Markets in financial instrument directive (MiFID), which comes into force in November 2007, is the cornerstone of the EU’s strategy to create pan-European capital markets. In replacing the Investment Services Directive, MiFID will not only introduce changes to the existing regulatory environment across the EU, but also encompass products and asset classes that have not been subject to regulation before including derivatives.
MiFID’s 73 articles cover a wide range of systems, information and client relationship provisions including best execution, investment advice, client suitability, information about financial instruments and safeguards against conflicts of interest. In practice, compliance is likely to require a thorough review and upgrade of systems, training, record keeping, marketing materials and agreements with customers.
On a strategic level, MiFID will enable investment businesses to operate across different European jurisdictions while being governed by a single home regulator. The directive will also make it easier and more cost-effective for larger organisations or groups of companies to conduct proprietary trades outside exchanges. For investors, MiFID offers greater transparency, more choice of markets, consistent protection around Europe and potentially lower margins.
However, there could also be considerable business challenges. The creation of three new client classifications – retail, professional and eligible counterparty, each of which will require a different level of protection and associated commitment of resources – may require adjustments to existing business models.
In addition, companies will need to create a properly documented group-wide conflicts of interest framework. This should fully identify and determine how conflicts will be managed at group and operating level, which is in turn likely to require a re-assessment of governance controls, policy formulation, record keeping, training and disclosure.
How PwC is assisting financial services organisations
PricewaterhouseCoopers (PwC) has the expertise to help companies implement MiFID and embed its requirements into information systems and customer relationship management. It can also help companies to address the business opportunities and challenges of MiFID in areas such as governance, process improvement and business model review/re-orientation.
