Investment houses and financial services
companies will be able to trade across Europe when the rules come
into force, but the FSA itself has admitted that one-off costs
relating to the change could run to £1bn in the UK alone.
The FSA's Policy Statement is the
transposition into UK law of the EU's Markets In Financial
Instruments Directive (MiFID). It had to be published by today,
though the rules do not apply until November.
The law replaces the European Economic Area
Framework for financial services regulation and not only makes it
easier for companies to sell financial services products across
borders but regulates some activities that were previously
unregulated.
"It introduces new and more extensive
regulations for investment firms and and how they conduct their
business and their internal organisation," said Susan McKiernan of
Pinsent Masons, the law firm behind OUT-LAW. "It focuses on
managing operational risk."
Each EU member state had to transpose the
Directive by 31st January, and in the UK that was done by financial
regulator the FSA.
"We believe we have stuck to our commitment to
minimise the burden on firms by adopting a proportionate approach
to implementation," said FSA managing director Hector Sants.
"Implementation of MiFID will represent a substantial cost to
industry but it does create the potential for revenue opportunities
over the longer term, and we would encourage firms to focus on
these opportunities."
The UK is the financial services centre of
Europe, and the FSA's meeting of today's deadline will be seen as
vital. Other major European economies failed to publish their
rules. France, Germany, Austria, Spain, and the Netherlands
admitted they would miss the deadline.
Though there is not a fundamental change in
the basis of regulation, there is tighter control of how a company
manages other people's money. "The regulator says that it is still
a principles based system, but there is a lot more detail on
internal organisation and systems and controls," said McKiernan.
"It is going to cost companies."
The new rules will focus particularly on
outsourcing, so that companies which outsource remain responsible
for the activity, and that all activity is logged. "The integrity
of the records is the key point," said McKiernan. "The FSA has to
be able to reconstruct every part of a transaction."
"If you have previously followed the FSA's
guidance in drafting outsourcing contracts then you should have
contractually covered almost all of the requirements of MiFID at a
certain level," said Iain Monaghan, an outsourcing specialist at
Pinsent Masons, the law firm behind OUT-LAW.
"The main concern is likely to centre on the
extent to which MiFID requires the customer to monitor the service
provider's performance. What degree of monitoring will be expected
in practice? What level of in-house capacity will the
customer need to retain in order to react effectively to
non-performance?"
The new rules will be initially burdensome
both for regulated companies and for those who supply to them, but
the FSA believes that the economic benefit will eventually be more
significant.
"MiFID could plausibly be estimated to
generate quantifiable benefits of up to £200 million per year in
direct benefits, accruing principally to firms in the form of
reductions in compliance and transaction costs," said an FSA report
in November last year. "MiFID could also generate another £240
million benefit in ‘second round’ effects."
