On Monday, Roberto Gualtieri, chairman of the European Parliament’s Economic and Monetary Affairs Committee and MEP Markus Ferber, wrote to EU Financial Services Commission Lord Jonathan Hill agreeing to postpone the implementation date of far-reaching changes in the rules governing European financial markets. While this may seem to colleagues who do not work in this area like another impossibly boring, highly technical financial services file, its tortured path is worth reflecting on as it illustrates some of key high-level challenges of financial services regulation that will continue to test policy makers for many years to come.
Time is never on your side
It’s now over five years since the Commission adopted its proposed recast of the 2004 EU Markets in Financial Instruments Directive (MIFID). While the original directive was overdue for an update, it also became a response to the regulatory failings revealed by the 2008 financial crisis and the perceived need to make markets more efficient, resilient and transparent. Since 2011 however, the political and economic context around these issues has shifted massively: the growth agenda now dominates in Brussels, a new Commission and Parliament have taken office and many Member State governments have turned over in the meantime. Suffice it to say that the policy objectives of the key decision makers in this area today are no longer the same as those who approved the legislation back in 2014.
Unintended consequences guaranteed
Like any other policy area, financial markets regulation features competing policy agendas. These agendas however, tend to be driven by a theoretical view of how markets should work that does not necessarily equate to the reality that follows. For example, while few would dispute the need for greater transparency in the markets, the exact calibration of the rules can make the difference between a smooth transition to more transparent markets and sharp drops in liquidity/ the complete disappearance of a particular product or activity from the markets. The pervasiveness of this problem in the broader financial services area is what has led the Commission to publish a Call for Evidence regarding the EU regulatory framework for financial services (closes 6 January).
Technical does not necessarily mean apolitical
While there have always been some grey areas around the technical/ political distinction in implementing legislation (many of which are resolved by courts in other jurisdictions such as the US), the politicisation of the Level 2 process around MIFID2 has reached unprecedented levels, wreaking havoc on the established processes around the different levels of legislation set out in the 2001 Lamfalussy process. While this may mitigate as we move pass the avalanche of post-crisis primary legislation, the effects may linger on in terms of inter-institutional relationships and the role and responsibilities of the European Supervisory Authorities in all this.
The bottom line here is that while the delay and uncertainty around the implementation of MIFID2 (like Solvency II before it) has been difficult and costly for industry, given the complexities and risks involved, policy makers could do a lot worse than follow the Commission’s lead and make the most of the delay – rules that were expected from the Commission this month are now not likely to appear before January 2016. But as one Commission spokesperson recently acknowledged, “timings can always slip.”
*This piece was originally published on Public Affairs