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New EU securities rules set for patchy start

BRUSSELS - European Union rules aimed at giving people a wider choice of investments at cheaper prices come into force on Thursday but the launch will be patchy and some benefits will take time to feed through.

The rules form the cornerstone of the EU’s attempt to weave together 27 national financial markets by giving firms a ‘passport’ to offer their products and services anywhere in return for stiffer investor safeguards.

The Markets in Financial Instruments Directive (MiFID) will usher in major changes for some markets like France, Italy and Spain, but less so for money centres like London.

The launch will be a tentative affair.

The European Commission said this week a third of member states will not be ready, even though the deadline was January for introducing MiFID into national law so that companies have a full nine months to complete complex preparations.

Brussels launched legal action against 24 EU states for being late with rules that were seven years in the making. Some (transaction price) reporting aspects were delayed until next Monday to give firms an extra weekend.

‘It will be a bit of a patchwork quilt for a while,’ said Anthony Belchambers of London industry group MiFID Connect.

‘This is a major directive and bites very deep into firms’ internal processes. It requires a period in which people become accustomed to new rules,’ Belchambers said.

The European Banking Federation expects confusion and ‘clear competitive distortions’ until all banks have the necessary legal certainty with which to undertake business under MiFID.

Nobody is predicting chaos in stock and bond markets.

The limited ‘passports’ granted under the rules MiFID replaces will continue under emergency measures national watchdogs adopted this month to handle laggards.

Still, some firms will not be allowed to offer the full range of MiFID services until their home country is fully compliant.

‘This should not lead to any major difficulties but it does lead to exacerbation of legal risk and firms need to be careful about what they are doing, especially if they are not in compliance with customer facing rules,’ Belchambers said.

Regulators will likely take a softly softly approach in the first few weeks to give firms and countries time to get up to speed.

Customer comes first

All investment firms, mutual funds, brokers, banks and exchanges will have to comply with MiFID whether they operate only at home or more than one EU state.

For the first time in most states, investment firms will have a legal duty to put the customer first by ensuring that the products and services they offer are suitable for and fully understood by each client.

Firms have had to make costly changes to their internal systems and contact each customer personally to explain their new policies on handling internal conflicts of interest and commissions.

Customers will have to be told how the broker will seek the best deals, a process that must be reviewed each year. All transactions must be logged so that watchdogs have a full electronic trail.

The new rules should also spur competition in trading by scrapping the monopoly on share trading that stock exchanges in countries such as Italy, Spain and France have enjoyed.

New competitors are already moving in to try to undercut local exchanges and drive down costs for investors.

New operators like trading platform Chi-X are already building up volume, while Project Turquoise, another trading platform set up by investment banks, has yet to launch.

The message in the financial tea leaves is clear as the London Stock Exchange and other markets trim fees to keep customers from straying to new competitors en masse.

MiFID compliance has not been cheap and benefits for the end investor may take time to emerge.

The Financial Services Authority in Britain, the EU’s biggest financial centre, put the cost of implementing MiFID at 870 million to 1 billion pounds for the UK alone.

Brokers and big investors like funds should benefit from cheaper trading, clearing and settlement fees, but its not clear yet how much the small investor will be better off as the EU did not carry out any impact assessments before legislating.

A survey by ea Consulting Group this week showed that firms were already looking past upfront costs.

‘Principles based regulation means the industry needs to move away from the box-ticking we have seen up until now and start looking at the commercial advantages in a post-MiFID world,’ ea managing director Steve Robson said.

The EU believes MiFID will eventually boost EU economic growth by 1.1 percentage points and create new jobs as trading volumes rise and cheaper products attract new customers.