has been so huge and ambitious that many countries have fallen behind – the directive does, after all, attempt to redesign and harmonise practices across Europe.
SJ Berwin financial services partner Daniel Tunkel says: “Mifid’s creators had a noble ambition: to further integrate the financial services industry across Europe; to build a marketplace that allowed for effective, quality competition for services; and to better protect consumers of those services – all through agreed pan-European regulations implemented into national law.”
A noble ambition indeed, but ultimately the system is unlikely to work in that way for some time. As Tunkel points out: “This means that the cross-border passporting regime will work imprecisely at best until everybody comes into line and all relevant regulations are finalised.”
Which doesn’t mean to say that Mifid is bad per se, rather that the directive was pushed through despite the obvious fact that so few were going to be ready for it.
Indeed, the UK’s Financial Services Authority (FSA) was forced to take the embarrassing step of introducing a temporary rule to ensure no financial services company was committing an offence due to its home country’s non-implementation of the regime.
With the Investment Services Directive rendered obsolete on 1 November, UK branches of big European banks such as Santander of Spain and Deutsche Bank of Germany would have been breaking the law simply because their home jurisdictions had fallen behind with the new directive. Without the temporary rule, Mifid, which at its heart seeks to encourage pan-European competition, would have been rendered pointless.
So, whether we’re prepared for it or not, Mifid is here. But what does it do and what does that mean for legal advisers working in the financial services sector?”Mifid seeks to create regulatory transparency and competition between various stock exchanges in Europe,” says Reed Smith’s Heard. The directive also allows providers of financial services to sell their products into all participating countries. For some European countries, particularly those with protectionist rules in place, Mifid is a problem because it poses a potential threat to their domestic bourse. However, for Baker & McKenzie financial services partner Arun Srivastava, increased competition should be viewed in a positive light.
“This will lead to consolidation because it will be easier to do business across borders, and that will drive further consolidation,” he says. “There is more competition and banks are setting up other places to buy and sell shares that are not stock markets. It means there will be more of a level playing field between all the countries in Europe.”
All this has generated plenty of work for lawyers, and not just those advising the banks on the establishment of their trading platforms.
“This has generated a lot of work advising people on making sure that what they’re doing is compliant with the directive,” says Srivastava. “They have to make certain changes to their business and, because of the organisational requirements under Mifid, some companies have used this as an opportunity to engage in restructuring.
“Users of financial services such as pension funds have also needed advice about what might change as regards their relationship with a regulated company.”
The pan-European nature of the directive is also creating more opportunities for legal advisers; something that is likely to increase.
Dechert financial services partner Dick Frase says: “I’ve been advising in relation to Mifid in France and Belgium. One of the things I’ve noticed is that investment managers tend to do business across borders. Previously they didn’t have a presence across countries, but there’s been a rush to set up branches.
“That will continue and big management groups will find it easier to operate on a pan-European basis.”
But Mifid is still a long way off achieving what it set out to do. It will be years rather than months before the directive is up and running in all European member states and, even when it is, it will be longer still before the pan-European system operates smoothly. As Heard points out: “The benefits of Mifid will not be here today or even tomorrow, but maybe in three or four years. It’ll be a good thing in the long term though.”
Before that point can be reached a number of issues need to be addressed, not least the rule on inducements, which Frase believes is the least clear point in the entire directive.
“If you’re selling life insurance, a life insurer will give you various incentives to sell its products,” he explains. “The rule that regulates this has been around for a while, but it’s now being applied to the whole industry. There are just 10 lines in the directive, however, and the implications are very unclear. From a legal point of view there’s a lot of extrapolation to be done. Things like that will have to be picked up and rationalised.”
Arguably these issues should have been ironed out before the directive was put in place. On the other hand, despite the fact member states had years to prepare for 1 November, the scale and scope of Mifid is so huge that it was always going to be imperfect.
Regardless, there is a lot of work to be done before Mifid can be viewed as a success, and for the lawyers that can only be good news.
As SJ Berwin’s Tunkel says: “As with most regulatory reform programmes, this has been a rush, and over the next few months we will doubtless encounter all manner of rough edges to the regime and points that remain unaddressed by the new rules.”
Inevitably, the cost of regulatory compliance will rise as a result of much of the new regime.
So far, Mifid is a botched job.