Back when MiFID II was first being discussed as an extension of the original MiFID, and the implications were being considered, I was spending time with the CIO at one of the largest asset managers in the world ($500B+). We were talking about MiFID II, and I asked him for his thoughts. His response was one of the most unique I had heard in all my conversations: people were missing one of the biggest issues with the legislation; that it is written by the EU, and then implemented by the participant countries. He foresaw MiFID II potentially suffering from the same issues as tax law – that while it is written at the EU level, it would be implemented, lobbied, and arbitraged by each country to try and attract more of the financial services industry to their home state. Why wouldn’t France or Germany have a more relaxed implementation or interpretation if it meant attracting major firms, and their business, back to the relative financial hubs, and away from London?
Well, a few years in, and with Brexit on the horizon, it seems like his prediction is coming true. While everyone is focusing on the economic impact, I believe the biggest impact for those in the financial services industry might be regulatory. While part of the EU, the FCA has been one of the biggest advocates for a hard line MiFID II, including the unbundling of research costs and execution (in addition to the other roughly 1.4M paragraphs in the legislation). It seems that with Brexit on the horizon, the other financial centers of Europe (mainly Paris and Frankfurt) are now positioning to reduce or at least relax some of the MiFID II requirements, citing many concerns that have been raised (such as the decline of coverage and research available on small and mid cap companies). As recently as late August, the German government officially asked the EU to ease MiFID II rules. We’re seeing the same trend in France, with the AMF calling for a review of MiFID II several times over the last twelve months. If you’re running a major firm and thinking about where to headquarter your European operation, these trends will definitely be material. Expect to see more positioning ahead of the Brexit decision with the major European regulators jockeying to reduce or remove major elements of MiFID II in an attempt to attract the financial services industry to their related hubs. It took a long time to implement all the MiFID II rules – how long will it take to undo them? Seems, as they say, most things come full circle.
There’s another major issue to consider here. MiFID’s original aim was to “ensure appropriate levels of protection for investors and consumers of investment services across the [EU]”. Post financial crisis, they doubled down with MiFID II, massively expanding the scope and impact of the regulation. While there may be some self interest from the secondary financial centers of Europe looking to take the crown from the UK (nothing changes, does it?) there’s also a second, and more important issue manifesting itself here.
It’s well documented that companies are staying private longer. Regulators are looking to lighten the burden of going public on smaller companies in an effort to get those smaller companies going public earlier, which would open up new economic opportunities to all investors, not just those who have access to venture capital and private equity funds. However, if new legislation means that only large companies are economical for brokerages to cover and engage, and thus a small company won’t get covered until it’s large, then how is that company expected to go public before it’s large? With that context, one could argue that MiFID II might be creating more issues than its solving, potentially saving investors some small amount of money by unbundling research payments, but in the same stroke, making it more and more difficult for small and medium sized companies to go public, limiting the number of attractive investments available to those same investors, and dampening their returns. So which costs the investor more money, bundled research payments, or missing out on the next Google because they can’t go public until the upside is mostly gone? As the British say, sometimes you can be penny wise and pound foolish.
That’s why I’m watching Brexit – for those two reasons. First, to see what happens to MiFID II, and the EU’s broader regulatory view, if the UK and the FCA are no longer part of the decision committee. Secondly, we’ll see how the knock on effects of the regulation play out – if regulators in the new EU are more interested in maintaining the regulatory status quo (with its potentially negative side effects), or more interested in supporting small and medium sized companies entrance into the public markets, and helping their citizens access a broader pool of investment opportunities.
Only time will tell.
PS want a really quick refresher on MiFID II and its history? There’s a great (and quick) summary here
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