The EU’s Markets in Financial Instruments Directive (MiFID) was introduced in November 2007, replacing its forerunner the Investment Services Directive. The new directive was intended to harmonise the regulation of investment services in the 30 member states of the European Economic Area (EEA), while increasing competition and consumer protection.
All companies that perform investment services or activities are subject to MiFID. One company that has felt its force – or lack of – is spreadbetting outfit WorldSpreads.
Last October the company opened offices in Denmark, France, Germany and Sweden, and its experiences highlight many of MiFID’s shortcomings, particularly for those companies looking to expand their operations across the EEA.
Despite MiFID’s aim of harmonising regulation, WorldSpreads general counsel Dominic Bacon has found himself grappling with often unfamiliar rules and regulations in the new jurisdictions.
Companies subject to MiFID are authorised and regulated in their home states – in WorldSpreads’ case by the FSA – and once a company has been authorised it can use the MiFID ’passport’ to provide services to customers across the EEA.
“Being regulated by the FSA only helps you get your foot through the door, allowing you to open offices in, say, Denmark or Germany,” explains Bacon. “But you still need to take into account all the local rules and regulations in those countries, and they often have very different ways of doing things.”
The move has meant dealing with an array of financial bodies, including France’s Autorité des Marchés Financiers, Germany’s Bundesanstalt für Finanzdienstleistungsaufsicht and Sweden’s Finansinspektionen.
“Liaising with all those regulators can be difficult,” admits Bacon. “You’d think we’d be dealing with a common set of regulations, but we’re not.”
Setting up the new offices has meant investment in the company’s IT and back office units, but there has also been a significant spend on its legal and compliance functions.
“Dealing with counsel in those countries has been expensive,” says Bacon. “There’s also the problem that, as a new entrant into places like Germany, you sometimes have to go to the smaller law firms. Because we’re a new arrival the magic circle equivalents don’t know the company as well, so there’s a danger you won’t get the same level of access to the top decision-makers.”
On top of paying its advisers in the UK, instructing counsel in the new jurisdictions represents yet another layer of cost.
“You can find yourself going into five countries and having to ask the same questions in all of them,” Bacon adds. “What we try and do is work on the basis that the FSA rules are the gold standard. In a number of instances that’s going to be a more cautious approach than in, say, Sweden. But it also relies on the assumption that the FSA is going to have the more cautious approach, which isn’t always the case. It’s a bit of an imperialistic assumption.”
One area that has proved particularly problematic is marketing. The directive effectively bans companies from cold-calling, for example, yet leaves the definition of cold-calling up to the regulators in each member state. Rules covering risk warnings can also vary greatly from country to country.
Similarly, Bacon has encountered inconsistencies when it comes to adverts comparing WorldSpreads with its competitors.
“In the UK, when you compare yourself with another company you need strong evidence to back those claims up,” he says. “In other jurisdictions we’re finding local competitors can denigrate you without having the same issues, which makes it a lot easier to attack competitors.”
At the end of last year the European Commission published a review of MiFID. The consultation process ended in February, paving the way for an updated set of proposals known as MiFID II, aiming to address market developments since the directive was introduced.
The consultation responds to concerns arising from the financial crisis in relation to investor protection, the regulation of over-the-counter trading and the oversight and transparency of commodity derivatives markets.
Formal proposals are due later this year, but Bacon believes it is unlikely that MiFID II will address the regulatory issues his company encountered last year.
“MiFID isn’t like the FSA Handbook. It’s a framework document and you still need the Handbook when dealing with things such as financial promotions or reporting, and to look at local rules on things like investor protection and disclosure. MiFID is a kind of groundwork for financial regulation. It provides a baseline but grants local regulators discretion in how they implement rules. Nor does it cover it every aspect of regulation.”
Bacon believes the investment services sector still needs a genuinely pan-European regulatory body.
“MiFID is more of a precursor to a pan-European regulatory body that would have a single set of rules and regulations,” he concludes.