Lack of legal action over Mifid so far

Despite last year’s warnings from regulators saying they would punish financial institutions who had not complied with the Markets in Financial Instruments Directive (Mifid) in time for the November 1 deadline, no European Union member states or UK-based financial firms have faced litigation so far.

The directive requires investment firms to update their IT systems to publish trade and transaction reports, and demands that they be able to prove they have traded according to best execution guidelines, and store data post-trade. Firms also have to disclose fees and commissions prior to providing investment services and classify clients into three categories: professional, eligible counterparty and retail, which affects how investments firms do business with the different types of client. Regulators said they would be tough on firms that did not meet the requirements in time.

Several European regulators had not finalised their approach to Mifid by the time it came into force. According to the European Commission's Lamfalussy League Table, which tracks the progress of European regulators in adopting the rules, the Czech Republic, Spain, Hungary, the Netherlands and Poland had not transposed all the regulations as of November 13.

“The European Commission has not taken any action against European Union member states that did not transpose Mifid rules in time for the November 1, 2007 deadline,” said Bob Penn, partner at law firm Allen & Overy in London.

The UK’s Financial Services Authority (FSA) was one of the national regulators that did manage to interpret the rules into British law in time. However, Penn highlighted the fact the regulator has been lenient towards British firms so far, even though it has now been three months since the rules came into effect.

“To my knowledge, the FSA has not taken any legal action against any UK investment firms as yet,” he added.

Some have drawn parallels to situations after the FSA introduced previous financial regulations, where the regulator only started fining firms months after rules came into effect.

“It is not surprising the FSA has not taken legal action over Mifid so far. As was the case with enforcing other new regulations, such as the Financial Services and Markets Act 2000, the regulator is giving firms some time before it starts taking legal action,” said Simon Gleeson, partner at law firm Clifford Chance in London.

While the FSA’s first prohibition order under the Financial Services and Markets Act 2000 was in April 2002 against Sunderland-based independent financial adviser Albion Management Services, the authority said it does issue private warnings to companies that are not made public knowledge.

Gleeson said the largest banks have made the most effort to comply with Mifid, as they would be likely to be targeted for high-profile legal cases if they did not make an effort, while some small and medium-sized investment firms may still not have met all the requirements.

Even though Mifid came into effect several months ago, there is still some uncertainty over final agreements of the rulings. Because the regulations are international, national regulators in Europe may have different interpretations of the rulings. On issues such as customer documentation and fee disclosure the European Community is still far from reaching a consensus on how to apply rulings, according to Gleeson.

See also:
Simply the best?
Is IT Mifid-ready?
European countries miss January Mifid deadline