Brexit, What next for MiFID?

The Markets in Financial Instruments Directive (MIFID) was an EU regulation initiative that aimed for harmonisation of financial services regulation in Europe’s 31 member states.

The intention was to see increased competition and more consumer protection.

MiFID 1 in EU directive 2004/39/EC was the first step and in April 2014 MiFID 2 was approved that tidied up the original MIFID thinking and by January 2018 MiFID 2 and MiFIR (Markets in Financial Investments Regulation) will take effect.

MiFIR/MiFID II had the potential to boost transparency and increase investor protection and readying the member states for implementation was likely to be a very painful process and no allowance for any transitional stage will make the deadline even harder to meet.

And what about the massive MiFID costs already incurred and about to be incurred by the UK? So far:

  • One-off compliance costs for the UK were estimated to be up to £188 million
  • Ongoing costs from 2017 are estimated to be  between £79.8-£150.4 million
  • The UK will/ would have bear 36% of the estimated total cost of Mifid II
  • Total transition cost estimate is £194.8 million
  • Average annual cost, excluding transition: £112.5 million

*Source: HM Treasury Impact Assessment

Now we have voted to leave the EU, where does the UK go on implementation, almost two years on from when article 50 to leave will have been implemented?

Where does the EU go as the UK market is amongst the biggest of global financial players?

Time for some guidance from the FCA and HM Treasury I think?

Especially as the Stock Exchange is about to be acquired by the ‘Germans’…..or will it now?

Cobbs Paradox

Cobbs Paradox could be another descriptive for the regulation of financial services in the UK today.

Cobb’s Paradox states, ‘We know why projects fail; we know how to prevent their failure – so why do they still fail?’

Thirty plus years of regulation with five different regulators and actually, there is an answer, but the question seems to have become unpopular.

As an industry, a regulator cannot prevent every product or advice failure, but a regulator should know enough to prevent most of them if they use what they know smarter?

The use of the ‘Rumsfeld’ argument- There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know” could be an interesting starting point.

Let’s say the FCA are perfect at estimating the probability of better outcomes success. With an estimated 75% probability of success 25% are going to fail some of the time, but they can’t prevent or predict which of the individual ‘outcomes’ will ultimately fail.

So, if you can estimate the probability of success for a universe of ‘outcomes’ and your estimates correctly predict the success/failure ratio of that universe of ‘outcomes’ over time, then you have, essentially, prevented project failure to the maximum extent possible.

But you still have failed projects.

The FCA collects huge amounts of data from firms. Data holds all sorts of interesting opportunities to be explored, and not in the way most would expect.

Data can take many different forms. Regulators are often asked what they do with it all.

The answers may be obtuse, but you can be sure that data can be looked at in so many ways to throw up trends, habits, behaviors’, attitudes. It can be searched and analyzed in simple forms; it can be searched and analyzed in highly complex ways.

This all no doubt builds a very detailed picture of advisers and consumers, their attitude to service and risk management.

The FCA correctly requests data from companies in a bid to understand the markets it is tasked with regulating.

Financial services companies are of course also obliged under law to provide data to the FCA under certain circumstances. For example, under the EU Markets in Financial Instruments Directive (MiFID), financial services companies that outsource data processing activities are generally required to ensure that regulators have “effective access” to data for auditing purposes.

In future the FCA said that the data it collects will be “effectively governed and controlled” and “clearly specified”.

It said it would put review systems in place to ensure it stopped collecting data from businesses where “it no longer meets our needs”.

What all that means is not entirely clear, but to quote another ‘Rumsfeld-ism’

“If you try to please everybody, somebody’s not going to like it”.

Dogs Breakfast?


So now we have it, the FSA has been given the EU nod of approval to ban commission payments from providers to advisers in it’s implementation of RDR next year.

The EU parliaments final version of Mifid also makes clear that a ban on commissions or other financial inducements for independent adviser firms will apply across Europe too. But just to help create confusion the definitions of independent differ and the resulting outcome will be that independent advisers may be treated differently to those who are not or who may offer restricted advice.

Mifid is the key piece of EU regulation that is set to transform the way a range of instruments are traded in Europe. It aims to update and build on the reforms introduced by the 2007 directive, it is the European Commission’s proposed view on what the new rules ought to look like for all EU member countries.

The UK government does not often have influence or success when EU regulation collides with UK law but on this occasion there is some acknowledgement that individual countries regulators can plough their own furrow to a degree, so RDR looks safe as the FSA can press on with its RDR commission ban.

But there is genuine concern that these ‘just before midnight” changes and clarifications will raise very real fears that those choosing to plough the independent furrow will be treated differently to those who are not.

The EU Parliament voted on the final Mifid wording last week and it passes, when intergrated into the Council’s wording, into EU law

The skeptics out there should note that there is no reference to restricted advice and this will no doubt see the UK playing field being marked out differently, a sort of imperial versus metric job meaning the same but different.

The EU definition of independent advice is seen as considering “a sufficiently large number of investment products” which are “sufficiently diversified [by] type and issuers or product providers to ensure that the client’s investment objectives can be suitably met”.

Importantly though recommended products must not be limited to those offered by providers with “close links” to the adviser firm.

IFA Simon Mansell observed in FT Adviser On the 06/12/10 Michel Barnier, Commissioner for Internal Market and Services confirmed (to me) that the FSA would be unable to restrict inwardly passporting firms offering their services post RDR. For those subjected to FSA regulation they will be placed against heightened competition from other EEA states, paying commission not fees and they (UK advisers) will be unable to respond because their hands are tied by a rope called RDR. 

The FSA is not accountable to Treasury Ministers or to Parliament, and now it seems Europe! European Union law operates alongside the legal systems of the European Union’s member states but where conflict occurs, takes precedence over national law and that will include even the FSA! It seems that the FSA does not take this view!

So the

What is Mifid? Just the basic facts, can you tell me where it hurts?

Don’t wanna confuse nobody, dont wanna be confused

European politicians reject plans for commission ban,making the FSA look increasingly isolated in Europe.Thefinal version of Mifid expected early next year, will combine the European Parliament’s amendments with those from the European Council – formed by representatives from national regulators – alongside the initial proposal from the European Commission.

 “German MEP Markus Ferber first took steps to remove references to a commission ban in March, and there has been significant opposition to the ban, proposed by the European Commission from both advisers and fund managers on the continent”.

Mifid is the key piece of EU regulation that is set to transform the way a range of instruments are traded in Europe. It aims to update and build on the reforms introduced by the 2007 directive, it is the European Commission’s proposed view on what the new rules ought to look like for all EU member countries.

So now, with this political rejection thrown into the mix,  are we all about to start walking down Conundrum Street?

Where does this proposed ruling fit with FSMA 200 regarding UK compliance with EU directives, will RDR produce two tier regulation, opportunity and remuneration and how will it affect advisers and most importantly the Consumer?

Uncertainty is the impact for sure, the FSA has pressed on with RDR regardless of advices from many, including the TSC to hold off until Mifid II decisions are clear. The European parliament earlier this year was reportedly set to reject the introduction of a Europe-wide ban on commission paid to IFAs and that is what appears could be now happening.

The EU parliament’s economic and monetary affairs committee had removed references to the ban in amendments to a revised draft of Mifid II. The European  Econ committee is proposing tougher disclosure rather than a Europe-wide ban on commission.

Swedish MEP and Econ member Olle Schmidt was on record as saying: “A total ban was not supported by the majority of Econ members”.

He went on to say: “If you introduce a ban, as in the UK, you can go too far. It would limit freedom of choice for ordinary investors and those most in need of advice would not be able to afford it. A more balanced approach is needed. There are other ways of safeguarding investor protection.”

As an industry we have all been led to believe by the regulator that they were as one with European Union regulation plans yet it would appear this might not now be true.

There are some overlaps with existing UK regulatory requirements and planned regulatory changes, such as the RDR, which could lead to implementation challenges for firms. For example, the MiFID II proposals set out that in order to qualify as ‘independent’, advice should be based ona ‘sufficiently large number of financial instruments available on the market’

However, this is different to the definition adopted as part of the RDR.

In addition, the proposed scope of Mifid extends to include structured deposits but the confirmed scope of the RDR does not. Under the RDR changes, advisers giving restricted advice (as well as independent advisers) will not be able to receive commission. These differences will need to be addressed by the relevant bodies prior to Mifid implementation.

The TSC advised Messrs Sants & Turner earlier this year that EU rulings could throw up some difficulties with the grand plan and this clearly fell on deaf ears.

So with all this confusion swirling around, Linda Woodall has ‘upped the anti’ telling advisers “ Don’t be caught unprepared for RDR”. She wrote a very long article and when referring to implementation deadlines being only a few months away, she said, “it’s time to embrace the changes that both regulators and industry have worked so hard to achieve……….the FSA is committed to helping advisers achieve a charging model which works for them, their clients and for the future.

Think about this now before it’s too late. Any London-based advisers will be familiar with mayor Boris Johnson’s catch-phrase for travelling during the Olympics: ‘Don’t get caught out!’ This is sound advice for all as we prepare for the RDR.

Wise words that sadly only appear to apply one way, the FSA have a history of being caught out failing to listen to “sound advice”. Is this yet another example of the European Parliament’s amendments putting a spanner in the works at Canary Wharf?

Ms Woodall may wish to take something from the EU position, the great Mr. Dylan’s lyrics sum up that something very well:

“But if you do right to me, baby, I’ll do right to you, too

Ya got to do unto others Like you’d have them, like you’d have them, do unto you”

UK firms have spent quite enough time and money dealing with “having it done unto them” please do not have them spending any more until Mifid is 100% clear to all.