LORDS

Lords Committee publishes report on MiFID II

10 July 2012

Rushed proposals from the European Commission to regulate financial markets risk damaging both the City of London and the entire EU financial sector. Flawed transparency proposals and the risk of creating unnecessary red tape means the EU needs to stop and take the time to get the proposals right, according to a report published today by the House of Lords Economic and Financial Affairs EU Sub-Committee

Commenting, Committee Chairman Lord Harrison said:

"We are very concerned that the undue haste with which MiFID II has been brought forward means that the Commission simply hasn’t had time to think through the implications of its proposals. The consequences of ill-thought-out legislation, not only for the City and the EU financial sector, but for consumers of investment services throughout the EU, could be hugely damaging.

While we absolutely agree that a review of MiFID I was needed, we simply can’t risk locking third country firms out of EU financial markets or damaging the provision of investment services. It is vital that the UK Government, the Commission, Council and European Parliament ensure that, rather than being bounced into these changes, all steps necessary are taken to ensure that MiFID II is fit for purpose before it comes into force."

The Committee has scrutinised the Commission’s proposals for a Directive and a Regulation in Markets in Financial Instruments (known as MiFID II). The new regulatory framework applies to a wide range of investment services such as global investment banks trading complex securities, fund managers investing pension funds, stock-broking firms and small high street financial advisers providing financial advice to the general public. This important and far-reaching proposal seeks to meet the G20 commitment to tackle the less regulated and more opaque parts (‘dark pools’) of the financial system, and to enable regulators to regulate, traders to trade, and consumers to use such products, with confidence.

In its report, the Committee conclude that while a review of the existing MiFID I regulatory package is necessary; the proposals contain fundamental flaws that must be corrected as a matter of urgency if serious damage to the EU financial services industry is to be avoided. In summary:

  • Proposals on third country access would effectively create a ‘fortress Europe’ - forcing countries such as the USA and China out of affected markets, to the detriment of EU consumers
  • Whilst the Commission’s desire for greater transparency is to be welcomed, an unsophisticated, “one-size-fits-all” approach that ignores the sensitivity of information before a trade is made (pre-trade transparency) not only risks damaging liquidity and reducing competition, but could also have a serious effect on market innovation
  • The new category of Organised Trading Facilities (OTFs), aimed at ensuring all organised trading is conducted on regulated venues, risks creating red tape through an overly complicated regulatory framework.

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