MiFID Implementation and its main challenges

1. MiFID Implementationand its main challenges Piia-Noora Kauppi MEP Brussels, 17.12.2007

2. Topics • MiFID – the big picture • View from the EP – observing L3 progress • Some examples of complexity of compliance: monitoring systems, conflicts of interest, home/host debate… • Looking ahead www.kauppi.net

3. Introduction • "MiFID looms on the horizon like a big black compliance cloud with a fuzzy silver lining of opportunity“ - Investor Services Journal January 07 • 57% of firms consider MiFID to be more about compliance than opportunity • Only natural considering the phase we are in, i.e. implementation • Clear benefits for first movers www.kauppi.net

4. But payday looms • Compliance burden is a known known • A known unknown if you don’t yet have a MiFID plan • But the opportunities are unknown unknowns www.kauppi.net

5. MiFID backbone • On the whole, principles-based regulation • Although, inevitably, some prescriptive, tick-the-box obligations • Objective: compliance through internalised procedures as part of normal execution routine • Expediency and common sense judgement calls are not going out of fashion… • E.g. best execution • Not just an obligation, but an opportunity • Firms that are first to use the flexibility built in to the concept will gain a lot • Various permutations possible (suitability, appropriateness; not just the price) • "Best execution will become a major differentiator in the marketplace" - ISJ www.kauppi.net

6. The big picture – let’s not forget! • A single financial market • More competitive marketplace • Cost of capital down • Depth and liquidity of markets • EU manufacturing output predicted to increase 1% more annually (Commission 2003 estimate) • Financial services best performer of Lisbon Agenda • McCreevy 4.12.2007 Eurofi-conference: EU now the major market in the world in commercial banking, insurance and foreign exchange, main innovator in derivatives. Our bond and equity markets are growing faster than US. • Offers new opportunities for transatlantic convergence and substituted compliance www.kauppi.net

7. The Role of the European Parliament • Throughout, EP resolute: • In defending bigger picture • In defending principles-based approach • Cornerstone L1 principles affirmed • Critics: L1 went too much into details. But, nota bene, we had good reasons for this. • L2 achievements of EP, inter alia • Best execution (flexibility) • Reduce gold-plating opportunities of MS • Qualitative criteria for determining whether a firm is a systematic internaliser • Clarity on inducements and conflicts of interest • Block trades (sensible transparency regime) • Directive vs. Regulation • Strong feeling that we have held up our end of the bargain www.kauppi.net

8. Why all the anxiety with implementation? • Does it arise from L1 and L2 regulation, or from L3 CESR methods? • Lamfalussy process was all new → “Community method +” (cf. rest of Lisbon Agenda) • CESR needs to show same community spirit (avoid gold-plating, new requirements) • Tight timetable • Still: 23/27 implemented on time. Only Spain & Hungary before the end of Dec, Chech Republic & Poland early 2008. • Problems caused by late implementation by the MS should not be over-estimated → 95% of the compliance info was already there when the L2 implementing measures were adopted www.kauppi.net

9. Some of my concerns • Some concern that CESR guidance is too normative • Compliance officers rely too much on prescriptive CESR advice • Flouts MiFID principles-based approach → also: new requirements, not always in line with the Level 1. • MiFID compliance should be about internalising into business routine, not ticking boxes • Evolutionary approach → Not the same as “laissez- faire” www.kauppi.net

10. What is changing? • Compliance arrangements • Efficiency and integrity • Internal system of controls • Internal audit • Adequacy of the reporting lines • The role of the senior management • Outsourcing • Recordkeeping • Management of conflicts of interest • Safeguarding the clients financial instruments or money www.kauppi.net

11. Managing compliance 2 • Centralised compliance organ vs. internal, consultative monitoring in the respective units • How independent from the operative units must the compliance observers be? • Nordic model vs. others • Supervisors claim: Both models would seem to be acceptable… • …but clients may drive demand for one or the other. • Integrity of the compliance function must in all cases be preserved. www.kauppi.net

12. Managing compliance 3 • Who is the best judge of best execution? • The executioner or the compliance dept? Either way, proper management of best execution policy is key • Safe harbours • Ideally: presumption of safe harbour when following MiFID parameters bona fide • Senior management responsibility • HR-management takes on new dimension • Jury is still out, but in general terms principles-based rules normally require responsibility at all levels of organisation. → Especially the senior management must learn to live in the new environment. www.kauppi.net

13. The future of financial supervision • The need to get answers is growing • Home/host issues • The relationship between lead supervisors and other supervisors in the college > A pre-set college for all 45 banks active X-border? > Shouldn’t, of course, freeze the market of M&A’s in banking... • CESR working methods > is the progress too limited? What do the Lamfalussy reforms mean in practice? • Good crisis prevention is crucial... • ...but we might need crisis management as well. • Important to work this out – can’t rush to bad conclusion > Do we really afford to wait for the next real crisis? www.kauppi.net

14. Towards a transatlantic investment market? • In US, reg.NMS only one fifth of the scope, happens in mature market, one currency, one language, one securities regulator • Of course people complain about the costs, when the tangible benefits come years later • This is an industry which supports nearly 7 million US and EU jobs, nearly €2.8 trillion in direct investment and stock and bond flows in excess of €35 trillion; and accounts for 80% of global financial services business. • True that may have overregulated some aspects - more about overdone execution, not intention (cf. SOX)  www.kauppi.net

15. Substituted compliance? • US anxious about financial business lost to Europe • Momentum towards a dynamic transatlantic marketplace is building • Mutual recognition of exchanges and broker-dealers? • MiFID sets the stage • What is the influence of recent market turmoil to EU/US co-operation? • McCreevy 4.12.2007: “It is only when the reality bites that the weaknesses appear.” • Basel II implementation more interesting than MiFiD developments. > Still: MiFiD can reduce problems with its methods of sophistication. www.kauppi.net

16. The long view • Post-MiFiD world did not begin with big bang in November this year. • MiFiD certainly brings changes to market structure, which are too early to estimate. • It certainly brings changes to individual company structure • Also a driver for more convergence on tax and legal traditions? I certainly hope so. > McCreevy? I love simplistic thinking as much as I hate it. • It will also be a permanent topic on the EU-US financial regulatory agenda. • MiFiD is now the best practice globally • Japan interested to follow • China considering some of the aspects • Mumbai Stock Exchange CEO in WEF New Delhi 3.12.2007: “We are going to be international financial center in next ten years. We are going to follow the examples of others.” > MiFiD? www.kauppi.net

17. Looking ahead • The price non-delivery becomes higher every day – what happens if we do not implement properly? • Jacques Delors: “It is not possible to fall in love with single market.” • I think he was wrong. It is. • If EU would not exist, it would have to be created. • If MiFiD would not exist, it would have to be created. • MiFiD definitely was the right thing to do. www.kauppi.net