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.
Part 3 – Excessive Trading Data Requirements
Last week, we saw how the EU Directive MiFID II’s approach to financial research has created a complex and unwieldy system, likely to favour larger incumbents at the expense of smaller firms.
The burden of transaction reporting in the finance sector has also expanded considerably under EU financial regulation. Under MiFID II and the accompanying MiFIR directive, trading firms are now required to report to regulators on 65 different data points per trade. This represents a 270% increase on the amount of data required per transaction under MiFID I – something many market participants already found excessive.
What was the goal of the regulation?
Presumably, the regulatory goal was to protect consumers by increasing transparency for regulators about who was responsible for a trade and who is the beneficial owner of the investment. Though much of MiFID II is designed to protect retail investors, in reality, this laborious box-ticking exercise has allowed investment banks to protect themselves by documenting that their client was the decision maker.
Was this regulation ever necessary?
Probably not. Somewhat paradoxically, the City of London has operated for many years with less transaction information in total – but with a much more informed picture overall. This is because the amount of data collected under these directives is far too weighty for regulators to assess in any meaningful way. Even the regulators’ computing systems have struggled to cope with the volume of data produced on a daily basis in London. It is also likely that brokers and investment managers will increase their charges to private clients and frequent traders to cover any additional costs.
Moreover, these regulations are looking increasingly redundant thanks to new innovations in “Regtech” (Regulatory Technology), which will soon automate the transaction data so that no real thought about the clients trading decisions will be required by the broker. In other words, non-regulatory developments are already addressing MiFID II and MiFIR’s client protection objectives.
Why are the additional data requirements anti-competitive?
The data collection itself presents less of a problem than the sheer volume of data required. The new requirements disproportionately affect investment firms with a large number of small clients or frequently trading clients, as opposed to larger firms with fewer, large clients or clients who “buy and hold”.
Picture this: Under the new regime, a private client asset manager with 1000 private clients would have to collect 65,000 pieces of data every time they trade. Yet a larger firm buying the same number of shares, but for just one institutional client, would need only collect 65 pieces of data.
Even under MiFID I, which collected data on just 24 data fields, many of the big multinational investment banks with large compliance teams managed to fall foul of the reporting requirements. Between 2013 and 2015, Merrill Lynch was fined £13.3m, Deutsche Bank £4.7m and RBS £5.6m.
In 2015, the FCA increased the penalty from £1 to £1.50, per line of incorrect or non-reported data because they believed the fines were not large enough to be a credible deterrent for large investment firms. However, while a larger firm may be able to absorb these fines, a smaller investment firm would be unlikely to survive a fine of these proportions.
Suffice to say, the combination of higher fines with the ever-growing burden of data collection, does not bode well for SMEs.
Continue with the series here…