MiFID – will the markets be ready?

A recent survey, picked up and reviewed by global news bodies such as the Financial Times and the US's NBC news services, indicated that nearly two thirds (60%) of financial institutions in Europe were believed not to be able to meet the November 2007 deadline for the implementation of the Markets in Financial Instruments Directive (MiFID). The survey believed that the UK was in a better situation but that still 27% were unlikely to comply in time.

On the surface, these are fairly frightening statistics and, at face value, could damage the chances of MiFID achieving its goals on a common Europe-wide playing field for investment organisations. However, it is worth looking at these numbers in greater detail.

The impact of MiFID will vary greatly as to the size, coverage and operation of the financial institutions in question. Large, multi-service investment organisations, which currently cross trades within their organisations, will be greatly impacted – but there are relatively few of these. Smaller firms, particularly those who trade within only one regulatory area will have much simpler obligations. The first group will be putting in major systems and process changes to both protect their current client base and to gain customers from other firms. The second group will have minimum changes – possibly only client classification checks and contract preparation.

If the first group are late, the impact on their marketing plans will be significant. Delay in the second group will have minimal impact. An informal conversation with a European regulator indicated that it is likely that only four or five of European regulators themselves will be ready for MiFID – and that their priority is the 8 to 10 major pan-European investment banks operating within their jurisdictions.

The quoted survey, by a business process management solutions vendor, only interviewed 97 financial institutions and lawyers – there is no indication of the classification of firms interviewed. If these were the top 97 European banks, this level of readiness would be a qualified success. If all 97 were small, single-country operations the results are insignificant.

The survey report shows only five simple questions that were asked; there are no questions showing whether firms were adopting only the basic requirements or whether they were taking advantage of systematic internalising opportunities. The main questions are targeted at UK firms – and the survey asks these firms what their belief is of the readiness in other EU countries – hardly a valid analysis.

MiFID is about good practice. There is very little that is completely new. There is a lot of work to be done, particularly for those looking for major benefits, but many smaller firms will treat it as business as usual. Perhaps the reason that 67% of European firms are not thought to have "MiFID-dedicated compliance officers" is because they don’t need one? A larger question is whether we need such surveys.