Proposals by the European Commission (EC) to update the regulation of financial markets under the updated Markets in Financial Instruments Directive (MiFID II) have been brought forward too quickly and risk damaging both the City of London and the entire EU financial sector, says the UK’s House of Lords economic and financial affairs EU sub-committee.
In its report, the Parliamentary House of Lords committee acknowledges that a review of the existing MiFID I regulatory package is necessary, but expresses concerns that the new proposals on transparency are flawed and risk creating unnecessary red tape.
Committee chairman, Lord Harrison, said: “We are very concerned that the undue haste with which MiFID II has been brought forward means that the Commission simply hasn’t had time to think through the implications of its proposals. The consequences of ill-thought-out legislation, not only for the City and the EU financial sector, but for consumers of investment services throughout the EU, could be hugely damaging.
“While we absolutely agree that a review of MiFID I was needed, we simply can’t risk locking third country firms out of EU financial markets or damaging the provision of investment services. It is vital that the UK government, the European Commission, Council and European Parliament ensure that, rather than being bounced into these changes, all steps necessary are taken to ensure that MiFID II is fit for purpose before it comes into force.”
Specific criticisms levelled at MiFID II in the report include:
- Proposals on third country access would effectively create a ‘fortress Europe’, forcing countries such as the USA and China out of affected markets to the detriment of EU consumers.
- Although the EC’s desire for greater transparency is welcomed, an unsophisticated, ‘one-size-fits-all’ approach that ignores the sensitivity of information before a trade is made (pre-trade transparency) risks damaging liquidity and reducing competition, and could also have a serious effect on market innovation.
- The new category of Organised Trading Facilities (OTFs), aimed at ensuring all organised trading is conducted on regulated venues, risks creating red tape through an overly complicated regulatory framework.
The aim of MiFID II, of course, and the OTF rules is to regulate any markets that were missed the first time around under the Multilateral Trading Facility (MTF) stipulations.
Only time will tell if the OTF rules work and the wider agenda for extra transparency under MiFID II comes to fruition. The industry would no doubt tell the regulators to take care that this European initiative fits in with other global post-2008 drives to improve the oversight of the trading environment, such as the move towards centralised clearing for over the counter (OTC) trades for example, but whether the EC is minded to listen or not is debatable. It is determined to take action to try to ensure that another 2008-style crash cannot happen again and is probably not minded to listen to the House of Lords and its pleading for the special place of the internationally-focused markets in London.
It also remains to be seen whether MiFID II, OTFs and the rest of the proposals work as intended in practice, but it is likely the new regulation will only turn out to be the latest instance of the on-going war between the regulated and the regulating. As the ‘poachers and the gamekeepers’ argue over the specifics and implementation, the end result may well be a MiFID III eventually. Surely, not an enticing prospect for anyone.
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