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Should the UK ‘ditch’ MiFID rules post-Brexit?

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By Roger Aitken – With 18 months having elapsed since the implementation of the European Union’s (EU) Markets In Financial Instruments II (MiFID II) Directive, ushering in the era of unbundling for investment firms for buy- and sell-side institutions, the former chairman of the UK Individual Shareholder Society (ShareSoc) argues that many of the rules behind MiFID should be ditched or scrapped after the UK leaves the EU…

Commenting on the benefits that have accrued to investors from MiFID such as increased transparency and best execution, Roger Lawson, the ex-chairman of ShareSoc, which represents around 5,000 retail investors, says: “I don’t know of any benefit that retail investors have gained from MiFID [I or II]. And, in fact it’s actually got worse. Basically there is no money in providing research on small cap companies – unless the company pays for it.”

But does this view hold merit and is it shared by other financial market participants? On that score it seem to depend on who one canvasses, and there is even talk in some quarters of what is dubbed a “MiFID II refit”, as regulators realise the Directive might need amending.

When it comes to MIFID II’s affect on research covering European small-caps, the impact varies depending from sector to sector. Research prices overall however, have been cut, budgets reduced for firms and broker lists shrunk.

Sandy Black, Chief Investment Officer at Polar Capital, is among those who confirm there is less research available on UK small and mid-cap companies.

A recent survey by the CFA Institute of over 500 European portfolio managers and analysts has revealed that the average budget decline for research is 6.3 per cent. However, this rises to 11 per cent for larger firms managing in excess of EUR250 billion in assets. The findings show that independent research providers have also not benefitted from MiFID II, nor have new research platforms gained traction.

Lawson notes that one of “the problems” from MiFID centres on the compliance cost facing stockbrokers. “Fees charged [to end customers] by stockbrokers have been going up as a result [from MiFID] because they have to spend a significant amount of time in compliance in making sure they are compliant,” he says. “And, costs have been pushed up everywhere.”

An active equity investor, Lawson contends that the UK can “get out of MiFID”, by “probably just changing some regulations – rather than a full Act of Parliament.” He also laments that MiFID was “designed by people [the regulators] who didn’t understand the stockmarket or the way investors operate.” In essence, he says, it was “regulation for the sake of it” and misconceived.

Graham Bishop, a consultant on EU integration issues based in the UK, remarked on a panel at the annual Mondo Visione exchange forum in The City: “That [the] corpus of rules [ie around MiFID] have been shaped by the UK and agreed by the UK. So, why would we [the British] now turn around and say: ‘They are all wrong…let’s ditch the whole lot.’”

The consultant, however, added: “It may be that there will be people who want to make a specific case on that bit and that bit, etc. That’s fine. You lose the ‘equivalence’ – fine. But complete ditching? I would be quite surprised if the House of Commons was prepared to put its reputation at risk from some of the practices of yesteryear.”

Artur Fischer, a former joint CEO of Börse Berlin until this November, commenting from an exchange perspective, says: “If the UK wants to continue to play a leading role in trading across Europe, it would be beneficial for all parties involved if the UK would continue to follow the MIFID II regulation after Brexit. As a minimum the UK rules should only deviate to such an extent that European Securities and Markets Authority (ESMA) can still acknowledge ‘equivalence’.”

An unintended consequence that can be levelled at MiFID II is that while the directive banned OTC trading in equities, it pushed trading on to other venues or Systematic Internalisers (SI’s).

As Petr Koblic, CEO of the Prague Stock Exchange (PSE) and chairman of the Federation of European Securities Exchanges, says: “That’s great for the big banks in London, but not for exchanges like the PSE, where today we are unable to see around 50 per cent of the trading activity since it is in the ‘dark’ – as opposed to on ‘lit’ books.” That, he says, should “greatly worry” traditional exchanges along with the trend in companies delisting.

Koblic adds: “MiFID II certainly accentuated the problems around MiFID I that it was supposed to remedy, but has utterly failed in that mission. I don’t know if we need MiFID III…but definitely we need something.”

Alasdair Haynes, founder and CEO of Aquis Exchange, an independent pan-European cash equities trading venue that has been gaining market share lately across leading European markets, says: “The proposition to ditch MiFID rules [by Lawson] isn’t as mad an idea as one might first think. Take Best Execution, it’s no better today than it was two years ago.”

The former Chi-X Europe CEO adds: “The desire of MiFID was to get centralisation of trading on ‘lit’ books. However, what we see today is less trading on lit books and more trading on less transparent market places transparent [eg dark pools]. And, the drive to cap dark pools has failed totally. We also see a move towards ‘the close’ [of trading]. That was never the intention of MiFID.”

Even indirectly retail investors are “not benefitting” from MiFID, according to Haynes. “We know that the difference in toxicity between our platform [Aquis] and other exchanges can be in the region of GBP1 billion a year. While this is not necessarily the retail investor per se, it’s the retail investors’ pension money and fund management money that is put aside for investment, which is missing out.”

This is all despite the fact that tools, analytics and information are available today to evaluate whether best execution has actually taken place. For example, EU regulatory standards RTS 27 and 28, lay down obligations on all execution venues to publish data relating to the quality of execution of transactions (ie venue, average price, volume traded).

Furthermore, says Haynes, the regulators are starting to realise that MiFID is “not working” as they had originally envisaged or intended it to do. “What I’ve been told is that there is much consultation going on in what is being referred to as the ‘MiFID II refit’,” he says. “And, there’s a fear that nobody wants to go to MiFID III.”

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