The Financial Services Authority has published the new rules which will change the face of the European financial services industry. Designed to create a single European market for capital, the changes could cost UK business £1 billion.
Investment houses and financial services companies will be able to trade across Europe when the rules come into force, but the FSA itself has admitted that one-off costs relating to the change could run to £1bn in the UK alone.
The FSA's Policy Statement is the transposition into UK law of the EU's Markets In Financial Instruments Directive (MiFID). It had to be published by today, though the rules do not apply until November.
The law replaces the European Economic Area Framework for financial services regulation and not only makes it easier for companies to sell financial services products across borders but regulates some activities that were previously unregulated.
"It introduces new and more extensive regulations for investment firms and and how they conduct their business and their internal organisation," said Susan McKiernan of Pinsent Masons, the law firm behind OUT-LAW. "It focuses on managing operational risk."
Each EU member state had to transpose the Directive by 31st January, and in the UK that was done by financial regulator the FSA.
"We believe we have stuck to our commitment to minimise the burden on firms by adopting a proportionate approach to implementation," said FSA managing director Hector Sants. "Implementation of MiFID will represent a substantial cost to industry but it does create the potential for revenue opportunities over the longer term, and we would encourage firms to focus on these opportunities."
The UK is the financial services centre of Europe, and the FSA's meeting of today's deadline will be seen as vital. Other major European economies failed to publish their rules. France, Germany, Austria, Spain, and the Netherlands admitted they would miss the deadline.
Though there is not a fundamental change in the basis of regulation, there is tighter control of how a company manages other people's money. "The regulator says that it is still a principles based system, but there is a lot more detail on internal organisation and systems and controls," said McKiernan. "It is going to cost companies."
The new rules will focus particularly on outsourcing, so that companies which outsource remain responsible for the activity, and that all activity is logged. "The integrity of the records is the key point," said McKiernan. "The FSA has to be able to reconstruct every part of a transaction."
"If you have previously followed the FSA's guidance in drafting outsourcing contracts then you should have contractually covered almost all of the requirements of MiFID at a certain level," said Iain Monaghan, an outsourcing specialist at Pinsent Masons, the law firm behind OUT-LAW.
"The main concern is likely to centre on the extent to which MiFID requires the customer to monitor the service provider's performance. What degree of monitoring will be expected in practice? What level of in-house capacity will the customer need to retain in order to react effectively to non-performance?"
The new rules will be initially burdensome both for regulated companies and for those who supply to them, but the FSA believes that the economic benefit will eventually be more significant.
"MiFID could plausibly be estimated to generate quantifiable benefits of up to £200 million per year in direct benefits, accruing principally to firms in the form of reductions in compliance and transaction costs," said an FSA report in November last year. "MiFID could also generate another £240 million benefit in ‘second round’ effects."