Disquiet over financial market regulation in the EU is rising as the key MiFID II directive faces almost certain delay.
The ruling coalition in Berlin, according to a Feb. 3 article in Börsen-Zeitung, has expressed its dissatisfaction in a parliamentary motion, stressing that European financial regulation needs to be developed efficiently.
German political disquiet over regulatory excess adds to the headwinds facing MiFID II. The Markets in Financial Instruments Directive is a cornerstone of Europe's move toward capital markets union and the push to create transparent, fairer and safer financial markets and trading. The dismay in Berlin was originally sparked by a proposal by the European Securities and Markets Authority, under MiFID II, that sales commissions should be abolished, for example on insurance policies, and be replaced by advisory fees. Yet MiFID II could be seen as a prime example of inefficient and highly complex regulation.
Its implementation is now widely expected to be officially postponed until Jan. 1, 2018, from Jan. 1, 2017. Steven Maijoor, chairman of ESMA, has supported a delay of one year, but claimed a further extension may be necessary if the European Parliament, Commission and Council proved unable to agree on the vast range of technical standards underpinning MiFID II.
"Everybody would be astonished if it were not delayed," Emma Radmore, a managing associate at law firm Dentons, told SNL.
The key sticking point at the moment is the tardy response of the European Commission to ESMA's extensive draft technical standards which were mainly published on Sept. 28, 2015, with an addendum on Dec. 11. They specifically target regulation of non-equity products and seek to move over-the-counter trading on to regulated platforms. Yet even they do not deal with all the complex issues.
"A number of the key conduct of business issues have to be addressed in the legislation that only the Commission can propose and make," Radmore said.
The Commission appears to be struggling both politically and technically. It recently pulled out of participating in the MiFID II Implementation Forum at the end of January in London. As one observer told SNL, this made it appear incapable of setting out the current state of progress on MiFID II and detailing its response to ESMA's proposals.
"There have been a lot of criticisms since the financial crisis of European measures made in haste and not properly thought through," Radmore said. She said the Commission is now expected to respond in March 2016, which would give market participants less than the foreseen two years to comply with any national implementing legislation.
Only when European agreement is reached can the regulators finalize their IT systems and they are already struggling, leading to ESMA's request for a delay. This in turn hits the investment plans of the market participants themselves.
There appears to be a profound disconnect between goals and means in MiFID II. Transparency and fair and equitable treatment in equity and non-equity markets, extending to their products and their marketing, are surely laudable aims. This is driven by the experience of the financial crisis which has revealed significant market-rigging and mis-selling.
Yet, as the German politicians observed of EU financial regulation generally, it is far from transparent — and extremely onerous.
The whole world of market trading faces regulatory change. Market participants and trading markets will be subject to pre- and post-trade transparency requirements. High-frequency trading, commodities markets, futures and options, as well as bond and equity markets, are affected. Payment for investment research which looks set to be unbundled from trading remains a contentious issue.
Radmore said the core challenge was "the mixture of the systems and algorithms required for implementation together with the understanding what precisely is required and why." This has created many unanswered issues. Moreover, these problems are inter-related and interdependent as ESMA has pointed out. As the leading financial center, the City of London faces the greatest task.
There is considerable disquiet in London as well as Berlin that the regulation might be excessive, based on previous experience of European legislation. However, supporters say, this is what a level playing field for market operators, institutional participants and retail clients looks when legally formulated. Making it work is already proving challenging.
