TL;DR Breakdown
- U.S. banks face challenges with Mifid II EU rules, impacting their operations with European clients.
- The U.S. “free pass” shielding banks from EU regulations is expiring.
- Mifid II separates research costs from trading costs, causing issues with U.S. regulations.
Regulation is a word that often leaves businesses unsettled, and U.S. banks are currently learning this lesson in real-time. They are grappling with a regulatory dilemma that brings them face to face with the European Union’s sweeping financial regulation overhaul—Mifid II.
An unexpected regulatory challenge
For decades, banks worldwide have grumbled about the pervasive influence of U.S. regulation, arguing that they were often coerced into adopting Washington’s rules.
However, the tables have turned. This time, it’s Wall Street, traditionally the exporter of financial standards, that finds itself on the receiving end of an EU regulatory bombshell.
This critical situation unfolds as U.S. banks and brokers servicing European clients face the daunting prospect of losing a U.S. regulatory “free pass”.
This safeguard has so far shielded them from the domestic regulatory consequences of adhering to EU stipulations regarding payment methods for their research.
Under the pre-2018 status quo, payment for research services – encompassing written reports and services such as industry conferences and access to company executives – was typically bundled with trading costs.
This meant that clients ‘compensated’ for research by steering trades and associated commissions towards specific brokers.
However, the EU’s Markets in Financial Instruments Directive or Mifid II, implemented in 2018, decisively split the two, forcing investors to pay directly for research.
This move aimed to shatter what some perceived as excessively comfortable ties between banks and fund managers, ties that obfuscated costs and the specific services that end-clients paid for.
U.S. banks are now feeling the pinch of this paradigm shift. One major pain point stems from enduring U.S. regulations requiring any entity selling research to register as an investment advisor, thereby imposing another layer of rules.
Unfortunately for U.S. banks, a five-year waiver from U.S. regulators, which protected them from this requirement, is on the brink of expiry.
This predicament leaves them in a quandary, as investment advisor registration ranges from being a tedious process to potentially affecting other investment banking operations.
In a recent interaction with reporters, Securities and Exchange Commission (SEC) chair Gary Gensler made it clear that the industry should not hold its breath for an extension of the waiver.
Faced with this reality, financial firms are scurrying to find ways to sidestep the necessity of investment advisor registration.
This complex regulatory puzzle doesn’t have a one-size-fits-all solution. It’s further complicated by the fact that banks aren’t uniform in their approach to these challenges.
For instance, both Bank of America and Jefferies have already registered units as investment advisors in the wake of Mifid II, demonstrating that it’s feasible without crippling investment banking activities.
Nonetheless, the task of reorganizing intricate structures merely to accommodate a foreign rule, when their regulated activities remain unchanged, is causing much frustration among brokers.
Adding another dimension to this scenario, a bipartisan bill that could extend the waiver for six months and mandate the SEC to reevaluate the issue was approved by the U.S. House Financial Services Committee last month.
While the bill’s enactment before the deadline is doubtful, it could still potentially come into effect in the upcoming months.
As U.S. banks wade through these turbulent regulatory waters, they echo a sentiment long expressed by European banks doing business in the U.S.—having to comply with regulations from a foreign land can be a challenging endeavor.
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