MiFID Conference - Keynote Speech
Speech by Hector Sants, Director, FSA
MiFID Conference, QEII Conference Centre
May 15 2006
Introduction
Good morning ladies and gentleman. I welcome you to the FSA's MiFID conference.
MiFID, as you well know, is a major piece of European legislation aimed at encouraging a single European market for investment business. Through several years, the investment by Member States, regulators and the industry, in discussion and negotiations on MiFID and its Level 2 implementing measures has, properly, been extensive. We have now reached the stage where the talking is almost stopped and we need to proceed with implementation.
Without doubt, it will have been a long journey already for many of you here. And for any of you tuning-in seriously to MiFID for the first time, well you are late to the party, despite our megaphone invitations over the past year and more. It is certainly important, as our American cousins say, that you now "listen-up". In any event we are pleased to see so many firms from both the wholesale and retail sectors here today.
You will be looking for the clearest possible messages from the FSA as to the programme for UK implementation and what that will mean for your businesses. Equally you will recognise the uncertainties that still remain pending finalisation of the Level 2 now expected next month. My main purpose this morning is therefore to describe the framework for the practicalities of timely implementation. That framework needs to enable us to deliver, consistently with appropriate consultation as FSMA requires. I will not dwell extensively on what we might call the "political economy" of the Directive: how it comes to be in its current shape and its long-term impact.
Our prime focus must be on what you can expect from the Commission, the Treasury and the FSA through this year. With the help of our other speakers, you should then get a useful feel for the challenges in particular sectors and how they are being tackled. This should help you decide what issues you need to prioritise for your firms.
European timetable
First, a brief update on where we are in the European timetable. At the end of April, the extension of the timetable for the Directive was published in the Official Journal. The transposition date is now confirmed for 31 January 2007 and the implementation date as 1 November. Some of the benefit of the timetable extension has been taken up by continued debate on the Level 2 measures in the European Securities Committee. Both the FSA and the industry have been giving important technical support to the Treasury as it represents the UK interest in the ESC. Although the Level 2 measures have been under active discussion for more than a year now, it has been crucial that we not flag on the last lap.
But after so many false dawns we do now see light at the end of the tunnel. The final Level 2 proposals are due to be voted on by the ESC at the end of June and agreed by the European Parliament by mid-July. But should you wait until the final text is ready before you can start preparing? The answer to that question is no. The areas where significant change is likely are now few and we all need to start preparing for MiFID now. For our own purposes, we are preparing this summer's Consultation Papers on the basis of the draft Level 2 proposals issued by the Commission in February. Where the final package differs we may need to adjust our proposals in some areas but in project management terms we now have sufficient stability in the Level 2 measures to get our statutory consultation processes into gear. The sooner we begin the sooner we can be making the final rules which you will all need to finalise your preparations in an orderly way.
Domestic Consultation programme
As outlined in our Business Plan for 2006/07, we will be publishing four consultation papers and a series of other, informal papers on key aspects of MiFID in the next six months. We gave fuller and updated details of the consultation programme in the Joint Implementation Plan which we published with the Treasury on 4th May. Meanwhile, we have been keeping trade associations in touch through our "PRECLC" Committee, whose proceedings are accessible through our website. And we have good liaison with the "MiFID Connect" grouping set up at the welcome initiative of the industry.
The very first of our implementation CPs will be published shortly. It sets out proposed amendments to our rules and guidance on systems and controls so as to transpose the relevant organisational requirements in both MiFID and the Capital Requirements Directive – the latter needing to be implemented from 1 January 2007. We are proposing a unified and coherent framework of requirements applying to firms subject to either or both Directives. We have dubbed that a "common platform", that seeks to rationalise some clear differences in the standards set by the two Directives. But we will not be pursuing tidiness where it cannot be justified on cost benefit grounds, and in some areas we are inviting you to challenge or confirm our cost assumptions. Christina Sinclair will speak on our proposals in more detail in the last session this afternoon.
We are aware that the MiFID Best Execution requirements are of particular concern to firms. In order to engage firms and their thoughts on the key issues in this area we will publish this week a tightly focused Discussion Paper to prompt dialogue on practical ways of addressing them.
We plan to issue in July the first of our blockbuster CPs. It will cover all the remaining non-COB aspects of MiFID. That is, matters such as transparency, transaction reporting, professional indemnity insurance; and authorization, enforcement and co operation. Then in Q4 of this year we plan to publish the CP on 'Reforming COB regulation'. This will cover all the COB elements of MiFID and also significant changes that will bear on firms and activities outside the scope of the Directive. It will set the MiFID requirements within a wider programme of reform springing from the COB Simplification project on which we have been working for more than a year now. Dan Waters will be outlining the scope of that more fully later this morning. He will also touch on the parallel CP planned for Q4, on the marketing communications aspects of MiFID and wider proposals reflecting our review of the financial promotions regime.
As we re-emphasised in our Business Plan for 2006/07, we shall be taking the opportunity, where we can, to further our drive towards a more principles based approach, characterised by high level rules rather than prescriptive detail.
Costs and Benefits
Having given you that run down of what our consultation programme will be over the coming year – I would like to touch on costs and benefits, on which commentary has become more measured over recent months, as some of the uncertainties resolve.
Even where the Directive requirements are substantively similar to those imposed under the ISD or under existing FSA regulation, the costs of reviewing existing systems and processes and adapting them to the new regime should not be underestimated. And where MiFID imposes new obligations, firms will likely face recurring costs in addition to the one-off implementation burden.
As the FSA we are of course devoting substantial resources preparing for MiFID. But we are looking to ensure that our implementation is as cost-effective as possible. Where we have discretion in how we implement, we will give full weight to the desirability of minimising the burden on firms, consistent with effective implementation of the Directive and consumer protection.
At one level, the benefits of MiFID in terms of enhanced consumer protection are likely to be markedly less in the UK than in some continental European countries, for example those where investment advice has not hitherto been regulated. However, the improvements to passporting should allow cross border firms to reduce their compliance costs – specifically by reducing the need for duplicate or variant systems and structures for compliance in multiple jurisdictions.
And more generally the greater harmonisation in European regulation may help to attract customers from a wider range of jurisdictions. To give you a particular example on the upside of MiFID, I turn to Markets. The MiFID provisions in this area – such as an end to "concentration" rules designed to keep all business "on exchange", the introduction of a pan-EU regime for multi-lateral trading facilities (MTFs) – should bring economic benefits and fresh opportunities to securities firms. From our discussions with London firms we know that a number are planning to exploit the new freedoms.
However, I would not want to exaggerate the likely impacts for UK markets themselves - for example, we already have a relatively open competitive environment for exchanges and MTFs. And we already allow systematic internalisers. And, more generally, the impact of MiFID should not be exaggerated relative to other factors which are affecting the trading landscape, such as technological change, the consequences of exchange consolidation, and developments in the clearing and settlement space.
We plan to set out our take on the overall CBA of MiFID implementation in October, taking account of the impact in the conduct of business area and assessment of the final Level 2 requirements.
Pending that publication I believe a reasonable summary of the CBA position remains as we set out at last July's Annual public meeting. Namely, the implementation costs are likely to be significant and the benefits to the UK will be less easy to grasp. However, as I have mentioned today, one of the main messages is to encourage you all to plan to exploit those benefits relevant to your firms. The clear cost of implementation of MiFID will only prove justified if firms take the opportunities generated to raise revenues.
So in conclusion, MiFID is here – it is here to stay, so now is the time to identify the challenges you will face and the issues that you need to tackle in your preparations to meet the MiFID requirements come 1 November 2007. MiFID should not be feared or worse – ignored; this Directive should be embraced by your business as early as possible so that you can meet the challenges and opportunities that it presents.