Head of A&O's London financial services regulation
team Damian Carolan examines a range of issues, including
whether Mifid II will achieve its core aim of making things
fairer for the end user, how its implementation has been
progressing and what unintended consequences Mifid II may have.
Among the latter is the risk of inconsistent approaches across
jurisdictions, whether the investor safety vs regulatory burden
balance has been properly calibrated, what Brexit means for
Mifid II and whether genuine third country equivalence is
What perspective do you most often approach Mifid II from
and how has this evolved over the last 12 months?
At this stage, everyone is in the throes of implementation
and that has been the case for the last six months. Everyone is
frankly straining to get as close as they can to a compliant
state by end of year, which is tricky when it is not clear what
a compliant state is. The work has a range of flavours: there
are issues remaining around interpretation and there is also
the heavy lifting challenge of changing massive business
My work has moved on significantly from the earlier stages
where there was a lot of interpretation, lobbying and shaping
of the legislation. Normally you would expect that kind of
activity to have ceased completely at this stage in the
process, but given the ongoing uncertainty there continues to
be an element of actually trying to shape the policy. We are
having to react to de facto changes resulting from the European
Securities and Markets Authority's (Esma) Q&A and other
examples of policy making on the hoof that continue to come
In terms of the demands on the various groups, within the
sell-side there is a host of good old-fashioned implementation
activities to be carried out. For buy-side, there are new ways
of servicing their clients and interacting with the wider
markets that they need to get to grips with. We are also
helping on the infrastructure side, shaping the whole host of
new market venues that will be used.
What does Mifid II represent in terms of the application of
extraterritorial and multijurisdictional rules? What are the
long-term impacts of this sort of rule-making and is there
going to be a point where regulators/market participants say
enough is enough?
The extraterritorial impact question has several angles. The
overall risk, as each geographical bloc takes an
ever-increasing focus on the level and type of compliance
expected within their geography, is that the threat of
siloisation grows. If any one regime does not 'bake in' these
concepts of equivalence and the ability to interact globally in
a way that is commercially viable but also meets the purposes
of the regulation, then we could see problems.
As for the point at which market participants say enough is
enough, I do not think we are there yet, but that is based on
the premise that in implementing Mifid II there is scope for
using the tools available to actually still oil the wheels of
international finance. That does not mean open borders, but
rather keeping open the channels for doing business that are
there today with the right protections around them. It needs an
element of pragmatism on the part of the regulators, otherwise
one risks seeing genuine impact on market behaviours and
liquidity and therefore, client choice, pricing and cost.
We often hear from non-EU lawyers and non-EU firms (such as
asset managers) that Mifid II is a European issue that only
effects European entities – to what extent is this
I am afraid that is not correct, and I think the wider world
is waking up to that now. It is more that we are still learning
exactly what the extent of that impact for non-EU firms is,
based on certain uncertainties. Within asset management, for
example, there has been a debate about how far delegation to
non-EU asset managers requires the export of Mifid obligations.
That is a live debate and its impact is actually more critical
Another example is that under Mifid II you will not be able
to pick up the phone to your European broker and just do a
large trade by phone. That broker will need to think very hard
about how it will handle your order, and whether its behaviour
attracts European transparency obligations – which of
course is something that people are quite sensitive to. The way
in which you interact with EU service providers and venues will
potentially impact your visibility to the market and the way
you achieve execution, so there are a variety of effects
– direct and indirect – that will continue to
play out as we come to the final stage of implementation.
Do you think it will change the composition of markets with
fewer US/Asian participants in Europe than before?
It is hard to say. It is important to note that there
probably are not too many direct service providers into the EU
from the US and Asia today in fact, because the existing
licensing regimes at play do not make it easy for them to
provide services directly on onshore clients. In theory, Mifid
II harmonises the borders of Europe, so I do not expect that
situation to change in a positive way. It may narrow the
The only thing that could be a game changer here is the
point at which Europe uses the powers open to it to recognise a
third country regime as equivalent for all purposes, and those
third country firms attract a passport to provide wholesale
services across Europe. There is a lot of speculation about
whether any non-EU regime will ever achieve that benchmark of
equivalence to Mifid II, but if they do, that will open a far
wider channel. We will wait to see.
What will likely be the impact on the large research
departments of banks?
It is hard to speculate what the research departments of
banks will look like in future. There is no doubt that users of
research who are regulated entities – like asset
managers – will be thinking much harder about its
usage and value, rejecting anything which does not bring what
they see as the requisite value.
We have seen recently some asset managers giving public
indications regarding how they intend to pay for research
– whether they plan to pass the cost on to clients by
use of research budgets, or pay for it from their own P&L.
Particularly where firms are paying for it themselves, or
transmitting costs on to clients in a transparent manner, they
will think a lot more carefully about what they need and from
who. Does that mean that the sheer volume of research generated
will reduce? Possibly, but it is still too early to say for
Protecting investors is at the core of Mifid II –
do you think Mifid II will make things fairer for the end user?
Or will it simply increase costs and reduce choice?
Protecting investors is at the core of Mifid II, and we
cannot criticise that as the aim of a piece of regulation. My
take is that one always needs to remember that investor
protection is part of a balancing act of achieving an effective
financial market. You could achieve the highest level of
investor protection on the planet, but services would be so
restricted and expensive that no one would be able to use them.
That, in turn, contradicts other goals.
Investor protection is important but we must also consider
its wider effects. To point out an example of the challenges
with Mifid II's approach to investor protection, one is the
clear desire to treat professional clients in broadly the same
manner as retail clients. That is based on a philosophical view
that professional clients are not sophisticated enough to look
after themselves. That, when taken on a rigid basis, makes it
very expensive to provide sophisticated services to
sophisticated users, when in many cases neither service
provider nor recipient wants that. So a range of these services
will not bring a greater level of protection, but will
undoubtedly bring additional cost.
From a purely European perspective, how might Brexit impact
Mifid II, if at all?
In theory, the answer should be none at all. Inevitably
however, at the practical level, many questions asked about
Mifid II now have a Brexit political overlay. One example which
has been debated since Mifid I, and continues to be debated, is
the ability of an EU firm to utilise its passport to provide
services to European clients from a non-EU branch. That has
always been an open question, and never had a huge amount of
focus. But in a post-Brexit world, where London is suddenly an
offshore location, that has critical implications. So, Brexit
will therefore play into the interpretation of that question
and also the seriousness of the consequences.
Partner, Allen & Overy
T: +44 20 3088 2495
Damian Carolan advises financial institutions on
national and international regulations, with a
particular focus on derivatives and securities
regulation and the development of new markets and
clearing settlement systems.
He advises banks on regulatory reform, including
changes to custody requirements, payment systems and
the authorisation processes to open new branches and
subsidiaries. Carolan has also assisted industry
associations with developing standard form
documentation and submitting responses to consultations
Carolan is ranked as a leading individual for
regulatory matters by Chambers & Partners and as a
leading lawyer by IFLR1000 and is regularly quoted in
the press on regulatory matters.