THE ESSENTIAL DIFFERENCE between the Anglo-Saxon culture of our trading islands and continental Europe can be summarised as follows: In Europe citizens assume that unless the law explicitly states that you can legally do something, they assume they can’t, whereas in our Anglo- Saxon culture unless the law specifically states that citizens cannot do something, we assume that it can be done. Nowhere is this more evident than the regulatory mess which trades under the benign but complex banner of MiFID I and MiFID II.
This is the EU regulation that overlays UK financial service regulation and it is the stick that the EU will use to continually beat the City of London with. Make no mistake, the Europeans will amend and change this legislation to best fit their goal of undermining the City of London and extract business to Frankfurt.
Now that the UK has officially left the EU it is imperative that we streamline our financial services regulatory environment as well as re-orient our taxation policies if the UK is to attract much needed long-term investment in innovative companies. There is a serious danger, however, that this could be overlooked in order to achieve EU dictated ‘equivalence’ giving access to EU markets. Current EU financial services compliance legislation (MiFID II Jan 2018 and MiFID Nov 2007) deliberately obstructs the Anglo-Saxon equity market culture in the UK due to the fact that traditionally European businesses have been funded by bank lending while Anglo-
Saxon businesses have relied on equity investors which is one reason why global companies are for the most part non-European.
By multiple interconnected and detailed local devices, EU financial services
regulation purposefully curtails both UK investors and small and start-up/SME companies and firms listed on the UK stock markets from raising equity capital from investors – bringing UK SME capital raising efforts down to EU levels. This is done in the name of “investor protection” but has much deeper consequences. Costly and time-consuming regulation has caused consolidation among smaller UK brokerage and advisory firms where their obligation to sell research, as opposed to distributing it freely, reduces the amount of research available on small and start-up companies in the UK. This has also allowed multinational investment banks to devastate independent research providers. Meanwhile MiFID II costs and obligations are forcing retail investors away from
direct share investment and into funds.
As a result institutional managed funds are now becoming too large to invest in SME companies and in some cases, they are also too big to trade on public exchanges without moving the market against them and thus causing a price spike – yet MiFID II regulations restrict the amount of trading that funds can do in dark pools.
The global financial service companies will pursue international regulatory “equivalence” which
is fine, but the EU should no longer be allowed to deploy and control this equivalence to retain its rules across the whole sector.
At an institutional level at the SME level
Allowing UK brokerage firms to give away research if they like should not be an offence
and indeed pre MiFID II this helped smaller firms to remain on investment managers’ brokerage lists. Forcing institutional investors to make research payments is reducing the amount of analyst coverage available on SME companies and thus reducing the amount of interest in the junior AIM market and in start-up companies. This is a prime example of unsatisfactory MiFID II consequential effects.
At an institutional level investing in the stock markets
The EU imposes something called Double Volume Caps which have a major impact on UK companies with large trading volumes by stopping sizeable trades. This decimates UK
market liquidity more than any other EU market and should be abandoned as it is strangling the London markets evidenced by its recently reduced opening hours which may be just what the EU wants.
UK authorities should be encouraging the management companies of large funds to be based in the UK in the same way as the EU use Dublin or Luxembourg. To do so requires markets that enable large funds to trade without disturbing the market if required. This could be done by creating an enterprise-zone-style scheme potentially based outside London. Conceivably, it could be used as part of the Northern regeneration.
At private client level
The requirement to issue separate ‘retail’ prospectuses in simplistic language should be removed. A new issue should only need one prospectus, this regulation is older than MiFID and needs reform.
Private clients are the group most likely to invest in smaller companies and AIM listed companies. The regulatory squeeze is, however, now pushing smaller companies towards other non-listed forms of capital raising and pushing private clients into collective investment products. Bureaucratic trading data collection before and after each trade should be streamlined so that it is actually protecting and informing consumer choices without increasing the cost and ease of investing. Meanwhile the requirement to send written advice to a client when all telephone calls are recorded should be removed.
At present VAT is not charged on fund management fees but is charged at 20% on individual investment advice fees. This makes financial products produced by banks, pension companies and insurers less expensive relative to more specialist investment advisory services.
Providing easily accessible financial education is probably the only effective way for the authorities to truly protect retail clients. Investors must understand “Caveat Emptor” buyer beware, not be shielded from it by an ever expanding octopus reach of regulation. One of the original aims of the FSA was investor education but this was jettisoned.
Unfortunately, some UK based law firms have found it lucrative to wallow in these regulatory complexities, perpetuating malaise by presenting their clients with imperfect solutions and the prospect of on-going jeopardy. The FSA, PRA and FCA themselves have not been able or seen fit to stop or bring attention to the deeper impact of destructive EU regulation on UK Financial Services.
It is no coincidence that the greatest global companies have grown up principally in the USA under the Anglo-Saxon model. There are virtually no European competitors for Amazon, Google, Facebook, Nividia and the countless other companies who have grown exponentially on the back of the data/communications revolution.
For Britain to flourish fully after Brexit, we need to junk MiFID I and II and return to the entrepreneurial model of financing cutting edge companies which served us so well for many generations.
This legislation is a straitjacket for the City of London, made deliberately obtuse so that we won’t realise until it is too late. The City is worth protecting, the Government needs to act fast and effectively.
Time for Gulliver to break free of the Lilliputian ropes and, yet again, save Europe from itself.
Rupert Lowe is a brexiteer, entrepreneur and farmer. Delighted to have been one of the last MEPs for the West Mids after first standing for Sir Jimmy Goldsmith’s Referendum Party in 1997. Involved in the football industry for over 20 years and ex-Chairman of Southampton FC, getting St Mary’s Stadium built and its fantastic youth academy up and running.
Image by skeeze from Pixabay
February 14, 2020