November 1, 2007, is the long-anticipated date when the EU's new investment services regulatory regime under MiFID — the Markets in Financial Instruments Directive — should apply throughout the EU. There has been considerable focus on the state of readiness of investment firms to comply with the organizational and conduct of business requirements under the Directive, but as the application deadline approaches, there is also a question over the ability of EU Member States to ensure that the necessary national rules are in place. As of seven days before the deadline, only 16 of the 27 Member States had notified full transposition of the Directive to the European Commission and it seems almost certain that not all States will meet the November 1 deadline.
This state of affairs should not have arisen. MiFID is novel in that it is subject to staggered deadlines for transposition and application. As a Directive, MiFID must be implemented in each EU state by national rules and, subject to certain exceptions, investment firms will comply with the implementing rules of their home Member State, even when they carry on business in other EU States under the "home/host" principle. Member States were supposed to finalize their implementing law by January 31, 2007, with the aim of giving firms a further nine months to adapt their structures and business practices to that law before November 1. In fact, only the UK fully met the January transposition deadline, and the vast majority of States that have completed transposition have done so since the end of June.
Late transposition is not, therefore, simply a technical matter of Member States breaching their own obligations to meet implementation deadlines. It could affect firms' ability to comply with the regulatory requirements that will apply to them from November 1. The risks of a serious failure of compliance are mitigated by the fact that MiFID is supplemented by detailed implementing legislation that spells out more precisely the measures that firms must take to meet the high-level requirements of MiFID. Nevertheless, the clear intention of the European legislators in giving firms an extra nine months between transposition and application is being undermined.
Moreover, if, as seems inevitable, transposition is delayed after November 1 by some Member States, more serious problems may arise for firms that wish to carry on cross-border business. MiFID allows firms to provide investment services throughout the EU on the basis of authorization by the supervisory authority of their home Member State. This "passport" is dependent on the firm having a MiFID authorization and complying with the MiFID rules as transposed in the national law of its home State. If a firm's home State has not transposed MiFID, the legal basis for it to carry on investment services in States that have transposed is uncertain.
The potential problems are sufficiently real that the UK Financial Services Authority (FSA) is to adopt additional transitional rules and powers to deal with firms from late-transposing States that wish to continue carrying on investment business in the UK. The proposal would allow the FSA to impose a core set of MiFID requirements on such firms to plug the regulatory gap opened by the failure of the firms' home States to implement. Similarly, on October 22, 2007, the Committee of European Securities Regulators (CESR) published a statement setting out the practical arrangements agreed between regulators to allow firms from late-transposing States to continue their cross-border services and business through branches in other States provided that certain conditions are met. In brief, the existing conditions of authorization and operating rules to which the firm is subject in its home State must be comparable to those of MiFID.
It is regrettable that MiFID itself does not contain transitional provisions to deal with this foreseeable risk. In the absence of such provisions, these regulators' initiatives are welcome, as they provide greater legal certainty for firms carrying on business in the host State and confer the level of consumer protection intended by MiFID. However, the CESR agreement does not solve potential problems completely in that it does not appear to cover activities that were not subject to authorization under the Investment Services Directive (the predecessor to MiFID), but are regulated for the first time at an EU level, under MiFID (such as regulated activities concerning commodity derivatives, credit derivatives and financial contracts for differences). The FSA measures, by contrast, are expected to cover such business, so that, for example, UK branches of firms from late-transposing States will have a valid permission to continue their activities in the London commodities derivatives market.