Sweeping new rules to inject competition into securities trading come into force tomorrow as the European Union takes a significant step towards the creation of a financial services market without internal borders.

The pan-European legislation – the Markets in Financial Services Directive (MiFID) – is designed to increase opportunities for investment firms, banks and exchanges to provide services in other countries while reducing costs and providing a greater degree of protection for investors.

The initiative, which Charlie McCreevy, the Internal Market Commissioner, has described as “ground-breaking”, will end the domestic share monopolies that stock exchanges have enjoyed in France, Spain and Italy. It is being seen as the biggest shake-up in the sector for two decades.

“It will transform the landscape for the trading of securities and introduce much-needed competition and efficiency. The cost of capital should go down over time and this will have major benefits for the European economy. Last but not least, investors gain, in terms of greater choice and stronger protection,” Mr McCreevy said.

On the one hand, exchanges, banks, new platforms and multilateral trading facilities will be able to compete throughout the European Union on the basis of a single passport delivered by their own national authorities and on harmonised national rules for investment services.

On the other, they will have to offer investors better protection through new transparency, reporting and disclosure obligations, and demonstrate that they consistently provide best execution or optimum service when carrying out a transaction.

The new financial environment will not emerge overnight. “It could be up to a year before the full benefits begin to be felt,” one analyst said.

The gradual impact of the new measures is dictated in part by the complexities of the reporting and other requirements that firms will have to meet, responsibilities that larger companies in London, for example, will find easier to meet than smaller competitors.

Legislation will not be uniformly introduced across Europe, even though it was formally adopted 3½ years ago. Estonia, Greece, Latvia, the Netherlands, Portugal and Slovenia have already signalled that their implementing measures will not be in place by tomorrow. Four other EU countries – the Czech Republic, Hungary, Poland and Spain – are even further behind. The delays expose governments to legal action by the Commission and also penalise their companies looking to develop business in the enlarged market.

Mr McCreevy pointed to both potential consequences when he told countries that had not put the legislation into practice that a lack of action would damage their own firms because they would be left at the starting line.

However, with top financial centres such as London, Paris and Frankfurt complying with the legislation, it is estimated that 90 per cent of the EU’s on-exchange share trading and turnover will be covered from the outset.

While acknowledging the early competitive benefits that the new legislation will bring, Guy Sears, director of wholesale at the Investment Management Association in London, pointed to another advantage that could emerge: “The new set of rules will force national regulators to cooperate and communicate with each more other than before,” he said. “This will reduce the scope for individual interpretations to protect national interests. That can only be good if you operate on a pan-European or global basis.”

However, Mr Sears made a plea for regulators not to underestimate the huge investment in information technology that the industry has had to make to comply with the MiFID.

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