European financial markets are going through some big bang changes. The overhaul of financial rules in the EU’s MiFID II directive is meant to make them fairer and safer but the changes come at a heavy cost and a risk of regulatory loopholes.
The latest iteration of the new regulation touches most aspects of EU financial markets. Banks will have to make sure that customers are sold the right products at the right prices. Fund managers will have to in turn make sure that they will get the best prices and more trading will happen in a transparent way. The ultimate result should be more competition and cheaper services, ultimately leading to cheaper capital for companies but most of the burden is believed to fall on the financial institutions themselves.
There are indirect costs as well and making banks and brokers charge clients directly for research is likely to decrease the amount of financial analysis conducted by banks. This may impair price discovery, mostly for smaller companies, thus raising their cost of capital. Moreover, the burden of regulation will be good for companies with state-of-the-art technology and bigger businesses. This may ultimately lead to restrict choice and consolidation.
As to the possibility of loopholes, the rules may lead to the so-called “systematic internalizers” – a kind of trading system where banks match order from clients directly with positions on their books, instead of executing trades through an exchange. This can, however, also lead to greater competition over more heavily regulated exchanges. That could fragment markets and undermine MiFID II’s major aim of improving transparency.
