I am delighted to be here again at the Institute of European Affairs and glad to see that you continue to discuss some of the hottest – even if sometimes the most obtuse topics on the European agenda.
Our topic for discussion today comes at a time when the ink is just about drying on the final package of legislation that glories in the great sobriquet of the ‘MiFID’. This is not a fearsome man-eating plant. It is simply Brussels shorthand for the Markets in Financial Instruments Directive.
The MiFID is actually three measures - it encompasses a framework Directive that was passed in 2004, and the more recent implementing Directive and implementing Regulations that have been the subject of such extensive debate and negotiation right up until now. The Commission has been working on the implementing measures for nigh on 2 years, with expert help from our colleagues at the Committee of European Securities Regulators, representing the supervisors. The implementing measures have been in intensive negotiations with the Member States in the European Securities Committee for over 12 months, and more recently in the Parliament. A final deal has been struck. No mean achievement in my view. Member States will now have until 31 January 2007 to implement the legislation, with firms being required to comply with the entire package of measures on 1 November 2007.
The implementing measures develop a number of the provisions set out in the level 1 Directive adopted in April 2004. Having emerged from a lengthy consultation and negotiation phase, I believe they are balanced, proportionate and sensible and that they will protect investors and consumers - without imposing excessive or unnecessary compliance burdens on firms.
In my view, MiFID as a whole is a ground-breaking package of measures. It will transform the landscape for the trading of securities and introduce much needed competition and efficiency throughout Europe’s financial markets. It is good news for investors because it will both increase their level of protection and give them greater choice. It will drive down the cost of capital, generate growth and boost our competitiveness.
MiFID will remove obstacles to the use of the passport by investment firms, foster competition and a level playing field between Europe's trading venues, and ensure a high level of protection for investors across Europe.
The rapid globalisation of financial markets is an opportunity which Europe cannot afford to miss. We are already emerging as a global leader in financial services and these implementing measures, which complete the MiFID package, will help us to stay ahead of the game. The Member States must also do their bit by implementing the measures fully, accurately and on time.
Main purpose and anticipated benefits of MiFID
Perhaps you will find it useful if I drill down in a little more detail to the benefits and implications of MiFID as I see them.
The MiFID will significantly increase competition across borders. It will do this by substantially updating the so-called "single passport" for investment firms, allowing investment firms to operate across the EU on the basis of an effective single authorisation, across a wide range of financial instruments and investment activities.
The ‘single passport’ means that a firm need only answer to one regulator for most of its compliance questions. Conflicts of interest, internal control, and all activities done on a cross-border basis will be subject to home state control. The host state regulator will have a limited role in supervising branches in its territory, but that will be all.
As a result of stimulating cross-border competition, intermediaries will come under pressure to match incoming firms’ offers, cost structures and support services. This can only diversify the range of products and services that investors can access and markets that firms can tap into.
We would never have got agreement on a stronger passport without strong and consistent investor protection rules being agreed across the Union. This gives both investors and regulators the comfort that foreign firms will not be able to rip off vulnerable consumers.
Investor protection rules will be harmonised at a high level so that investors can feel confident in using the services of investment firms wherever they are in Europe and wherever the investment firms come from in Europe.
For the first time, we have strong European rules covering the core investor protection topics: best execution, information to clients, order handling, suitability, investment advice, inducements and conflicts of interest.
Secondly, and perhaps most profoundly of all, MiFID will lead to a step-change in competition between investment firms, stock exchanges and other trading venues for the right to host transactions in shares.
For the first time in many countries, trading in shares will not be the sole prerogative of the local stock exchange. Share trading will be able to be done on the stock exchange as before, but also on an electronic trading platform, a voice broker, a so-called ‘systematic internaliser’, or via a bilateral OTC transaction.
This should put significant pressure on exchanges to lift their game, to reduce costs and to offer services that investors want. This in turn should lead to improved standards of service to investors, lead to more investors using capital markets, and hopefully therefore to deeper and more liquid markets. Ultimately, we believe it will benefit companies by lowering the cost of capital.
This is not just pie in the sky – a recent study by some academic economists has found that where an exchange’s market does become open to competition from another exchange spreads narrow and the composite depth of the order books taken as a whole is significantly enhanced.
The next big change is in transparency. We would not have got agreement to prise the market for trading wide open if we had not also mandated a level playing field for transparency. Otherwise all the trading might have migrated to untransparent venues, leaving investors in the dark and open, transparent markets unfairly exposed.
So in future, we expect investors to be able to subscribe to services which show them the whole market in particular shares, not just their local stock exchange. This will enable investors to get better prices, and prices to more fairly reflect what is going on in the marketplace.
MiFID contains several technical innovations allowing for much more coherent supervision of our pan-European financial markets. From now on, transaction reports on a whole range of financial instruments will be channelled to the relevant supervisor of the overall market. And co-operation and information-sharing will be enhanced across a range of topics.
Another big impact from MiFID, we believe, will be deregulation. The rules we have developed are principles-based – not a boxticking exercise. They put the onus on firms to behave, on regulators to supervise and act, always, in the best interests of their clients.
But most importantly, the level of detail is often significantly less than is contained in national rules. And we have inserted an ‘anti-gold-plating clause’ in the MiFID. This means national supervisors will be required to cut back any rules that go beyond the MiFID, unless they can be rigorously justified in terms of consumer protection or market integrity.
In the end what matters is that the cost of capital in the EU remains as globally low as possible for all EU economic actors; that EU financial markets are properly regulated by European regulators; that EU markets can grow strongly; that cross border clearing and settlement costs are significantly reduced and that the EU through its new market practices and regulatory regime can influence and develop strongly its financial relations with the rest of the world (including China, India, Russia, and Japan ), using its good emerging model of regulation as its passport ...
Opportunities and challenges
I want to turn to opportunities and challenges presented by MiFID for industry players.
Firms will be faced with a choice: are they going to treat MiFID as just another compliance exercise, or are they going to think ahead and think strategically about the new possibilities in the new competitive landscape? There will be first-mover advantages.
Perhaps the baldest choices will face those banks that are currently doing, or could do, systematic internaliser business to compete with stock exchanges. This is the business of dealing with clients off-exchange on own account on an organised, systematic and frequent basis. This kind of business will attract quoting obligations, which are part of the enhanced transparency measures I mentioned. They will need to consider whether the risks of this business are worthwhile in light of the potential profits, and whether they can carry on similar business as trading platforms such as MTFs.
For exchanges, the changes will be profound. As I’ve said earlier, in many countries they face competition from other trading venues for the first time. Competition from other Member States will also be ramped-up significantly. So both defensive and offensive options will need to be considered.
And now we have the stock exchange consolidation chess game. I see some advantages to consolidation as long as competition rules are fully respected. After all, significant economies of scale are there to be realised, to the benefit of users and shareholders alike. And we should remember that mergers have the potential to increase innovation in terms of the products and services that are offered to investors.
There could also be interesting knock-effects. In the same way that regulatory change produces change in the market, so change in the market can lead to regulatory changes. There are, of course, sensitivities as to the regulatory regime which would apply should mergers take place – particularly trans-Atlantic mergers. But, in the long run, the result could be a convergence of different regulatory cultures and greater trading possibilities for investors. And this would be welcome.
So what does the MiFID mean for smaller Member States? I am convinced that those Member States – such as Ireland – that are open to the globalisation challenge will do well. Ireland showed in the 1990s that it was prepared to modernise, change and adapt, to specialise and to attract foreign investment. I am confident that it will do so under MiFID. Of course, Dublin will continue to build on its strengths in areas such as funds. But there is no reason why firms, exchanges and trading platforms cannot thrive here in the new, far more borderless world that will commence in November next year.
MIFID has meant a lot of hard work for a lot of people. High praise is due to the Commission staff involved, but to many others as well – not least CESR (the Committee of European Securities Supervisors).
CESR came to the party early with good-quality, expert advice. And most importantly, the level of input in finalising the MiFID from all stakeholders – but particularly the trade associations – as well as the inter-institutional co-operation has been exemplary. It shows that industry and consumers, the Parliament, Commission and Member States are able to work together in a sensible and pragmatic way in order to achieve the right result for Europe's financial markets and Europe's investors. As a result, Europe is the winner. And it shows that the Lamfalussy procedure – under which the two-level MiFID has been developed – works.
The rapid globalisation of financial markets is an opportunity for Europe. These implementing measures for the MIFID Directive mean we are well placed to stay ahead. Our financial markets are in good shape. They are growing strongly and are set to grow even faster in future as the Union enlarges further, our middle class expands and people increasingly take responsibility for their own pension provision. I am proud to say that MiFID will be an important part of this ongoing story.
I want to conclude by saying a few words about SEPA because I know it is an issue that is exercising the minds of many in the banking industry and that they see pluses and minuses in the proposal. There will, of course, be front end costs to be incurred and new competition will be opened up. But I have no doubt but that the benefits that a Single European Payments Area will deliver to the European market as a whole will be significant. Protecting inefficiency, restrictive or protectionist practices never delivers welfare benefits to consumers, economies, or businesses in the long term. Open markets and competition always do. And when economies benefit, financial institutions that compete in those economies benefit too. Everyone knows that investing in a leading bank in an economy is invariably a leveraged play on the performance of that economy. So in my view, the banking industry needs to focus on the macro benefits and the opportunities that SEPA will bring as well as the micro benefits in terms of taking out direct costs in their businesses. A fact that has perhaps been overlooked too is that the arrival of SEPA should make it much easier for government to dismantle, for example, some of the regulatory impositions and controls on bank charges that can currently retard innovation and should be made redundant by the more intense competition that SEPA should deliver.
Finally, I am delighted naturally to see the continued progress of the international financial services industry here in Ireland. I have no doubt that that progress will be sustained if Ireland continues to have a light touch but prudent regulatory environment in which investors can have confidence, ongoing investment in new skill sets and in the development of intellectual capital, a culture of entrepreneurship, opportunism, and innovation, a favourable tax regime, and a good infrastructure. Those have been the keys to success to date and in the increasingly competitive world in which we live, none of those keys must be thrown away. Thank you very much indeed.
