Cicero Policy Briefer

Issue 1, June 2006

MiFID: striking the balance in investor protection

By Mark Twigg

The introduction of MiFID (the Markets in Financial Instruments Directive) in 2007 will bring about major changes in the regulation of investment services. The need to press ahead with greater progress towards a single market for both retail and wholesale investment activities is clear: the EU still lags way behind the US in terms of the scale and efficiency of our capital markets. The failure to date to properly tackle this situation means that the goal of achieving the Lisbon Agenda by 2010 looks increasingly forlorn.

However, with 2007 just round the corner, the challenge of implementing MiFID—one of the major planks of EU regulatory reform – is now itself becoming a major headache. Will the perceived benefits actually materialise? The short answer to that is we simply don’t know. Anyone close to the EU policy-making process knows first-hand how much EU legislation has been justified on the basis of the potential contribution to consumer protection; while at the same time very few of those benefits are ever tested in advance. Having never been subjected to a cost benefit analysis, MiFID has suffered hugely in this respect. So while the costs of additional regulation will be felt from day one, the benefits derived from having more confident and assured investors will take years to materialise—if they ever do.

The Treasury's recent consultation made clear that the Directive will bring about major upheavals to current UK market practice. The FSA, too, continues to sound the alarm bells. However, that the impact of regulation will be felt more widely is not the major problem; rather, it is the ongoing confusion and uncertainty. Many firms are finding it difficult to prepare themselves for what is something of a moving target. The issue of best execution has been a central concern, and the extent to which the approach at implementation will be deemed ‘proportionate’ to consumer risk. After all, not all investors have the same level of sophistication, nor do they face the same risk profile.

Following the heavy-handed implementation of the Insurance Mediation Directive the omens are not necessarily good. However, the industry cannot afford to disengage from the process at this late stage. While the Directive and its shortcomings may well be set in stone, the final rules still leave something to play for.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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