SVI in Brussels: There’s no such thing as perfect regulation
On Monday I had the pleasure of taking part in a panel discussion in Brussels on the evolution and disruption of financial regulation in the 21st century, hosted by New Europe, a leading European affairs publication. My fellow panellists and I – coming from across the financial industry spectrum, including participants, advisory, research, and regulation (though all speaking in a personal capacity) – engaged in a wide-ranging conversation on what we had learnt from the first few months of MiFID II, its impact and unintended consequences, and made some forecasts for the future.
Massimo Amato, the Managing Director of EFG Bank (Luxembourg), describing himself as the “living example of the unintended effects of hyper-financial regulation”, opened with some interesting insights into his own experience, having been CEO of UBI Banca International S.A. which was subsequently acquired by EFG. It was noticeable how similar Massimo’s experience had been to my own, despite coming from a completely different angle. Both of us have found that hyper-regulation only serves to concentrate the industry into a small number of companies that become too big to fail, as smaller players are squeezed out by the burden of compliance and incoming entrants have a harder time.
These concerns were mirrored in the remarks of Isabelle Jaspart, speaking from her experience in regulation at Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF). She acknowledged that it’s impossible to effectively regulate against every type of risk inherent to the financial system, and said that the complexity of MiFID II in part owes to regulators being handed a blank cheque after the financial crash, essentially with the instruction to solve all of the industry’s problems. When it comes to the kind of expertise this would require, regulators aren’t necessarily better equipped than market participants to achieve this. It’s difficult to know if such a task is even possible.
As the conversation went on, helpfully moderated by Pieter Willem de Groen, a researcher at the Center for European Policy Studies (CEPS), various different aspects of regulation and its unintended effects were raised. Massimo Amato argued that lawmakers were “intruding into the management of a company” by regulating at such a micro-level, while Aleksandra Palinska from EuropeanIssuers – an association representing the interests of publicly quoted companies on European stock exchanges – suggested that mid and small cap stocks were unfairly penalised for non-compliance, rarely because they had broken the rules, but rather because they simply didn’t know how to comply with them.
Dimitri Valatsas, the European Director at Greenmantle, a macroeconomic and geopolitical advisory firm, offered an entirely different insight, speaking about how MiFID II had actually been an immense boost to research shops, given that the unbundling requirements meant there was greater demand for research from specialists.
As with much of the discussion, it was encouraging to see how much agreement there was across the panel during the closing remarks. I made the point that regulators need to be nimble and adjust to circumstances as regulation evolves, building on the consensus that the focus now should be on implementing the regulation in the spirit of its intent. Aleksandra Palinska put this well when she remarked that we mustn’t introduce new rules until the current ones have been in place and properly analysed.
Perhaps most interestingly, when offering forecasts for the future, panellists offered quite different time frames within which to evaluate the success of MiFID II. The only regulator on the panel suggested the next month will be key, while others thought it would still be another three months at least before we really know. Either way, it was clear to all that evaluating and implementing a piece of regulation the size of MiFID II is an ongoing process with no definitive time frame.
I suggested early on during the panel that for regulation to evolve, a conversation needs to happen with all parts of the ecosystem. Yesterday’s event was certainly an example of this, and I look forward to many more such conversations in future.
Daniel Schlaepfer, March 22, 2018.