How does this affect private investors? The honest answer is that right now nobody can be absolutely sure, but given the extent of Mifid II’s changes it will surely be significant. As well as introducing tougher standards for financial products and services, the new regime is designed to shift much off-book trading onto regulated exchanges – that, its designers say, will mean greater pricing transparency, notably in derivatives and bonds, but in reality all corners of the market will be affected as tighter reporting requirements seek to guarantee investors the best deal every time.
Alongside better consumer protection, Mifid’s designers argue that the new regime will bring about the proliferation of competition that will improve service and bring down costs. This idea, though, is where opinion diverges. Many in the industry think Mifid is too ambitious a single leap, and the €2.5bn cost of implementing it will simply trickle down the value chain to be borne by end customers. And larger companies will be better able to spread the extra cost burden, which could force smaller rivals out of the market.
One area of specific concern likely to have knock-on consequences for smaller investors is around the provision of equity research, which will be charged for separately rather than – as has long been the case – wrapping its cost in commission structure. The idea is to drive out conflicts of interest, but critics suggest this could make it uneconomic to write about smaller companies, and leave them in an information vacuum that suppresses liquidity in their shares. And if, as is hoped, putting a value on research stimulates a market of independent providers, it may well be that only larger investors can afford to buy it – besides which, independent providers may find it difficult to survive if research moves in-house or the sell-side decides to give it away at peppercorn prices, a suggestion that the regulator is likely to take a dim view of.
But that highlights the subtle yet important difference between Big Bang and Mifid II. While the former can be characterised as a massive deregulation of the financial system, Mifid II is about introducing more rules, and that means its effectiveness will be dependent on its ability to enforce them. There is no doubt that complicated markets needs appropriate oversight, but such sweeping change in the compliance burden will be expensive, and with no guarantee that it will improve markets as intended, either. We’d be keen to hear any Mifid experiences you may have with your brokers this year.
