A new EU directive is described as the final piece of the single market puzzle. But does it live up to the billing, asks Caroline Madden  

The European Commission is touting it as the final piece of the single market puzzle. Compliance experts are calling it the most significant regulation since Basel II, and software firms are eyeing it up as potentially the biggest money-spinner since Y2K or the euro changeover. But will MiFID (Markets in Financial Instruments Directive) live up to its billing, or is it just a case of the emperor's new clothes?

In essence, MiFID aims to create a single, harmonised European market for investment services. If successful, the Directive will increase the level of protection and choice available to investors. It will also provide investment firms with an effective "single European passport", enabling them to offer cross-border services on the basis of their home country authorisation.

While the objective of this ambitious project may seem perfectly reasonable, the cracks are already beginning to show. The deadline for transposing the Directive into national law was January 31st, but so far only three EU members - Ireland, the UK and Romania - have notified the European Commission of full implementation of MiFID.

Charlie McCreevy, European Internal Market Commissioner, who has been doggedly championing this project, announced last month that the Commission has taken legal action against the 24 member states that missed the deadline.

"Further delays could well expose Europe's firms and banks to serious competitive disadvantage," he said. "There is a risk that member states could face legal action by private parties who might claim damages incurred because of late implementation of national legislation."

Although Ireland may be at forefront of MiFID implementation at a national level, many Irish investment firms are dragging their heels, despite the fact that the deadline is set for November 1st.

Large banking groups may have their MiFID implementation well underway, but Sonja Foley of KPMG says many medium-sized and small firms have been much slower to engage in the process. Why are these firms finding it so difficult?

"MiFID has an end-to-end nature of change. It changes how business is done, rather than just bringing in new controls," says Foley.

MiFID is one of the first European directives to be implemented using the Lamfalussy framework, a relatively new approach to developing EU financial services regulations which aims to enable faster lawmaking in response to market changes.

The prbolem with this, Foley explains, is that there was a lack of industry and market knowledge at the first level of the process, where political agreement is reached.

"There wasn't an appreciation of how far-ranging the proposals were. There is a view that if you were starting again, you would not end up with what we have. The Directive is trying to achieve too much, and the Lamfalussy process meant that there was no industry input at level one," she says.

Another reason that market operators are shying away from tackling MiFID is "regulation fatigue". Joe Beashel, partner at Matheson Ormsby Prentice, points out that Irish investment firms are already grappling with the new Consumer Protection Code, Sarbanes-Oxley, the Capital Requirements Directive and the third Money Laundering Directive.

Some firms are holding out for further guidance on a number of ambiguities and uncertainties that have yet to be ironed out. "I think they're waiting for more practical guidance, but I'm not sure that the guidance will give them the simple answers they're looking for," says Foley.

One such uncertainty is the fact that certain elements of MiFID (such as principles of best execution and suitability) overlap with the Consumer Protection Code.

The Financial Regulator has said that "the improvement in consumer protection introduced by the MiFID complements the Irish Code", but there are some industry concerns as to how the two pieces of legislation will actually be reconciled.

Another headache for firms is that, under MiFID, dealings in financial instruments will be subject to transparency requirements.

This means that the value of most such transactions will have to be reported to the Financial Regulator. According to Peter Osborne, consultant to McCann Fitzgerald, this will represent a particularly onerous burden for brokers and other firms and will have significant implications for their IT systems.

While the implementation and ongoing compliance with MiFID will be hugely costly for investment firms and banks that fall within its remit, it is hoped that it will open up valuable new opportunities.

"For an ambitious firm, one of the key strengths of MiFID is that they'll be able to go out hunting for business across a market of hundreds of millions of people, using what is now commonly accepted as the language of international finance - English - and having the pedigree of a well-established and well-respected international financial services background here in Dublin," says Osborne.

Of course, while the European market will open up to Irish firms providing MiFID services, the reverse is also true. There is likely to be more competition from foreign investment firms especially with the evolution of web-based services.

The European Commission hopes that MiFID will liberalise and modernise capital markets and drive competition, but Beashel predicts it will be five years before its will be fully apparent. "How effective or revolutionary MiFID is, only time will tell."