Mifid. It sounds like a cross between the vicious three-legged plants in John Wyndham’s science fiction novel and a Welsh county name created by civil servants in the boundaries reorganisation of the early 1970s. In fact, it’s scarier than either.
Mifid stands for the Markets in Financial Instruments Directive, the most wide-ranging piece of European Union legislation covering the financial markets to emerge in the past decade. Investment firms and fund managers have been struggling to understand its implications for several years now. But since its direct impact is on firms rather than individuals, it has barely impinged on the consciousness of the average investor. As the implementation date approaches, however, it may be useful to know a bit more about it.
So what exactly is Mifid?
It is a key part of the European Commission’s plans to create a single market in financial services. Goods can, in theory, already be freely traded across Europe but services have proved harder to export. Greater cross-border competition for, say mortgages, ought to bring down costs to borrowers. There is a risk thatcivil servants will try to “gold plate” the original, increasing costs and red tape for all those affected. The Financial Services Authority, the City regulator, is currently consulting financial firms on how to implement the directive but has promised not to add on extra rules.
What does Mifid do?
It harmonises the rules for securities trading, provides protection for investors and makes it easier for investment firms to operate across the European Union. A firm regulated in one country will be able to sell its services throughout the EU. It will no longer require the approval of regulators in every country under a process known as passporting. The range of products covered by the passporting rules will be extended to bring in commodity derivatives, credit derivatives and financial contracts for difference.
Is that all?
Another key element is that stock exchanges will lose their monopoly over trading domestic stocks and shares. Other dealing platforms and the in-house securities trading carried out by banks and brokers will be granted equal status. The aim is to create a more level playing field for the different markets.
Many markets, notably the one for corporate bonds, are already over-the-counter operations, with dealings taking place directly between banks and brokers.
Does this mean it will be easier to obtain prices for shares and other securities?
It should do. The new rules will require greater transparency for share prices wherever they are traded: on a stock exchange or over the counter. Exchanges and investment firms will have to publish the price, volume and time of transactions in as close to real time as possible. Bond prices are not covered by the current Mifid rules but the European Parliament has asked the commission to investigate whether they should be included at a later date.
Mifid also lays down rules on how investment firms manage their business and how they deal with clients. For example, when a firm provides advice or portfolio management services it must obtain enough information about the client’s knowledge and experience to decide whether the advice is suitable. It will also cover how firms manage conflicts of interest and how they look after securities and money they hold on behalf of clients.
Who is affected?
A wide range of financial services businesses including investment banks, portfolio managers, stockbrokers and broker-dealers, corporate finance firms, futures and options firms and commodity firms. Not all firms in the last three categories are covered by existing legislation. Large organisations including retail banks and building societies will be subject to Mifid for parts of their business – selling securities or investment products containing securities – but not others.
What does it mean for the consumer?
The directive’s immediate impact is on the way financial services firms carry out their business but this has serious implications for the sort of service customers receive. It sets out more explicit rules on dealing fairly and efficiently with customers. For example, dealing at the best price – best execution – will require firms to take into account not just price but also factors such as the cost, speed and likelihood that the deal can be completed. Parts of the global securities markets where prices are not always readily available should become more transparent.
When does it take effect?
The new rules were originally intended to apply from April 2006 but following lobbying by individual governments they have been delayed until November 2007. The directive itself was adopted by the EU in April 2004 but we are still waiting for the technical measures to implement it to be approved by the European Parliament. This is expected to happen later this year.
What will it cost?
No-one knows. Astonishingly, no cost-benefit analysis has been carried out at an EU level. The FSA is only now starting to do the sums. For the larger individual firms, however, the costs could run into the millions.
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