The new year is fast approaching and this month it looks like many regulators will be working harder than ever leading up to the holiday season. More than half of the EU’s member countries are still rushing to put the revised version of MiFID II into their legal compendiums.
Now in the eleventh hour, the directive will soon be enforced as of January 3, 2018 – however the upcoming regime is still being met with widespread industry confusion. Financial firms are racing to comply while their respective regulatory authorities are still in transposition, the process of converting the directive into enforceable law within their jurisdictions.
According to Bloomberg reporting and the European Commission, 17 countries, including Belgium, the Netherlands, Finland, and Spain are still in the process of converting the revised Markets in Financial Instruments Directive into regulation or law. More than just a minor hiccup, this is a major issue because unless the directive is codified into law, it isn’t able to directly apply to businesses and individuals in these locations.
Unlike its companion, MiFIR (Markets in Financial Instruments Regulation), which is entirely binding and directly applies to all EU countries, the second iteration of MiFID has to be codified into nationally based law before it can take effect.
Back on October 17, Valdis Dombrovski, the EU’s chief on financial policy confirmed: “Member states are still continuing with their transposition”. Conceding that this was indeed very late, “the process of transposition is being followed closely to ensure that there is consistency in its application across the EU.”
This last minute scramble certainly adds to the uncertainty of the wide sweeping changes that are expected to cost banks, money managers and financial brokers $2 billion in order to comply. Not surprisingly, this has put pressure on regulators across the EU to show leniency once the law becomes operative.
Without there being an EU country that hasn’t been contacted with this request, sources say that it has been met with unofficially supportive feedback.
Many regulators have reassured firms that they do not intend to clamp down on the first day. BaFin, the German financial regulator advised it will “look closely at which processes are being put in place for implementation and determine if it is happening in a timely fashion.” Spokeswoman Anja Schuchhardt said: “We are aware the schedule is tight and for that reason we will maintain a sense of proportion.”
The Financial Conduct Authority of the UK has advised that it will act “proportionately” given the scale of changes, particularly in the early stages where it will not take an approach of strict liability.
Last month, Mark Steward, FCA director of enforcement and market oversight, said: “We are very aware of how much work many firms have been engaged in for a very long time now in re-tooling and preparing…this means we have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligation by the start date.”
With much of its own implementation still incomplete, the Dutch Financial Authority advised that while there are doubtless going to be ambiguities, firms should still have a rough sense of what is going to be required.
What comes next?
While EU directives are binding, national authorities have discretion in terms of how overall objectives are achieved. This entails that regulations will differ between one EU country and the next.
“It is understandable that, for certain topics, financial firms will have difficulty getting ready in time as there is still lack of clarity” said an officer within the Dutch AFM, “and we will be taking this in to account in the way we perform our supervisions. However where significant regulatory uncertainties are not a factor, we expect market participants to be in compliance.”
Although the deadline for transposition was July 3, 2017, a date that has well and truly come and gone, many EU governments are still hopeful that they will have regulations in place by the deadline.
Finland’s Finance Ministry said the schedule is “tight, but possible” even with approval still required to be passed through parliamentary debate. Belgium, which ironically is the home to the EU legislative body, and Luxembourg, a happy host to major investment funds, both still have their regulations uncompleted. Somehow, Lithuania’s regulator expects firms will abide by rules, even despite the law not being adopted.
As uncertain as it all seems the deadline is a strict one, where infringement proceedings will be put in motion against tardy regulation authorities, whereby they can be taken to court by the commission and potentially fined.
ESMA, the European Securities and Markets Authority, the EU body that aims to co-ordinate standards throughout the bloc, has conceded that there is still a lot of work required in defining regulations for commodities and bonds which even if done in time, is still not going to be time enough for the market to adjust.
So this Christmas, a wide berth is likely to be given to EU policy makers, lawyers and administrators still sitting in the cold, deliberating on how to avoid an irrevocable fracture on a $438 trillion market.