FIX EMEA Trading Conference 2017 - Dealing with MiFID II in a global regulatory framework
Ladies and Gentlemen, it's a pleasure to have been invited to speak to you today.
Not just on European financial services legislation including the omnipresent MiFID II, which will be covered in great detail over the course of today,
But also on the many interesting and surprising political events and upsets that took place last year
And a few more that are on the agenda for this year
The only certainty is that the politics isn’t over yet given that we have a busy schedule of European elections throughout 2017.
If you spoke to many of the politicians in Brussels at this time last year, the UK’s Brexit referendum was not top of their list of priorities and I suspect for many still isn’t.
The migration crisis
The expansionist tendencies of Russia
And the ever rumbling economic crisis in Greece
All were issues that the EU was created to solve, but whether it was migration, Russia or the Greek debt crisis, they did not seem to have the necessary tools to deal with any of the political urgencies that arose
So when “More Europe” was needed last year, it was sadly lacking.
In contrast, the Brexit referendum was perceived as a unilateral political decision by one political party in one member state.
Called to deal with internal political tensions and perhaps deal with the rise of UKIP.
A local problem unique and specific to the UK that was thought to have nothing to do with the EU as a whole.
In contrast, the ideals of the EU would suggest that collective action by the EU member states, in the face of an unprecedented number of migrants
caused by the situation in Syria and the wider region
Would have been the best way to deal with a migration crisis that had landed Southern European Member States like Greece and Italy with a humanitarian crisis they were ill equipped to deal with.
Yet EU action was limited and thwarted at every step of the way by unilateral actions by member states taken often without even consulting one another.
The big EU Schengen area project that caused consternation in the British media – although we were never legally obliged or even expected to participate being outside of Schengen
Was the idea of resettling some of those millions of migrants who had already landed in Italy and Greece, on small islands unable to deal with such influxes of people.
The proposal of the Commission in the end was to resettle a mere 20,000 people.
A drop in the ocean in comparison to the numbers already in Greece and Italy
Yet countries like Slovakia and Hungary responded with anger
Hungary started building its wall long before Donald Trump came on the political scene.
One notable statement from a Slovak minister cited the lack of mosques in his country as a reason that migrants wouldn't feel at home there.
Most embarrassingly when parts of this EU migrant programme did get off the ground, some migrants refused to get on buses destined for certain parts of the EU
Not deepest darkest Finland or poverty stricken rural Romania, but France!
The unilateral action of Germany to throw open its borders, originally hailed by left wing groups as a huge act of compassion, had terrible consequences for those countries on the transit routes to Germany, and in the social unrest that has followed.
The ironic thing is that the EU had existing legislation in place for dealing with refugees and asylum seekers, and it was exactly this legislation, the Dublin regulations, that Germany suspended unilaterally in order to under take its actions.
While experts and NGOs can argue over the benefits and negatives of different countries actions during this period
the one thing that was made patently clear to normal people across the EU at this time was that the EU was not capable of responding to a crisis of this magnitude.
The other issue that is supposed to be at the heart of the EU that has caused a loss in confidence in its ability to address the needs of citizens, is the Eurozone crisis.
The very current discussion about the latest IMF package for Greece has fallen off the front pages
Whereas we used to have pictures of Merkel and Sarkozy in deep discussions over how to save the Euro
We no longer even expect the largest countries in the Euro area to assist
A fudge of some kind is the most anyone hopes for
When the population of Greece was asked what they thought of the EU’s package of proposed reforms in Greece they voted no – and got the package anyway.
In their general election, mid crisis, They had voted for the most non-political elites possible, led by the leather jacket clad finance minister Varoufakis, and it made absolutely no difference to the outcome.
In that context, you can understand why political apathy and far right parties are on the rise all across the continent
The intent of Jean Claude Juncker when he was appointed European Commission President in 2009 was that the EU should be doing the big things better and slow down the flow of EU regulation on the small things.
No more regulating olive oil bottles in restaurants or the vacuum cleaners in our houses
And on the small things you can see they have made progress.
Juncker has proudly announced that his Commission has released an average of 23 proposals per year – in contrast to the 130 per year of previous Commissions.
A great achievement
But still we see little or no progress on the big things.
The reduction in Brussels’ interference on the legislative front might decrease people’s anger and annoyance with the EU but falls a long way short of seeing it as a benefit.
That is the backdrop to a significant number of the people of the EU going to the ballot box this year.
Elections will take place in the Netherlands, France, Germany, and Italy – to name a few.
All countries of the eurozone where politicians have had their hands tied by the EU on some of the most important policies affecting their people
Namely, The economy.
In France, the EU is seen as a liberaliser, trying to take away employment rights and disempower trade unions
Many French citizens believe that their Generous pension provisions and the privileged status of certain industries is being threatened by the outward looking EU, anxious to throw open its collective markets to the rest of the world.
The single market that so many in the U.K. see as the only good thing about the EU, is a Margaret Thatcher invention that many French politicians would like to see rolled back.
Twin this sentiment with apathy, the left behind generation we have heard so much about
And it is easy to understand why the only French politician to consistently poll at 25% of the vote is Marine Le Pen.
From a distance we can sit and evaluate the other candidates in the process,
Centre right Fillon with his current legal and moral issues over payments to his family
Leftist Hamon who makes Jeremy Corbyn seem almost Blairite
And many column inches have been devoted to the dark horse, the odd combination of former Socialist minister and Rothschild banker – Emmanuel Macron.
But as we have seen in election after election, pollsters and journalists no longer seem to be tapping into popular sentiment on how people feel about politicians
Is it simply that every time expectations have been raised by a new and charismatic figure, promising change, those expectations haven't been met?
Now, instead of simply not voting, people want to register dissent in the only way they can.
The rust belt of the United States has never received as much attention since it abandoned the Democrats and elected Donald Trump.
There are plenty of regions of the EU that would raise the exact same problems as Detroit when complaining about their government and how Socialist policies have let them down.
Germany has had the same political leader for the past 13 years,
stability and consistency are the two words most associated with Angela Merkel
As a German politician characterised it to me recently
“Why would we change a winning team?”
Yet Germany has been run by a grand coalition of centre left and centre right parties for a long time.
Neither can really promise to do anything differently.
I find it paradoxical that Martin Schulz, the former President of the European Parliament and Socialist candidate to replace Merkel is being billed as an outsider.
He was an MEP for the past 20 years.
He Served on their party board, took part in coalition negotiations
He was always right in the middle of it.
It feels like a cynical PR strategy to say he’s a fresh proposition
Exactly the kind of PR that voters are telling us they are sick of
That being said, I am not standing here predicting that the AFD – the Alternative für Deutschland party will come out from behind and win a majority
Nor am I necessarily saying that Marine Le Pen will out poll the rest and get over 50% in the first round of the French presidential elections-
although she could as a charismatic leader, appealing to both the hard left and the nationalistic right
The more likely scenario this year is what has been happening in the Netherlands, quietly for a long time.
Geert Wilders, despite being recently convicted of the equivalent of incitement for racial hatred
has succeeded not only in getting a large share of the vote in previous elections – even entering government for a brief period before he discovered it was easier to criticise government policies than make them
But has succeeded in moving the views of other mainstream political parties on significant issues.
The Netherlands Socialist led government has become a hardline voice alongside Germany in issues like bailouts and obeying Europe’s fiscal policies
The recent referendum on the EU’s trade and partnership deal with the Ukraine would never have been granted without the pressure from parties like Gert Wilders Freedom Party
While it may seem as though the EU elite in Brussels is ignoring Brexit and the rise of similar movements across the EU
Acting as A juggernaut seeing more integration as the solution to all problems
Now All of those national politicians in Germany, France and the Netherlands are having to face up to the fact that this is not a UK problem.
Facing the electorate on a one to one basis, knocking on doors and pounding the streets is a sobering experience.
Talking about the European project and the digital agenda or capital markets union does not persuade the old lady on the street why she should vote in favour of a pro-EU party.
I think therefore, that we will have some surprises in the many elections this year, but more importantly, the changes they will make within the Council of Ministers, made up of new Governments who have faced that animosity and ambivalence on a personal basis, will cause change in how the EU functions going forwards.
It may be too late for the UK to be part of that change, but it will have a big impact on the Brexit negotiations.
Even at the last EU summit, the final communique was all about a multi speed Europe,
A concept previously denounced as the buffet table approach to the EU
Yet now seen not just as a reality, but as a necessary degree of flexibility to allow the EU to continue in a state resembling its current form.
I have only heard one Member State’s ministers refer to the Brexit negotiations as a way to punish the U.K. and teach its own citizens not to vote against the EU.
It is not the dominant feeling in Brussels or any of the other national capitals I have visited lately
Rhetoric may be high and no doubt the media will be looking for drama in the negotiations in the coming months
Boring negotiations on the minutiae of fisheries policy and how to extract ourselves from the Open Skies policy while still allowing planes to land at Heathrow,
Let alone the many hundreds of EU regulations and directives that are thoroughly intertwined with U.K. law.
These things will not sell newspapers.
Yet the statements of politicians you have never heard of that whip up a media frenzy will be given air time – whether they are close to the negotiations or not.
In this, I fully agree with Donald Trump
We need to be sceptical of the mainstream media
When Theresa May says she will not give a running commentary on Brexit that is the right approach.
This will be a negotiation with many moving parts
And a discussion of red lines and negotiating platforms conducted via the red tops will not help anyone.
I would urge you to take the European media and the British media with a pinch of salt, particularly in the coming months of election fever.
A withdrawal on this scale has never been done before, and good will will be needed on both sides to work out the logistics
But I think the politics will ultimately work alongside the technical detail to get a good result
It is in both sides interest to get a deal that can be made to work
Trust and Confidence in the U.K. as a good neighbour is critical
Trust and confidence in our ability to regulate the capital markets, post crisis, will play a part in the broader negotiations too.
There may be alternatives for the UK without a deal- but none of them are particularly pleasant.
I suspect I was one of the few politicians who took part in the Brexit campaign who mentioned MiFID as a reason to stay in the EU.
Not exactly a door stop issue in rural Wales
But here in the City, I gave speeches, I hope, making clear, that voting Leave would not mean you didn't have to apply to rules of MiFIDII, EMIR or even SFTR
Many of the rules involved in these regulations stem from global agreements at Basel or at IOSCO that the Uk has led the charge in strengthening
Believing that global capital markets become more efficient the more coordinated their operations are.
In many ways, the UK regulators wanted to go further than the EU rules do, they certainly aren't about to start a bonfire of capital markets regulation in a post-EU Great Britain.
In the immediate term, I can tell you, there will be no stepping away from MiFID II implementation
On Jan 1st 2018, we will still be a fully paid up member of the EU and will still be implementing all of the rules
Post 2019, effective implementation of MiFID II will be even more important.
While the Great Repeal Bill that the UK government has announced will put existing EU legislation like MiFID directly onto the UK statute books, which provides an obvious path to being granted equivalence with by the EU
It is by no means certain
I, along with MEPs from other parts of the EU, have previously criticised the politicisation of the EU’s equivalence process.
The fact that it took four years for the agreement on EMIR derivatives clearing equivalence with the US,
two developed jurisdictions with strong legal safe guards for each other's investors was a huge frustration for me
The Commission released a paper earlier this week that summarised how equivalence currently worked and gave a list of how many jurisdictions had reached the necessary standards – in more cases than not, the list was none.
A damning inditement of the process if ever there was one.
However, I would not put the UK in the same category as these other jurisdictions.
Jurisdictions with different rules that need to be read, understood and taken in the context of their legal and supervisory systems
The UK has been applying laws not equivalent to the EU, but the laws of the EU for 40 years
ESMA does not have to look at UK enforcement of financial rules – they have all been reported to it since ESMA was formed
It should be a straightforward process.
But, politics will play a part
If Industry in London is seen as trying to circumvent rules of MiFID and the EU has no recourse to bodies like ESMA or in the most egregious of cases the European Court of Justice,
There will be a backlash.
If London is seen to be exploiting loopholes in MiFID, equivalence becomes less likely.
The PR game will go against you.
French newspapers talking about bankers in London exploiting mom and pop investors will sell.
No matter how strong you think the legal opinion you have that says you are obeying the letter of the law, the spirit matters in European legislation.
While we are still inside the EU, I am continuing my role as shadow rapporteur of MiFID II, working alongside rapporteur Markus Ferber to follow the process through to implementation.
As we have scrutinised the technical advice, delegated acts and regulatory technical standards released from the Commission our goal has been to ensure that what was agreed at the level 1 negotiation is carried through into the level 2, level 3 and Q and A by ESMA.
As the politicians responsible for some of the political decisions in the text, we see it as our duty to ensure that the letter and the spirit of the text is properly carried out.
We have done this by questioning ESMA on the content of its technical advice to the Commission on issues like research payments
We have written letters and conducted meetings on pre trade transparency in the fixed income markets, making clear that we did not intend for the equitisation of the fixed income markets
Securing a much more dynamic regime that will be phased in over a longer period of time should the market react negatively to increased transparency
Now that the structural level 2 measures are adopted, that is not the end of the process for the Parliament.
We are still closely following implementation
As we are told about different interpretations by different member states supervisors or market participants of certain provisions it is our collective responsibility to avoid divergences.
There is no point in having a European regime if it ends up being a patch work of different interpretations of the same wording.
Therefore, where we are hearing about such different interpretations between member states such as in the area of research payments and the SI regime, we are bringing them to the attention of ESMA and the Commission.
ESMAs primary role is to ensure supervisory convergence across the EU.
It was no secret that some member states did not really implement MiFID I, and that supervisory standards varied across the EU
Enforcement cases against member states take a long time and are unpopular on all sides
Creating one agency that would conduct peer reviews of the application of EU law and provide guidance on how to ensure one interpretation of how to apply the rules seemed a much more sensible way of achieving a true single market
Competitive distortions and a race to the bottom would be avoided and the burden of complying with different local rules would be reduced.
We gave ESMA the tools it needs to adjudicate where there are differences of interpretation and so are now continuing to help them with their job by raising these difference where we find them.
In some cases they have told us that they need more guidance from the European Commission, the legal guardian of the treaty
Empowered to give their interpretation of the EU law
Then, as in the case of whether or not a network of linked Sis in equities are possible we expect the Commission to reconfirm in its reply to us, our view that this is not in line with the current level 1 text
ESMA will then have a strong mandate to release Q and A that make this absolutely clear.
I hope that there will not be so many incidences of the Parliament needing to step in like this
I hope that in most cases the letter and spirit of MiFID II is pretty clear
And I have full faith that the FCA will be ensuring that it maintains the highest level of standards in the UK in order not to put any future equivalence decisions in jeopardy.
Anyone who is interpreting the Trump victory in the US and the leave vote in the UK as a mandate for deregulation of the financial sector is likely to be sorely mistaken.
The people of Merthyr Tydfil did not vote to give up their EU structural funds subsidies because they wanted to repeal the legislation on bankers bonuses
Middle America did not vote for a relaxed regulatory regime for Wall Street at the expense of Main Street.
The disaffection people are currently facing is not just targeted at politicians it is much wider.
The financial industry is still not rehabilitated from the financial crisis, subprime mortgages and even the PPI mis-selling scandal.
The letter sent by House Financial Services Committee Vice Chairman Patrick McHenry to Janet Yellen calling for more accountability of the Fed when it makes international rules was not about deregulation
It was about politicians feeling that their hands were tied by international rules they had not had oversight of that were negatively impacting their constituents.
The European Parliament passed a similar resolution a few months ago asking for the exact same thing.
While I have read a lot of commentary in the financial media about how this letter sent to Yellen is going to cause deregulation I have also read general condemnation in the main stream media that new deregulatory policies will cause another crisis.
Somewhere between these extremes is where we need to get to.
The regulatory zeal of 2010 certainly created some illogical and conflicting rules – Not least in those areas of cross over between markets and prudential regulators pervue
A review is long over due
The European Commission’s call for evidence on overlaps in the EU’s financial regulation needs to be followed through with real changes to the underlying legislation.
Donald Trump’s executive order looking at which areas of Dodd-Frank need to be reviewed should be taken seriously by industry, providing evidence of true conflicts and negative impacts so that the regulatory agencies in the US can act without fear of being accused of dialling back much needed reforms.
The financial services Industry needs to rebuild trust with consumers and investors, proving that they really are helpful to the economy and not a drag upon it.
But it's not all doom and gloom
There are plenty of positives to look forwards to as well.
For me, FinTech is a new sector looking to revitalise financial services, taking it closer to what consumers and investors actually want
Using big data analytics and algorithms to be more responsive and more efficient
Regulation has provided an impetus for a whole new group of companies providing RegTech solutions
And, as large institutions have to make investments in technology for compliance purposes they are more willing to get rid of old legacy systems and spend money on better ways of doing things.
I enjoy hearing about the new technology under development and the aspirations of many providers in areas like block chain.
It may not be the new internet as the oft quoted phrase goes, but it could make markets more efficient and better serve the needs of investors in a way that no piece of Financial services legislation ever could!
There are many challenges ahead of us
Some global in nature, others very local as we look at a new relationship with our EU neighbours
However, global regulatory fora have been valuable over the last few years in financial services and the banking sector
We need to continue along a path of enhanced regulatory cooperation and dialogue
The UK needs to lead much of these efforts through establishing a new regulatory forum for financial services with the EU and other European countries, with the US and regulators throughout Asia.
Enhanced cooperation will lead to increased trust and confidence and hopefully, over time, diminishes the threat of global regulatory arbitrage
And even reduces the requirement for individual equivalence decisions
My vision and wish is to move to an era of enhanced mutual recognition amount the worlds financial centres
But it can only be achieved if the spirit and letter of the rules are willingly followed.