Regulation has never been bigger business – the Dodd-Frank reforms are pushing ahead in the US and Europe is grappling with Basel III and MiFID II, amongst others. In fact, in its bid to improve current MiFID legislation, which was put in place in November 2007 to increase competition and consumer protection in investment services, the EC was this week accused of rushing through the consultation process on MiFID II, giving market participants a window of just 8 weeks (which also fell over the Christmas holidays) to respond.
Financial News this week reported FSA and UK Treasury claims the process was "inappropriately curtailed" and "not conducive to sound policy-making" in its joint response to the consultation process.
One of the important lessons in the regulatory world is of unintended consequences – with the best will in the world regulators can’t always predict how financial markets will react to changes in the way they are governed. The introduction of MiFID back in November 2007 led to a slew of unintended consequences. Having encouraged trading to move away from the home stock exchanges (such as the London Stock Exchange) by making it easier for competition to establish itself, fragmentation of the trading function has made it difficult to have a single view of liquidity across the market. This in turn makes it more difficult for investors to determine where best to trade.
This is just one aspect which may indeed be addressed by MiFID II, but the lesson here is that in the complex world of financial market it’s prudent to take the time to understand from market participants how proposed changes to regulatory regimes could cause shifts in behaviour. As we’ve seen in recent years (Lehman’s, anyone?), markets are more interlinked than we realise.