This question is often posed to Brexiteers, usually by those who believe Eurosceptics lack detailed arguments or, worse still, didn’t know precisely what they were voting for. Though this may be true in some cases, EU-friendly commentators are also, at times, guilty of a myopia of their own – assuming that the current regulatory status quo automatically equates to ‘best practice.’
In reality, the European Union has been responsible for a raft of regulations which have caused great harm to businesses and consumers. While much is made of the business compliance cost of certain regulations, less attention is generally paid to the anti-competitive harm they cause. Increasing costs for certain firms, and forcing some (especially smaller, firms) to exit the market can have the effect of raising prices for consumers and diminishing capacity. Anti-competitive regulations make it difficult for new competitors to enter the market, thereby entrenching existing companies and leading to the formation of oligopolies.
In the coming weeks, we will be examining a series of regulations with anti-competitive effects to illustrate how they work and the harm they cause. The series starts with financial services regulations.
MiFID II is the EU’s second directive on Markets in Financial Instruments and came in to force on the 3rd Jan 2018, after being postponed twice from July 2016. The Directive, together with an accompanying Regulation, MiFIR, was intended to create a more transparent, competitive and integrated financial market in the EU, by harmonising the regulatory regime with respect to organisational requirements for investment firms, regulated markets, trading outside regulated markets, data reporting services and conduct of business rules for investment services. These include inducements, investor protection, disclosure requirements and product governance rules.
An EU Regulation is a legal act of the European Union that becomes immediately enforceable as law in all member states simultaneously. Directives like MiFID II only set a minimum standard to be achieved by Member States, which are free to decide how to transpose the directives into national laws.
Yet despite this flexibility, and the additional 18 months deferral for implementation, 12 EU countries are still yet to fully implement MiFID II. This includes not just the poorer ‘A8 countries’ like Lithuania and Poland, but even relatively sophisticated financial markets such as Spain, Luxembourg and Sweden.
Many would argue that imposing the same regulations on all EU markets is a nonsensical aim in itself, due to the enormous differences between, for example, the City of London and the far less sophisticated markets of Eastern Europe. The London Stock Exchange has been operating for 447 years, has over 2600 listed stocks from over 60 countries, with a market capitalisation of over $9.2tr. The Bulgarian Stock Exchange, meanwhile, has been operating for just 21 years, with 114 listed companies and a market cap of $14bn. And yet, MiFID II would take an indiscriminate, ‘one-size-fits-all’ view of both these markets.
Yet that is not the end of the story. MiFID II covers extremely diverse aspects of the investment markets – and there have been many reports of practical problems with its implementation. In some cases, it is having the counterproductive result of reducing, rather than improving, access to financial instruments. But by far the most consistently mentioned problem with MiFID II and MiFIR (as is the case with all EU regulations and directives) is that they disproportionately affect small and medium sized businesses. These must employ more compliance staff and increase their computing capacity to keep pace with the new regulatory requirements – thereby reducing their profitability. Yet for larger investment banks and investors, the additional cost of compliance is unlikely to have much of an impact on profit margins. They may even welcome it, due to the incumbent advantage it affords them.
Many City practitioners view the extra layer of regulation created by MiFID II as “an unnecessary solution to a non-existent problem”. One area of finance it unambiguously has favoured, though, is in compliance, where MiFID II has created a huge demand for officers to interpret and impose the weight of regulation. In fact, MiFID II has been responsible for most of the recent growth in employment in financial service providers – even though compliance departments are solely a business expense and do not generate any wealth of their own.
If regulation is truly not solving a real problem but, instead, carrying perverse unintended consequences, then it is crucial that the market authorities review and amend it.
Given what we know of MiFID II’s harmful effects; reduced competition among local suppliers, reduced access to financial products for end users and a much less competitive financial environment that may struggle to keep pace on an international level – this seems especially vital. If left unchecked, eventually the provision of financial services in the EU will be controlled by large oligopolies.
More on MiFID II next week…