Could Brexit Bring MiFID III With It?
September 28, 2019 • 6 min read
Odds are, you’re fed up of Brexit and MiFID II.
This has nothing to do with your personal politics or the kind of work your firm specialises in. As of the summer of 2019, EY calculated that the rolling Brexit bill of the financial services industry had surpassed £4bn with firms investing heavily in relocation costs, legal advice and contingency provisions. At 1.4 million paragraphs, MiFID II implementation has also been expensive project for financial services with consultancy Optimas estimating an industry wide implementation cost of €2.5bn (£2.2bn).
Overall, during the past few years a huge amount of time and money has been taken up by MiFID II compliance and Brexit planning.
Even though MiFID II has been implemented in the UK, uncertainty remains as Brexit is still dominating the agenda in Westminster. Even though the Conservative's recent election result has made a January 2020 Brexit more likely, uncertainty remains hanging over the long-term picture post-Brexit (making a lot of businesses pause their future plans until they know more).
Unfortunately, things could get worse.
Rumours are increasingly circulating that the drawn-out nature of Brexit could accelerate regulatory change and green-light the third generation of MiFID. But is this the case? Could Brexit bring MiFID III with it?
First, let’s look back at what we know. MiFID II is not going anywhere as it was implemented and became UK law while the UK was still an EU member state. Even in a no deal Brexit, this will still be the case according to the European Union (Withdrawal) Act 2018 which was drafted with specific contingencies for MiFID II:
"Consistent with the government’s objective of providing continuity to businesses and consumers as far as possible, the policy approach set out in MiFID II legislation will not change after the UK has left the EU."
Also as the FCA was instrumental in drafting much of MiFID II’s record-keeping and reporting principles, it seems unlikely that an independent UK would be involved in radically altering the finalised legislation.
However, there are two key points at play
First, since MiFID II’s implementation, problems and criticisms have already begun to surface. As of June 2019, MiFID II still hadn’t been introduced into the national law of 17 EU member states (including Spain and Holland) which suggests either wide scale ambivalence or underlying issues with how the regulation is drafted. Plus, in locations where MiFID II has been embraced into national law, evidence suggests firms are still struggling to truly integrate this directive into their processes. For instance, despite MiFID II’s focus on reporting requirements, in 2018 one in four transaction reports submitted to the FCA (or 1,355 reports) were inaccurate.
Furthermore, loopholes in MiFID II have been identified and caused some critics to question whether redrafting is required. For instance, one area MiFID II was intended to target was dark pool trading but under the regulation the systematic internaliser (SI) regime still allows bilateral trading between firms and clients. Obviously this is problematic because by connecting to one another to create de facto multilateral trading venues, SIs can essentially recreate broker-crossing networks. Therefore, from a purely legislative standpoint, is a new iteration of MiFID required?
And second, following Brexit there will still be a need for alignment between the UK and European markets with harmonised regulation playing a big part in this.
With it being anyone’s guess as to how the UK’s long-term relationship with the EU will look post-Brexit, some are concerned that confusion may arise over what role pre-Brexit regulations will continue to have. Difficult questions could be asked of the UK as a third country under EU law and how equivalency will work in reality, especially with such a major financial hub as London.
Both the FCA and ESMA have been active in their communications around this topic, assuring market participants whenever they can and issuing numerous guidance notes. However, until these authorities know what Brexit will actually look like it is hard for them to say anything material.
It is likely that MiFID III will occur at some point with former MEP Kay Swinburne, one of the architects of MiFID II, telling a conference last year: ‘I get asked if MiFID III is a myth or reality but it is always going to be a reality, its just a question of when it comes.’
There are uncertainties around Brexit and the future of MiFID II. However, both the FCA and ESMA have been vocal in their attitude towards deregulation and neither will want regulated firms taking advantage of potential mismatches between regulatory regimes. Therefore, it might be wise to assume they are more likely to issue new regulations in times of uncertainty than stick with the status quo. Brexit, and whatever form it takes, might just be the catalyst.
What could be on the Mifid III wishlist?
We’ve touched upon the areas that MiFID II that may be set for further legislative attention, identifying the issues most bothering regulatory authorities. But what about the market participants themselves? What would they like to see introduced in MiFID III or which parts of MiFID II would they expect to be scrutinised first?
Vicky Pearce, Director of compliance consultancy b-compliant, thinks a re-classification of MiFID instruments could be in order.
“For most clients their biggest pot of money is held within their pension fund which is not a MiFID instrument and therefore excluded from the disclosure requirements,” said Vicky. “Many [financial] advisers are including this information but where advisers aren’t there is a mismatch of information to clients. With so many regulatory changes over the last 20 months standardisation of the disclosure would be so much easier if it was mandated.
“There has been talk of MiFID III being right behind MiFID II, this could be a possibility once we leave the EU. One of the most helpful changes would be that everyone uses the same reporting periods, so all providers are reporting at the same time.”
For Nathan Fryer, paraplanner and director at Plan Works, MiFID II has been helpful in its work towards improving transparency and cost disclosures linked to investing. However, he thinks more work can be down on this front.
“The costs and charges disclosures need to be clarified as I believe many advisers are currently using best endeavours as a get out clause which cannot last forever,” said Nathan.
“My number one wish [for MiFID III] would be for fund costs and charges to be bundled together in one all-encompassing cost. Second would be for the ‘slippage’ methodology to be removed, third would be for some thought leadership around the amount of different numbers having to be disclosed to a client.”