MiFID: A regulatory doomsday?

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Karel Lannoo, in a commentary written for the Centre of European Policy Studies (CEPS) think-tank, writes that although regulatory interference in financial services may appear costly, the overall benefits for consumers and the economy should not be underestimated.  

The EU financial sector has undergone major regulatory adaptation over the past decade and has began to show signs of regulatory fatigue, according to the author. The upcoming MiFID directive (Market in Financial Instruments), is the latest piece of legislation to be introduced.

The author explains that as the centrepiece of the EU’s regulatory programme to create a single capital market, MiFID will radically increase competition between markets and banks. It replaces the 1992 Investment Services Directive, but employs a very high degree of harmonisation to achieve this integrated market. It also contains very detailed provisions on the best execution of trades, trade transparency, client suitability, conflicts of interest and internalisation of trades, which banks are preparing to implement.

Despite the huge compliance costs and detailed provisions of such regulatory interference, the author does not find evidence that the European banking sector has been unduly suffering as a result. 

Indeed, he asks if it is possible that “even if costs are high, the benefits for markets and the economy as a whole are even higher?”, with the conclusion being that although firms may face higher costs, users and the economy as a whole can be expected to benefit.

The challenge therefore is “to make sure that regulators apply these processes, but also that they do not refrain to take certain steps if they have to be taken”.