Its mind-boggling complexity is enough to make any banker groan. Even after a year-long delay, precious few experts fully understand the Markets in Financial Instruments Directive II, Europe’s biggest financial markets reform in almost a decade. It affects a broad swathe of institutions, from banks and asset managers to exchange operators and pension funds. Dubbed MiFid II for short, the directive came into force on Wednesday despite widespread confusion about its implementation, and how it will dovetail with regulations in the US.
On the face of it, this overhaul of a 2007 directive promises a lot of improvements. The new rules should make trading platforms for stocks, bonds, commodities and derivatives more transparent, allowing investors to easily check whether they are getting the best deal. A wider range of trades must be reported to regulators, with data to be scanned in order to spot market abuses. Among other key changes, and in a belated nod to technological progress, telephone-based trading will be replaced with electronic platforms in bonds and off-exchange derivatives. And consumers should immediately see financial advice standards rise.
The catch is, all this won't come cheap. Analysts estimate that MiFid II will cost $6 billion (€5 billion) to implement in the first five years. Although the new rules should increase competition and lower consumers' fees, particularly in the more obscure fixed-income and derivatives markets, the burden of compliance will favor the larger firms, which can spread the costs over more transactions.
Jörg Kukies, the co-head of Goldman Sachs in Germany, nonetheless said it was too early to guage the impact on day-to-day business. “We refer to ‘unknowable unknowns’ that only emerge gradually in practice,” he told Handelsblatt in an interview.
Another big change affects who pays for stock research. Previously, investors bought this information from banks and brokers as part of a package of services. But under the new system, stock research must be sold as a separate product. As a result, demand for it is already waning, meaning banks will likely shed stock analysts and trim their coverage of second-tier stocks. Small companies may end up funding their own research, with dubious results.
“Analysts tend to be skeptical about research commissioned by the issuers themselves. Firms must get the quality right,” said Ralf Frank, director of the DVFA, Germany's association of investment professionals. The market for stock research is likely to fragment, with prices ranging from €15,000 ($18,000) for basic services to €750,000 for comprehensive packages, predicts Werner Hedrich, head of Germany at research and ratings firm Morningstar.
Banks and advisers must be clear whether the investments they offer really suit their clients, in order to avoid high-pressure sales that target everyone. Commissions can be charged only if genuine value is added to customer service. Under this tighter standard, some independent advisers could face difficulties and come under pressure to merge, said Jan Altmann, head of fund adviser 4Assetmanagement.
One glaring oversight: It's unclear how the new rules will affect Europe's 39,000 independent financial advisers. Ralf Frank
At times the rules seems to contain as many shortcomings as benefits. One glaring example: It's unclear how the regulations will affect independent financial advisers. Europe has an estimated 39,000 such consultants who aren't attached to banks or insurers, and who are left operating in a "gray zone," according to Mr. Altmann. The German government wants to extend the regulations to independent advisers, but the economics ministry will likely need months to draw up a framework.
Financial regulators are aware that MiFid II will have teething problems and have signaled that they will give the sector leeway to implement it. But financial firms cannot simply continue doing business as usual. If they sell investments that fail to perform, clients will be allowed to take legal action to contest the transaction – and will have a good chance of winning.
The confusion will likely prompt Europe's regulatory masters to fine-tune the rules. Detmar Loff of Ashurst, an international law firm, predicted amendments in two waves, in early 2018 and in the second half of the year. “Some problems won’t be sorted out,” he added. Chances are technology and markets will render the new rules obsolete, as was the case with MiFid I. It might just take a MiFid III to iron everything out.
Katharina Slodczyk is Handelsblatt’s London correspondent. Anke Rezmer covers investment funds and Andreas Kröner covers banking and finance, both in Frankfurt. Jeremy Gray, an editor at Handelsblatt Global, adapted this story into English. To contact the authors: [email protected], [email protected], a.krö[email protected]