The idea of a single passport is very simple: that an investment firm, once authorised by the competent authority in its home member state, should then be able to operate through-out the EU under the continuing supervision of that home authority.
The overall aim of MiFID is to establish a comprehensive and harmonised regulatory regime covering transactions wherever they take place in the EU. It will also open up the shares market to greater competition. The directive widens the list of financial instruments which are subject to its regulation, seeking to bring as many types of instrument as possible under the same set of rules. Also, for the first time, the admission of any instruments to trading will be covered by a set of minimal requirements.
The directive also reverses the 1993 "host state" rule, requiring compliance with rules of the member state in which business is done. Under MiFID, a company, whether offering services in another member state through a branch or cross-border, may follow the rules of the "home state" in which it is based.
In addition, the directive sets minimum standards for the powers of national regulatory authorities and establishes procedures for cooperation amongst authorities in the investigation of breaches of the rules.
MiFID ensures a higher level of protection for investors through:
- Licensing requirements for a wider range of services and activities to do with financial instruments trading;
- best execution obligations on providing the best value for the client;
- new rules for handling clients’ orders;
- requirements for managing conflicts of interest, and;
- obligations on transparency and the information to be provided to investors.
MiFID was formulated using the Lamfalussy process which involves two basic levels of legislative process and was designed to cope with complex financial legislation. MiFID itself is a 'level 1' measure, adopted using the usual EU legislative process involving the Commission, Council and Parliament. It sets out a set of overarching general obligations on member states.
The detailed implementing measures are formulated at 'level 2' and are contained in a set of commission documents arrived at through a process of extensive consultation with the European Securities Committee (finance ministers from the EU states) and advice given by the Committee of European Securities Regulators (CESR), which is an independent body of securities regulators. The Implementing Regulation and Implementing Direcive were formally adopted and published in the Official Journal on 2 September 2006. Level 1 requirements and level 2 measures will come into force on 1 November 2007.
Complexity, impact on the industry and deadlines
MiFID will entail massive changes to the way market players conduct business, both in the rules to which they comply and how they do so. Substantial adaptation of IT systems will be required by all players: investments firms, banks, regulated markets and clearing and settlement intermediaries.
The scale of the changes involved, both for member states and for industry, led the Commission, in June 2005, to decide to modify the original timetables. The deadline for transposition of the MiFID provisions by member states has been delayed until January 2007. Similarly, firms and markets have until November 2007 to ensure their structures and procedures comply.
Internal Market Commissioner Charlie McCreevy on 10 October 2006 warned member states to implement MiFID on time to meet the November 2007 target date. He said: "The Commission will launch immediate infringement procedures against any member state which fails to transpose on time. There will be no exceptions." Some of the member states had indicated that they would not be able to transpose MiFID on time.
However, a recent study by business software group HandySoft revealed that almost two-thirds (60%) of European financial institutions were expected not to meet the MiFID November 2007 deadline.