Hedgeweek Mifid II Blog Series: Because I'm Worth It

Duff & Phelps' Nick Bayley is a managing director in the Compliance and Regulatory Consulting practice and has partnered with Hedgeweek to provide a monthly blog series providing insight on this imminent regulatory change.

Prior to this, Nick was a Head of Department in the FCA's Markets Policy and International Division, FCA Senior Markets Advisor, and was responsible for the UK regulator’s MiFID II Policy Project.

Fed up with MiFID II yet? We are in the home straight and January 3, is just over the hill.  But rather than relief that the finishing line is in sight, many of people I speak to are just a bit fed up with the whole thing.  

Of course, some firms aren’t ready and they will be on borrowed time in 2018 until they sort themselves out. 

But those firms who have got their preparation done are beginning to ask ‘Is this all going to work? Is it worth all the effort?’ 

A number of weeks ago, Anthony Hilton wrote a piece in the London Evening Standard, on the blizzard of MiFID II rules and the associated costs, not to mention internal upheaval, that investment banks face.  One of his points was that people just aren’t really ready for the impact MiFID II is set to have on the UK’s financial industry. 

That prompted me to go back and look at the EU Commission’s cost benefit analysis for MiFID II to find the exact cost estimates for this new regulation. The one-off figures – quite apart from the ongoing compliance costs – were estimated by the Commission, when it did its impact analysis back in 2014, to be between EUR512 million and EUR732 million for the whole of the EU. 

Speaking recently with a large sell-side institution, which still has over 700 FTE staff involved in MiFID II readiness, we got to discussing the overall cost to the industry. We did a back of the napkin calculation and estimated that the actual cost of MiFID II across the whole of the EU financial services industry is likely to be an order of magnitude higher than the Commission’s estimate; somewhere between EUR6 billion and EUR10 billion. 

It’s remarkable how much money is being spent on this project, especially on the sell-side. 

Unfortunately, of course, the industry has no choice but to get ready as best it can. 

Even after the UK leaves Europe we are still going to have MiFID II. Whatever deal the UK gets, it is likely to involve some sort of transition. And even if we do end up with a hard Brexit, MiFID II won’t suddenly disappear into thin air; it will still mean the regulations being re-worked and reworded to make them work in a UK-only context.  This is something the FCA policy guys are already well into. 

Recently, Kay Swinburne, a Welsh Conservative Member of the European Parliament commented that MiFID III could be “just around the corner”. 

I don’t know whether to be alarmed at the thought of the EU continuing to legislate in this way. But what I do know is that MiFID II will be a landmark piece of regulation; one that will probably be looked back on, a bit like the 2008 financial crisis, with a sense of relief that we all survived it and with a hope that we won’t ever have to go there again.  

What is it, exactly, that we think justifies the huge cost? 

Certainly, quite a chunk of the cost is going into transaction reporting. This extra granularity of reporting is set to benefit the regulators significantly in their quest to combat market abuse, an admirable goal, but it doesn’t really benefit anyone else. 

Other aspects of MiFID II, including some of those badged as being about protecting investors, the benefits may be a little less obvious. The regime the regulators have created for pre-trade transparency, for example, is extraordinarily complicated; the idea being that the increased transparency will make it more attractive for investors to put their hard-earned money into European markets and investment funds.

But I do wonder whether or not it is really going to transform the markets, and the quality and attractiveness of them. I’m certainly not saying it will be a non-event as some of the changes will be very interesting to observe, but one wonders if the pretty exorbitant cost involved is really worth it.   

I’ve worked with regulation and compliance all of my career but at an absolutely pivotal time when the UK is coming out of the EU and the economy is, frankly, struggling, this may in hindsight be seen as a cost the UK’s financial industry could ill afford. 

Could Brexit be an opportunity for the UK to go down a more thoughtful, perhaps more considered future path in terms of doing things?  There is a danger, with too much regulation, and without the restraining hand of the Brits that the EU could actually become less attractive for investors.

You want market structures to evolve naturally, with as much competition and natural self-regulation as possible, and ideally for governmental regulation to work in such a way that market evolution doesn’t damage investor interests. 

Instead, we’ve got an approach where EU regulators are driving market structure using highly legalistic and rather inflexible tools. 

Of course, we can’t just go back to the self-regulatory approach that served the financial markets perfectly well for centuries. Those days are gone.   

We will see if MiFID II is worth it in the long run, and if it does help investors make better decisions and attracts new flows to Europe’s markets. It will represent a new high watermark for EU financial services legislation in terms of its complexity and cost and I would be surprised to see its like again during my career.