The Rocky Road to MiFID II

By Chris Stephen

Remember 2008? Michael Barnier certainly does. The global financial meltdown was the spur for the EU’s former internal markets commissioner to promise a banking clean-up. MiFID II is the result.

Seven years in the making, weighing-in at 70,000 pages, the Markets in Financial Instruments Directive, or MiFID for short, is described by the Financial Times as “one of the most sprawling pieces of European financial legislation devised.”

And the process of creating it has been a rocky road. Barnier, who had spent a career oscillating between French government jobs and Brussels, got the commission job in 2010 and produced a draft text inside a year. “It is essential that we clean up the financial sector,” he said. “The crisis is not over.”

Partly, the urgency was because of red faces at the Commission. The original MiFID, now known as MiFID I, came into force in 2007, sweeping away national barriers to create a single European financial market. But its authors failed to spot the dangers that created banking catastrophe a year later. In the aftermath, they were determined to get it right second time around.

But it took Barnier three years to convince the EU’s 28 member states to agree the law, with sparks flying along the way. Britain’s Daily Telegraph suggested Barnier, an admitted European federalist, might be “the most dangerous man in Europe.” A frosty House of Lords report in 2012 included suggestions Barnier wanted to take powers from national regulators for the commission.

Barnier was unmoved, insisting the transparency at the heart of his new law was “a key step towards establishing a safer, more open and more responsible financial system.”

Once MiFID II was voted into law fresh problems began. Its implementation date was originally set for January 2017, but in late 2015 Europe’s regulator, the European Securities and Markets Authority (Esma) said it would not have technical specifications ready in time. The following April Europe’s parliament bowed to the inevitable, delaying implementation a year.

Barnier had by then moved on, but his reformist zeal found expression in the EU parliament’s MiFID rapporteur, Bavarian politician Markus Ferber.

“The failure of the European Commission to come up with the pieces of implementing legislation that are needed to fully implement MiFID II made today’s vote necessary,” he complained the day an extension was announced. “So far, neither Esma nor the Commission have managed to deliver.”

The bureaucrats complained that it is no easy task to draw up technical standards for a law so vast in scope.

Now, with its January introduction just weeks away, much MiFID II detail is still unclear. Only in October did oil companies say they were confident their hedging investments would not be subject to the same harsh rules affecting banks.

In mid-November Britain’s Financial Conduct Authority (FCA) appeared to widen the definition of what counts as research. A key feature of MiFID II is the “unbundling” of investment banks research fees and trader commissions, which until now are mostly combined in a single cost item. Uncertainty continues about what kinds of research must be paid for and what can be issued free of charge.

While regulators and the regulated continue sparring over detail, fully 17 EU member states have yet to pass matching legislation, including Luxembourg, the Netherlands and Spain. Most are unlikely to do so by January, putting them in breach of EU rules.

Meanwhile some MEPs are demanding a probe into Mr Ferber, accusing him of possible conflict of interest for supporting a foundation that helps firms understand the law he helped design.

Adding confusion is the looming arrival of Brexit, which will likely see the FCA, by far Europe's biggest regulator, decoupled from the EU. On another front, US and European regulators are scrambling to synchronise market standards to avoid trans-Atlantic fragmentation once MiFID II comes into force.

With so much in flux, many wonder whether the legislation can realise its key objective of bringing transparency to the financial system's darker corners.

One thing that has not changed, nine years on from the financial crash, is public ire at bankers. Europe’s competition commissioner Margrethe Vestager has won plaudits for tax assaults on tech giants including Amazon and Google. Explaining her case against Apple she declared: “We are doing this because people are angry.”

They are. And once MiFID II comes into force, prosecutors looking for scalps amid financiers know they will have public opinion on their side for aggressive action. With so much invested in this new legislation, Europe’s judicial and political figures want to make sure MiFID works, second time around.