One of the key architects of MiFID has attacked the new securities directive as bureaucratic, expensive and far from proven.

Theresa Villiers, the former Conservative MEP responsible for steering MiFID on to Europe’s statute books, said there was a danger that national regulators would ignore the directive to protect their domestic markets.

Ms Villiers criticised several European Union members, particularly Italy, for their behaviour in the run-up to MiFID’s implementation. She also called on individual governments to ensure that one of the biggest regulatory changes to affect the financial markets for a generation is a success.

Ms Villiers, now Conservative MP for Chipping Barnet, said: “My personal jury is still out about whether MiFID is going to be successful or whether the high costs will outweigh the benefits. It has yet to prove itself.

“It is not as good as I would have liked – the main problem is that MiFID does involve a lot of bureaucracy. I would have liked a lighter touch. I sometimes think that the epitaph on my grave will be ‘Theresa Villiers and MiFID: it was bad but it could have been a lot worse if she had not been involved’.”

Ms Villiers was speaking before today’s formal implementation of MiFID. The regulations are intended to make it easier to trade securities across borders and sweep away the dominance of national exchanges and their regulators. Seven years in the making, MiFID is designed to facilitate a single EU-wide market for financial services.

However, the directive met resistance in Italy, France and Spain, among other nations, as governments fretted that their capital markets and regulators would lose business and influence abroad.

The directive has also been criticised for the high cost of implementation. For Britain, the FSA has estimated that changes such as up-grading IT and trade-reporting systems will hit businesses with one-off costs of up to £1.2 billion. Ongoing annual costs of £100 million are expected, with annual benefits of £200 million hoped for.

Ms Villiers, while an MEP between 1999 and 2005, was the rapporteur at the European Parliament charged with building agreement over amendments to the draft MiFID legislation. She salvaged MiFID after it was voted down at a meeting of European finance ministers in 2003.

She said: “It was a ridiculous soap opera of a directive. There were deals, counter-deals and blackmail – individual states tried every trick in the book to avoid implementing it. Some people said that the only contribution the Italian presidency made to the directive was to change its name.”

Peter Montagnon, director of investment affairs for the Association of British Insurers, said that Ms Villiers was “absolutely right” that the outcome of MiFID was uncertain.

Mr Montagnon said: “We have got to see how the implementation goes in practice. One problem is that many member states are so behind in implementing that it is going to be difficult to get a picture.

“We have got to hope that the implementation in practice is reasonable, principles-based and proportionate and that we don’t end up discovering that we’ve incurred very large amounts of additional costs in exchange for only limited benefits.”

Mr Montagnon said that ABI members had “follow-up questions” about the directive, and the increased reporting of transactions that will be required both before and after they have taken place.

The CBI welcomed MiFID and urged the few remaining member states not yet ready, such as Greece and Portugal, to prepare themselves “as swiftly as possible”.

Richard Lambert, Director-General of the CBI, said: “MiFID has imposed heavy start-up costs on the financial services industry, but will lead to widespread changes in the way shares are traded across Europe. London should be a long-term beneficiary of these changes.”

Winners and losers

How does MiFID benefit consumers?
Providing “best execution” will mean that brokers must ensure that when trading on behalf of a customer, the firm attains the best possible outcome for the client – not just in terms of the transaction price, but also ensuring that the trade is done as quickly and cheaply as possible. Brokers will have to keep records for up to five years. Increased transparency should also force companies to be more competitive on the cost of trading.

John Tattersall, chairman of the financial services regulatory practice at PricewaterhouseCoopers, says that the benefits to retail investors will be gradual. “Ultimately they will have the opportunity to invest more cheaply and safely in a range of European equities, and trading costs and commissions will come down,” he says.

Which firms will benefit?
The opportunities for large investment banks are substantial. Some top banks have already revealed plans to set up Turquoise, a new multilateral trading facility (MTF). Also, the banks will have control of their own trading information, rather than hand it to the London Stock Exchange, and then paying to get it back. Most are expected to post details of their off-exchange trades on Boat, a pan-European trade reporting platform set up by the major banks.

Andrew Miller, managing director of Arcontech, the MiFID software company, said that commercial buyers of market data, such as fund managers and brokers, will be able to purchase the information more cheaply.

Concentrated markets such as France, where all sales must go through a central order book, will be opened up to UK firms. Large banks will be able to offer outsourcing administration and settlement services to smaller brokers. Michael McKee, executive director of the British Bankers’ Association, says, however, that small and medium-sized brokers will find it difficult to cope with the additional costs that MiFID brings and may struggle to differentiate themselves. Private banking may be hit because the banks’ customers may not want the transparency the directive demands, he says.

At least eight new MTFs, effectively alternative exchanges, are likely to enter the market by the middle of next year and small European bourses are expected to be bought up as their business falls away.

According to a report by Oliver Wyman, the financial services consultancy, established exchanges will have to speed up their services to retain business. TradElect, the electronic trading platform run by the LSE, said yesterday that it had increased its speed by 40 per cent and capacity by 70 per cent.

The report says: “We do expect that the greater emphasis on execution costs will lead to the emergence of new players that offer more tailored micromarket structures than the ‘one-size-fits-all’ model that many exchanges are offering today.”

How much will it cost to implement?
The FSA estimates that MiFID has cost UK businesses between £870 million and £1 billion to implement, with additional costs of about £100 million a year. The FSA calculates that MiFID will deliver about £200 million a year in benefits to the companies involved. MiFID could generate a further £240 million in “second round” benefits that would help the economy rather than individual firms.

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