The Financial Services Authority has published a paper setting out its assessment of the overall costs and benefits for the financial services industry of implementing the Markets in Financial Instruments Directive in the UK.
The overall impact of MiFID attempts to quantify, where possible, the benefits of MiFID in the UK, and sets these alongside the costs of implementation. The paper indicates that, under certain assumptions, MiFID could generate some £200m per year in quantifiable ongoing benefits, which will be attributable mainly to reductions in compliance and transaction costs.
The quantified one-off cost of implementing MiFID could be between £870 million and £1bn with ongoing costs of around an extra £100m a year. These are aggregate figures: it is likely that the distribution of costs and benefits will vary among firms depending on exactly how MiFID affects their business.
Hector Sants, FSA managing director wholesale and institutional markets, says: “It is in the nature of regulation that costs are relatively easier 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 industry particularly in the upfront years, but it does create the potential for revenue opportunities over the longer term. We would encourage firms to focus on these opportunities.”
The 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 number of scenarios relating to the impact of MiFID on business practices and dynamics in the UK’s financial services industry and the extent to which MiFID contributes to the aim of the Financial Services Action Plan in helping to foster a single integrated market in EU financial services.
The paper is a separate exercise from the detailed cost-benefit analysis undertaken in relation to particular policy decisions and published alongside the FSA’s MiFID-related consultation papers. In the case of a wide-ranging directive like MiFID, the FSA believes it is useful to step back and analyse the costs and benefits as part of the bigger picture.
However, a summary table of the detailed costs from the FSA’s MiFID-related consultations is included as an Annex, which shows that some of the largest MiFID-related compliance costs are one-off costs arising from the introduction of the appropriateness test for non-advised sales, changes to client categorisation and best execution requirements, and systems changes required by new market transparency provisions.