Conflicts of Interest in Investment Services: The Price and Uncertain Impact of MiFID's Regulatory Framework

Abstract

The Markets in Financial Instruments Directive (MiFID) lays down organizational and conduct-of-business rules on conflicts of interest of investment firms and banks providing investment services. It is easy to predict that, as a consequence of the home country control principle (investments firms and banks will have to comply with their own home country rules wherever they conduct their business within the EU), the MiFID will lead to de facto complete harmonisation of the rules on conflicts of interest: Member States will refrain from enacting further rules on conflicts of interest so as to avoid to put domestic firms at a competitive disadvantage vis-a-vis EC firms. This chapter inquires into this prospective uniformity, making two points. First, the uniformity will be more apparent than real, because in the absence of rules preventing a firm from acting in the presence of a conflict of interest and/or of rules dispensing it from the general fairness and honesty obligations where certain procedural or disclosure rules are complied with, there will be ample scope for ex post review of the firm's behaviour on the basis of such general obligations. It will be impossible, however, to ensure uniform EU-wide interpretation of such a fuzzy concept as fairness. The second point is that the uniform rules on conflicts of interests will lower the degree of investor protection in at least some Member States (namely, Italy) where regulation would be most needed in light of the lower degree of competition in the financial services industry, the lower level of investor education, and the unimpressive record of the financial services authority. The paper concludes that while the lack of real harmonisation is certainly an unintended result of MiFID, the fact that in some Member States investor protection may decrease due to the harmonisation process is best grasped in light of the objectives of EC securities regulation. Under the EC Treaty, the main purpose of harmonisation of financial services has traditionally been market integration. Investor protection is just an instrumental end, something to be pursued in order to attain market integration. But the two objectives may well conflict, and when they do, market integration easily prevails. Not only is market integration the real purpose of harmonisation under the Treaty, it is also the definite objective of the interest groups that favour EC regulation in this area, i.e. continental players from the main financial centres, whose quest for a single rulebook and a single set of rules is easy to understand. Local players, in good as well as in bad jurisdictions, are obviously, if not myopically, happy with the more lenient rules to which the various participants agree at the EC level. Leniency inevitably follows from the fact that investors' needs differ from country to country and that the securities industry is the only effective lobby. The final outcome is a diminution of legal protection for retail investors in bad jurisdictions - who are precisely those who most need such protection.