J.P. Casey and K. Lannoo, from the European Capital Markets Institute (ECMI), explain the evolution of EU regulation of investment firms from the original Investment Services Directive (principles-based approach) to the MiFID implementing measures (rules-based approach).
Described as “the most important measure in the Financial Services Action Plan,” the Directive 2004/39/EC or “MiFiD” follows the Lamfalussy model, the researchers point out. The new legislation is therefore composed of a Level 1 setting out the core principles of legislation (adopted by the Council and the Parliament in April 2004) and of a Level 2 text listing implementing measures (draft published in February 2006). Altogether, this structure is said to provide for a “more detailed securities’ legislation.”
From the outset, the authors emphasise the originality of the text – namely, its combination of regulation and directive components. The Directive part covers conduct-of-business rules, whereas the most constraining rules apply to “the hotly contested area” of pre- and post-trade transparency, record keeping and transaction reporting.
With this dual approach, the Commission wanted to “ensure that the same conditions apply evenly across the EU, albeit with differing degrees of standardisation,” e.g. to create an EU-wide level playing field for investment services, while avoiding excessively uniform financial markets. However, the researchers argue the spirit (if not the words) of the legislation amounts to “maximum harmonisation.”
Casey and Lannoo go on to draw a comparison between the MiFID and the 1993 Investment Services Directive. Apart from the fact that the MiFID is “5 times as lengthy as the ISD” (which “need not necessarily imply that it is more burdensome”), they note significant differences between the two Directives in terms of:
- Suitability and appropriateness of financial products for given categories of clients;
- Best execution policy;
- Price transparency and
- Management of conflicts of interest.
Against this backdrop, the authors find the MiFID too detailed and “too onerous for many markets to absorb,” which “will probably lead to excessive centralisation and concentration in EU securities markets.” Thus, it may cause the unintended consequence of ‘creaming off,’ that is, rendering operating conditions so demanding as to exclude many firms (most probably smaller brokers) from business. They also regret the legal uncertainty surrounding the new legislation.