MiFID: A lot of catching up to do

Alan Jenkins, European head of MiFID at BearingPoint, gives his assessment of the results of the online survey on MiFID which followed last November's Compliance '05 conference

Following the success of the MiFID (Markets in Financial Instruments Directive) panel session at the Compliance '05 conference, BearingPoint was delighted to further sponsor the online survey on the topic. The survey invited responses from all subscribers to Operational Risk and Compliance magazine plus other registered, interested parties. The survey generated 173 responses, of which 45% were from European parties and 25% North American. At least 68% of the responses were from financial services firms, as distinct from software and service providers.

Forty percent of respondents stated they were unaware of MiFID, which may be understandable given the global spectrum of responses. However, the majority of the 'aware' respondents had only become aware of MiFID during 2005 (and 30% only in the second half of 2005), which is more disturbing, considering that the primary legislation was enacted in the European Parliament in April 2004 after lengthy debate, particularly around the abolition of the Concentration Rule.

Almost half of the respondents who were aware of MiFID asserted that they had been involved in the consultation process, either for the directive itself (so-called Level 1) or for the implementation measures (Level 2, where consultations started in February 2004). This would suggest a high degree of involvement by the minority who were aware of MiFID by the end of 2004, but must also raise doubts over the breadth of the consultation process.

A majority of firms stated that their MiFID project is being lead by a senior compliance and/or risk management executive. BearingPoint sees this as probably but not necessarily appropriate; what is vital is that there is sufficient participation and buy-in from all of the many functional areas that are affected, in every investment firm.

It was most interesting that there was a more than two-to-one balance of respondents viewing MiFID as bringing net benefits, rather than net costs, to their firms. Accepting that all the 'vendor' respondents were in this category, this is still a more positive response than other surveys have suggested. What cannot be in doubt is that it is the early adopters who will be best prepared and best placed to be winners (and acquirers) post-MiFID.

A more surprising result was the rating of "increased focus on business continuity, operational risk and outsourcing" as the top-scoring functional impact of MiFID. BearingPoint sees the MiFID requirements in this functional area as being marginal, in the context of firms already gearing up for the Capital Requirements Directive (Basel II); however this may reflect the focus of the particular sample responding to this survey by Operational Risk magazine.

Also surprising was the low score for "abolition of concentration of securities trading, and creation of systematic internalisers". This suggests that respondents have not yet done their homework in terms of a comprehensive impact assessment for their firms, rather they may have taken a purely compliance and/or risk management perspective.

Moving on to the implementation date, the responses have a flavour of "I'm OK, you're not OK". If as the respondents believe, two-thirds of all investment firms will not be ready by October 2007 in most or all business lines, then much more needs to be done to raise awareness and to get the necessary MiFID projects kicked off early in 2006.

This is reinforced by the 50% of respondents claiming they need until October 2007 to get ready, versus the 22% who see the recent six-month postponement from April 2007 as reducing the urgency of MiFID-related projects.

In the UK, the recent HM Treasury consultation paper and the FSA consultation papers now planned for March and April 2006 will help to further raise awareness. Investment firms in other EU and EEA countries could do worse than to study these UK documents in anticipation of local publications and pronouncements by their own public authorities.

Turning to the budget needed for MiFID, we find 20% of respondents identifying figures of at least $5 million (and 5% over $50 million). Of more concern are the 44% who are budgeting less than $0.5 million: have these firms really considered the impact of MiFID across all their functions and all lines of business?

On the plus side, 73% assert that their boards of directors are at least "aware" of MiFID; but 76% also state that their impact assessments are either not yet started or not yet completed, which must raise uncertainties over the adequacy of their budgets.

BearingPoint continues to focus on mobilisation and impact assessment, across all functions and all lines of business, as the starting point for every investment firm facing the challenge of MiFID.