MiFID - will it be next big wave?
Many claims have been made about MiFID since its creation, and most of these are unrealised. In the market for interim executives and other professionals, MiFID holds a special place: it is the supposed torch-bearer of demand for regulatory change-related resources among the country’s, indeed Europe’s, financial services firms. In this brief article, we will consider the factors that will contribute to demand for professionals to support MiFID implementation, and review the likelihood that MiFID will be the next big wave.
At the height of Britain’s ‘third-way’ economic optimism and partly at the initiative of the UK government, the leaders of the 15 countries of the European Union gathered in Lisbon, Portugal for a special summit on economic reform hosted by Portugal’s popular Prime Minister, Antonio Guterres. The summit promised to be a show-down between pro-market reformers led by Britain, Ireland, Spain and the EU reformist nations, against the counties keen to promote the ‘European social model’. In light of the experience at the WTO round in Seattle the preceding November, large numbers of protesters were anticipated on the streets of Lisbon.
In a typically European compromise, the agenda reflected dual focuses: Modernising social protection and promoting social inclusion, for example, and “preparing the transition to a competitive, dynamic and knowledge-based economy”. This latter objective covered, among other things, “an information society for all”, “economic reforms for a complete and fully operational internal market”, and “efficient and integrated financial markets”. The final point included “setting a tight timetable” so that the Financial Services Action Plan, developed by ECOFIN, the Economic and Financial Affairs Council, would be implemented by 2005.
The summit, which as dubbed by some the dot.com summit, was heralded by UK PM Tony Blair as a "sea change" in European thinking on business and heralded "a new approach based on enterprise, innovation and competition”. Reflecting the dualism of the summit generally, he called for Europe to "match the dynamism of the US" while preserving "social justice".
While the Lisbon Summit is often regarded as the birthplace of MiFID, in reality it began in much more arcane settings: the key elements formed part of the reforms envisaged in a series of discussions held over two years by the Financial Services Policy Group (FSPG), composed of personal representatives of the finance ministers and the European Central Bank.
At its meeting in Cologne on 3 and 4 June 1999, the European Council requested the Commission to continue the work undertaken on the action plan within the FSPG. In July 2000, ECOFIN set up a “Council of Wise Men” to identify how to implement the European Council recommendations of March, and the adoption by the European Commission in 1999 of the Financial Services Action Plan (FSAP), a series of 39 legislative and regulatory measures to reform capital and financial markets across the ever-expanding European community.
By March 2001, the dot.com bubble had burst. Exactly a year after the Lisbon Summit, the Stockholm Summit of ECOFIN adopted the report of the Council of Wise Men, chaired by Baron Alexandre Lamfalussy, the first president of the European Monetary Institute, which became the European Central Bank in 1998. Under the process of development of legislation and resulting regulation suggested by the Council of Wise Men, the first level of legislation would be developed by the European Parliament and Council, with detailed regulations and guidance for national regulators to be developed by European committees of national regulators - in the case of MiFID, mainly CESR, European Committee of Securities Regulators. The third level of implementation would be national legislation and regulation or regulatory guidance, and the fourth level compliance and enforcement by national regulators. This process has become known as the Lamfalussy Process, and has MiFID has been its principal test-case.
Fast-forward to April 2004, and MiFID was enacted by the European Parliament. MiFID was required to be enacted in to legislation in each EU country by 31 January 2007 (known as transposition deadline). Of the 31 countries of the European Economic Area, only 2 achieved the transposition deadline: UK and Bulgaria. The progress of the remaining countries is difficult to judge. The original deadline for MiFID has moved repeatedly, but now seems set at 1 November 2007. With ink on the Level 2 guidance relatively fresh, this seems an enormous ask of most countries’ regulators.
MiFID itself is a laundry list of requirements across 73 articles covering all aspects of dealing in securities. There are many ways of breaking up the requirements. They cover: (i) understanding customers and products, (ii) creating market transparency, (iii) transaction-related requirements of firms, and (iv) firms’ own organisation and policies. Many summaries are available on the web.
The impact of the changes is profound; they will touch every firm dealing in securities in the UK and Europe. No firm will be able to avoid MiFID, however the depth of impact will differ significantly by firm. Most heavily impacted will be investment banks, some of whom have major development projects underway, in some cases for two years. However, some of these sell-side firms, and most of the buy-side firms have been slow to define their requirements and resource their projects. A key question is: why?
Unlike Y2K, MiFID is not date-critical. Although there is an implementation deadline, very few firms, other than those who perceive a material advantage from the systematic internaliser category in MiFID, will be compliant by the deadline of 1 November 2007. Given this wholesale expected non-compliance, what can the regulators do? Probably very little, other than attempt to cajole financial institutions with threats of subsequent dates at which they will become ‘tough’ in enforcement of the MiFID requirements. Also, they will stage their requirements - the client take-on and customer fairness provisions will be applied more rigorously more early than other, less customer-facing activities.
However, MiFID will have a sting in the tail. Record-keeping requirements will be key in subsequent regulatory enforcement actions, and firms which are challenged will not be given any lee-way on systems which were not compliant at the required commencement date. As now, expect most enforcement actions to centre on administrative non-compliance in addition to any substantive breach of rules.
Also, the enormous breadth of coverage and number of new requirements make MiFID qualitatively different from the Sarbanes-Oxley Act. First, the changes apply only to a single sector - securities dealing and trading. Secondly, SOXA required firms to do considerably more attentively what they did already; it did not change the scope of requirements, it merely specified the requirements more fully, and increased the penalties of non-compliance to extreme levels.
In the resourcing market, the demand-led reaction to MiFID has been as slow as it has been disappointing. Many firms have anticipated a bonanza as they have sought to market their previous SOXA candidates as MiFID project resources. However, the detailed knowledge required of financial services systems and client take-on, transactions and reporting processes mean that even within firms there are very few people with competence across the MiFID ‘space’. Those that have broad or deep skills in the specific areas required have largely already been ‘picked off’ by the investment banks, whose projects will in most cases run well beyond the implementation date. These people will not come back on to the market until MiFID is required to have been implemented.
The depth of specialism required in MiFID developments is likely to mean that interim recruitment will be to back-fill staff who have been moved on to the MiFID initiatives from within the firm. Hence, the requirements will often not appear as MiFID-related, but will appear in a range of related functions as it becomes obvious that the internal person’s run-the-bank role cannot continue alongside the demands of the MiFID role. Of course, as more and more buy-side firms realise that time is running out, and that they will need to meet the changing treating customers fairly (TCF) obligations and related requirements of suitability and appropriateness, order handling and best execution by 1 November, logic implies that the market will have to take off, and demand will reach those with less subject matter specialisation.
However, just as the initial deadline for MiFID has moved from 2005 to the end of 2007, so have all expectations of the explosion of the MiFID market been disappointed. The likelihood is that demand will grow over the Spring fo 2007, but it is unlikely to ‘go nuts’ in the way that Y2K and Sarbanes-Oxley requirements did. Unlike those initiatives, ‘re-tooling’ is not feasible; if you are not a financial services professional, MiFID is not for you - there is just too much to learn at the level of regulatory requirements, and at the process level in firms. None of the MiFID work will be repeating tests (a la SOXA). However, if you are a financial services professional, there is no better time to start learning about MiFID than the present. The key question on everyone’s lips is: from whom?
