MiFID II is coming on 3rd January, ready or not. Michael Wilson looks at what it might mean.
At a time when Britain is grappling with the whole idea of staying within the EU and its integrated markets, both for goods and for financial institutions, there are some who wonder exactly why we are taking the European securities and Markets Authority’s pronouncements on the MiFID II and MiFIR (its implementation mechanism) so very seriously. Aren’t we British aiming – at least officially – to run parallel with the European norms but not formally within them? And aren’t we already well ahead of MiFID II’s requirements anyway? (And haven’t we always been?)
The bigger picture
The second question is easier to answer than the first. Yes, we are indeed entitled to view London’s financial market supervision as being significantly tighter than that of Germany, say, or France – never mind Italy or Malta or Cyprus or Romania, where much more remains to be done. London’s FCA and PRA rules were among the regulatory models on which the MiFID II set-up was originally envisaged. But we forget at our peril that Brussels’s task is to implement a uniform continent-wide minimum standard which needs to encompass a wider range of national retail and marketing models than just our own.
It would be surprising if Britain didn’t have to make some concessions to the way in which other countries do things. Some countries, for instance, initially argued (unsuccessfully, as it turned out) for the abolition of execution-only trades, or at least for restricting them to sophisticated investors: the fact that Britain’s own system was robust enough didn’t alter the fact that in other places the same could not be said for the local rules. So, up to a point, accepting the new MiFID standard was always going to involve some compromises.
Arriving on 3rd January
Either way, MiFID II is coming on 3rd January, ready or not. And the welter of new ESMA pronouncements that arrived in late June and early July has rightly been concentrating minds – not least, because it’s really getting rather late in the day for tweaks that will allow the industry only months in which to get its act together. Both advisers and providers have been banging on furiously at the FCA for more essential detail, and now we’re getting it. But it’s still going to be tight. And ironically, the ESMA announcement of 29th June may in fact delay the implementation of some FCA efforts to tighten the control of issues such as excessive leverage in retail products.
But we’re getting ahead of ourselves. MiFID II, as you’ll recall, aims to protect investors firstly by tightening the final delivery process (especially with regard to risky trades) and secondly by reining in certain operational phenomena such as algorithmic trading (high-speed automatic trades) and unreported off-market trades (which can distort consumers’ perceptions of what is really going on price-wise behind the scenes.) Both of these latter issues have been dealt with in generally satisfactory ways – there will, for instance, be far fewer places henceforth where unrecorded trades can happen.
This summer’s developments
But the news since June has been about limiting the scope for investors’ losses – not so much by offering them fire insurance, but rather by removing the matchboxes in the first place. (Or some of them, anyway.) We’ll stress once again that the issue is not that Britain itself is particularly lax but that some other countries are playing to looser rules. And, of course, the Banking Passport rules can mean that once an excessively risky online instrument emerges it can be marketed throughout the trading bloc. Those fires can spread quickly.
- Firstly, ESMA wants to see a reduction in the hefty leverage available to retail investors who might not understand what they’re getting into when they use products like spread betting, binary options or contracts for difference – or for those who fall victim to gambling addictions and get into rapidly spiralling debts. These products may be based on currency movements, commodity values or bond yields as well as simply share prices or indices.
- Secondly, the European authority wants to limit the ways in which some highly-leveraged products are marketed, especially to unsophisticated investors.
- But thirdly, ESMA is talking about toughening up on the obligation of financial advisers to prevent or discourage their clients from what the FCA has called “these complex, speculative products [which] are reaching a wider target market than is likely appropriate”. The Financial Times reported on 29th June that an FCA sample of 23 companies had found that “many had inadequate assessments of customers’ knowledge and experience of products, failed to give appropriate risk warnings and had poor oversight.”
For now, the CFD industry is taking ESMA’s action very seriously indeed. IG Group, the country’s largest spread better, agreed last February to stop marketing some of its binary products to new clients. CMC markets has been talking about “limited risk accounts”. Elsewhere in Europe, providers have been proposing credit caps and other measures. But it’s the lack of a detailed game plan from ESMA that worries many. By this stage in the process, surely this sort of thing should have been clear and finalised?
Of course, no restrictions will presumably stop some sophisticated investors from simply registering themselves as “professional traders” in order to circumvent the restrictions. At least that would lighten the best-advice pressure on their advisers. But for other clients, the onus on advisers is about to get tougher. Just one more thing to worry about as we lurch unsteadily toward Brexit.
