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FSA estimates cost of MiFID to UK financial sector at £1 billion
The UK will have to spend up to £1 billion implementing the European Union’s Markets in Financial Instruments Directive
(MiFID), says the Financial Services Authority in its latest paper entitled ‘The Overall Impact of MiFID’.

The quantified one-off cost of complying with MiFID could be anything between £870 million and £1 billion calculated the FSA, with ongoing costs of approximately £100 million per year. The cost estimates are based on a survey of UK financial services firms in which they were asked to set out their actual and/or expected budget for MiFID implementation. The results from this survey were then aggregated using estimates of the total number of firms directly affected by MiFID.

On a more positive note, other findings from the paper indicate that, under certain assumptions, the directive could actually generate £200 million per year in ongoing savings, attributable mainly to reductions in compliance and transaction costs. Although it is not made clear if these benefits will apply to all sizes of financial market participants or whether it is only really the large multi-national players who will benefit from these economy-of-scale savings. As Hector Sants, managing director of wholesale and institutional markets at the FSA, says: “It is in the nature of regulation that costs are relatively easier to define and quantify for firms, while benefits can be harder to pin down.”

Surprisingly, the FSA’s research also revealed that more than half of the companies that will be affected by MiFID, which comes into force next year, have not yet fully budgeted for it, with many still just working on estimates. Of the 82 UK financial services firms questioned 52 per cent said they had not yet budgeted fully for MiFID implementation and 23 per cent said they did not know if their firms had or not.

The transposition date, when the FSA has to ‘comply’ with MiFID and incorporate its European-wide regulations into national law, is on 31 January 2007 and firms themselves have to be compliant by 1 November 2007, so there is not much time left for firms to finalise their plans. At the moment it is unclear what penalties incompliant firms will face but it is likely to involve a hefty fine.

Speaking at an event in November in the City of London to publicise the findings of ‘The Overall Impact of MiFID’ study, Chris Hibben, the head of MiFID implementation at the FSA, stressed that the authority fully intends to make its 31 January deadline. “We see no benefit in the UK being late,” he said.

“We don’t think the rest of Europe will drag their feet either,” added Hibben. “A few might be late but don’t expect there to be mass foot-dragging as the EC is certainly applying pressure to ensure that everyone meets the deadlines.”

Many in the audience at the Institute of Directors hub office in the City were sceptical of this statement however, as evidenced by a survey of the 85 attendees from large investment banks and financial services providers, which showed that 93 per cent believed that the MiFID requirements will not be consistently enforced across Europe. The survey, carried out by EA Consulting Group, the organisers of the event, also revealed that 40 per cent of those present see a lack of certainty as the biggest threat MiFID poses to their businesses; 29 per cent thought distraction from ‘business as usual’ activities was the biggest threat; while only 6 per cent were worried about the cost of implementation. More encouragingly, 65 per cent of the audience saw MiFID as an opportunity for the London financial markets, with only 18 per cent viewing it as a threat. A third (33 per cent) thought investment banks would benefit most in a post-MiFID world.

“These results suggest a change in mindset within UK financial services,” said Steve Robson, EA Consulting Group’s managing director. “More and more market participants are waking up to the fact that there are real business opportunities resulting from MiFID.”

For Samantha Mitchell, a director at the British Bankers Association (BBA), the important point to remember from the event was
the necessity of strong regulations for investor confidence but that these must be implemented in such a way as to ensure a level playing field across Europe. She also added: “The FSA shouldn’t proscribe and we’re confident its pragmatic principles-based approach means that it won’t. This leaves the onus on financial firms themselves to decide how they want to do business with
each other.”

• The next year promises to see many changes as the MiFID regulations come into force, with rival trading platforms being planned, Multi-Lateral Trading Facilities (MTFs), new market data regulations, and many other changes.