Bankers Are Learning to Love MiFID, If Not Understand It

(Bloomberg Gadfly) -- You don't have to understand regulations to think they're okay.

In an interview with Bloomberg Markets, UBS Group AG CEO Sergio Ermotti is asked whether MiFID II -- a new round of European Union rules for the financial industry -- will succeed. The regulations are already unnerving investors: implementing them is expected to cost $2.1 billion

Ermotti's response is illuminating.

"I guess so, if they [MiFID II] want to create transparency. I don't know what the final nonstated mission of regulation is."

The final nonstated mission of regulation. In other words: What are all these rules aiming for and do they make sense?

Back in 2009, the world's most powerful nations could get together and agree that it was time for sweeping reforms, global regulation and curbs on risk-taking to protect the real economy. Today, politicians in Europe and the U.S. want to roll back reforms or stop new ones -- again, to protect the real economy. It's confusing.

MiFID II is no different. The original MiFID promised a single market for investment services by bringing down barriers to trade and boosting competition. But regulators have since admitted to unintended consequences. More competition among stock markets and trading venues, for example, eventually encouraged the opaque dark pools and high-speed computer trading that MiFID II is now trying to curb. Yet the broad mission statement of safer, more transparent markets remains the same.

To his credit, Ermotti doesn't indulge in a traditional banker's gripe about pesky regulators sticking their nose into businesses they don't understand. He says he's confused, but he also says the rules create "an opportunity." So as MiFID II's 1,500 pages of rules are set to drag an increasing amount of lucrative trading into a more regulated future, this bank CEO seems satisfied. 

One reason for that is high regulatory barriers are good for those who live behind them. When the first MiFID was being rolled out in 2006, 15 percent of people polled in a survey by KPMG and the Economist said regulatory barriers to new competitors would rise. That's still true. Not every asset manager is going to be able to afford MiFID II's higher cost of investment research, which could be as much as $5 million extra annually, according to Bloomberg News. And if investors tighten their belt, the already dwindling ranks of small independent brokers and trading shops may get thinner.

It's a view that's playing out worldwide, not just in the corridors of Brussels. Britain's vote to leave the European Union was cheered by rich investors like Crispin Odey, who saw the opportunity to slash red tape and create a freewheeling Singapore-on-Thames. Yet as the Brexit deadline looms, bankers are both publicly and privately, straining to defend the status quo.

Giving British rules so-called equivalence with MiFID II, even if it means the country will take the rules without having any say in making them, would make financiers' life easier -- and make it harder for smaller players to nip at their heels. In the U.S., too, bankers say they're unwilling to push for a reversal of the Dodd-Frank rules that even Donald Trump wants to gut; they fear it would encourage more divergence of rules, not the convergence they want. Meanwhile, it's Odey who's complaining loudest.

Some bankers may not understand what global regulation is heading towards. But they can still feel good about the opportunity it throws up along the way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.