Apr 10 2007 Joanne Wallen
The European financial services industry will assume a "radically different shape" under the Markets in Financial Services Directive and there will be clear winners and losers, says Paul Beach, head of corporate investment banking at Atos Consulting.
Atos Consulting is part of Atos Origin, a £5bn IT services company with 50,000 staff in 50 countries. Among other things, it runs all of the IT systems for the Olympics and many stock exchanges, including Euronext and soon the New York Stock Exchange.
Beach reckons there are three stages of MiFID: fear and denial, control and compliance, opportunity and growth.
Buy-side firms are still in the "fear and denial" stage, he told Complinet . The task seems so big that they have buried their heads in the sand. On the sell side, the majority of firms are in the second stage. They are doing as much as is needed to ensure that they comply with MiFID by the November 1 deadline, but no more.
For many, this might be a sensible approach, keeping the costs under control and adjusting legacy systems to make them compliant.
Beach warned that simply becoming compliant, however, while preventing the firm from being fined, may not be enough to prevent it from losing business to the competition.
"The [European] Commission has not invented MiFID to make life hard for banks or to increase its own control over the market. It has done it to increase investment in European markets," Beach said.
Charlie McCreevy, internal markets and services commissioner, pointed out in a speech several years ago that while the economies of Europe and the US are broadly similar, US investment is five times greater than Europe. "Why? Because the market is more efficient. It works, and investors get a better deal," Beech said.
If McCreevy is right, Beech maintains, and MiFID helps to increase investment among private individuals throughout Europe, then any business that can "get it right" will gain a significant advantage.
If there is any one set of businesses that might need to worry, it is the pure brokers, Beach said. He noted that the new "openness of the market" would diminish the need to go through a broker.
Stock exchange shock
Stock exchanges will also be hit by MiFID, but experts have a different opinion on how significantly. Paul Beach, head of corporate and investment banking at Atos Consulting, reckons the main traditional exchanges will survive post-MiFID because "liquidity pools" will continue to be a big issue. Profitability will be "squeezed", however, as competition heats up from new trading platforms such as the one being developed for Project Turquoise.
Suzanne MacDonald, head of financial regulation at law firm TLT, believes that in a couple of years there may be no more London Stock Exchange.
The clear winners will be the "big boys", the so-called "bulge-bracket" investment banks, which are making "competitive changes" to their systems, and will become systematic internalisers to be reckoned with. MiFID defines a systematic internaliser as "an investment firm which, on an organised, frequent and systematic basis, deals on own-account by executing client orders outside a regulated market or a multilateral trading facility."
The small sell-side firms will no doubt come under increasing pressure, Beach reckons. They ought to be able to find a strong niche with their local knowledge, however, where they know their client better and are able to advise on investments in stocks traded on local exchanges. It is not possible, Beach said, for the big boys to have in-depth knowledge of all the hundreds and thousands of smaller stocks, some of them still sizeable, that are traded on local exchanges. Smaller firms could even become "specialist systematic internalisers".
It may be some time, however, before an Italian investor can buy a Swedish stock through a web site hosted in the UK, for example. The biggest "bugbear" of MiFID is the "increasing complexity of transaction reporting". As things currently stand, the above example might mean reporting the transaction to three different regulators. The new clearing and settlement directive should, Beach hopes, help to simplify reporting.
UK firms grappling with MiFID are the lucky ones, however, Beach reckons. For much of Europe the changes are even more marked. "MiFID is a very different model, it is a big jump and will put severe pressure on other regulators," he said.
Beech does not think that November 1 is the end of the story by any means. Nor will firms be closed down if they fail to get MiFID right by then, although firms will incur a significant overhead in achieving MiFID compliance. Atos Origin's own estimate, which was originally contested by the Financial Services Authority but subsequently confirmed, is that MiFID will cost UK firms £1.1bn. That sum, Beech was keen to point out, is nowhere near as much as it sounds when compared to the financial services market as a whole. It is even less for those that grab the bull by the horns and truly gain competitive advantage from MiFID.
MiFID will be more "evolution than revolution" and firms should not feel the need to "jump" too fast, he noted. There will be time to see how it is evolving and there is a faint possibility that MiFID could even turn out to be a "damp squib", Beach said.
