UK financial firms face £1 billlion start-up bill for Mifid

UK-based financial services firms could face a £1 billion bill for implementing the Markets in Financial Instruments Directive (Mifid), the UK’s Financial Services Authority (FSA) estimates.

In a paper published today, The overall impact of Mifid, it outlines the total costs and benefits financial institutions face in complying with the far-reaching European Union directive, which is designed to create a single market for financial services in the EU.

The one-off cost of implementing Mifid is estimated to be between £870 million and £1 billion, with ongoing additional costs of about £100 million a year.

The heaviest financial burden will be the one-off costs arising from the introduction of the appropriateness test for non-advised sales, changes to client categorisation and best-execution requirements, and system changes required by new market transparency provisions (See: Mifid test is threat to banks).

However, Mifid could generate about £200 million per year in quantifiable ongoing benefits, which the FSA attributes to reductions in compliance and transaction costs.

Hector Sants, managing director of wholesale and institutional markets at the FSA, encouraged financial firms to focus on the opportunities offered by the directive – which comes into force next November – as well as the burden of additional costs.

Sants said: “It is in the nature of regulation that costs are relatively easy to define and quantify for firms, while benefits can be harder to pin down. As we have already foreshadowed, it is clear that implementation of Mifid represents a substantial cost to [the] industry particularly in the [next few] years, but it does create the potential for revenue opportunities over the longer term.”

The FSA’s cost estimates are based on a survey of firms in which they were asked to set out their actual and/or expected budget for Mifid implementation. The results from this survey were then aggregated using estimates of the total number of firms directly affected by Mifid. The benefits were calculated against a series of scenarios relating to the impact of Mifid on business practices in the UK’s financial services industry, and the extent to which Mifid contributes to the aim of creating a single EU market for financial services.