MiFID Overview
The Markets in Financial Instruments Directive [MiFID] is the regulatory equivalent of the deregulatory 1987 “Big Bang” that shaped the current European financial markets.
The MiFID and its Level 2 implementing Directive are complex, comprehensive, and challenging for interpretive construction, given the novelty of the Directive, the absence of judicial decisions, and its opaque language.
In Lamfalussy terms, the MiFID is a Level 1 document containing “high principles” of governance.
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The level 2 Directive provides “concrete organisational requirements and procedures for investment firms” performing activities governed by the Directives (Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Recital 3).
This website selects certain investor protection provisions of the MiFID for examination, within the larger context of the macroeconomic function of financial markets, and the theoretical underpinnings of investor protection in the United States and in Europe, as well as the practical track record of enforcement of investor protections in Europe to evaluate the effectiveness of investor protection under the new instruments.
The conclusions reached indicate that the style of investor protection envisaged within MFID is likely to impose substantial costs upon investors to the benefit of investment firms, while probably falling short of fulfilling the promises of the risk/reward equation. The effectiveness of investor protection, which depends exclusively upon the quality of enforcement, is questionable given the EU passive enforcement style toward financial market misconduct. In addition, as the recent global financial crisis has demonstrated a fundamental assumption of the MiFID is false: the need to interpose a “professional investment advisor” between the investor and the markets.
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Countless examples from history related to scandals and market crashes support this contingent truth. the MiFID, if successful, will achieve its economic objectives of financing the markets with investor savings, and thereby achieving the conventionally accepted theory of the macroeconomic function of financial markets. Nevertheless, the question remains are the investor protection provisions of MiFID an Investor blessing or an investor execution.
