Markets in Financial Instruments Directive – MiFID

1. The macroeconomic function of financial markets is unsettled and remains subject to debate among finance and economic scholars. Professor Stout makes a compelling case that the conventional view is exaggerated and not supported by adequate empirical evidence. The value of capital actually transferred to the firms for use in production of social wealth may be relatively minor. Undoubtedly, the market serves the function of reallocation of wealth among anonymous investors in the secondary market, and securities constitute an important asset class in a diversified portfolio.

2. With the exception of enforcement, investor protection that takes the form of addressing informational asymmetries and inequality of bargaining power in the market are largely ineffective. In the context of securities markets, the delivery of prospectuses, proxy statements, and annual reports, though important, do not serve the needs of the retail investor, as the latter lack the skills required to draw conclusions from these documents to make informed investment decisions. Rather, there may be an inverse correlation between volume of information and investor protection, since as volume increases investors are less likely to read and analyse information.

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3. Intensity of enforcement is the sine qua non of effective investor protection. Professor Coffee’s empirical data do not bode well for the European Union. Though consumer protection is a key policy of the European Union and takes a position within the Treaty of the European Union, and though the European Union has adopted numerous Consumer Protection Directives, in the context of financial markets, and focusing upon the most basic violation “insider trading”, Professor Coffee has demonstrated that the public authorities fail to enforce the law, and thereby fail to protect investors.

4. A corollary problem is the problem of access to justice. The MiFID Directive, characteristic of most Directives, leaves enforcement to the Member States. In addition, like most recent Directives, the Directive encourages non-judicial settlement of disputes through arbitration and other alternative dispute resolutions. Empirical data is needed to assess the availability, cost, and fairness of existing ADR institutions as to the prompt and just resolution of investment disputes.

5. MiFID has set the required legal framework to establish a Pan-European market through “best execution”, “transparency”, and “linkages”. The potential to create an active integrated financial market consisting of innovative platforms and facilities is made possible by MiFID.

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6. The “client classification” scheme contains the virtue of striving to force firms to accept responsibility to make informed and tailored recommendations to retail clients in portfolio management. The back office operations of client order handling rules, pre- and post-trade transparency of prices, routing alternatives, and provision of trade confirmations, reports and account statements are vital to the investor. However, with the exception of Article 19(5), the classification scheme, suitability and assessment requirements, and conservative limits on trading activity subject to provision of information, approvals, and warnings are paternalistic and inevitably expensive. In the typical Wall Street manner these costs will be borne by Main Street to the benefit of professional money managers.