European rules to cost City £1bn - FSA chief

The City faces a £1bn bill as a result of new European rules designed to create a single market in financial services, Britain's City watchdog warned yesterday.

The Financial Services Authority said that while the EU's Markets in Financial Instruments Directive (Mifid) could generate £200m a year in ongoing benefits, the rules were likely to land companies with substantial one-off compliance costs.

Some companies have already voiced fears that the costs will ultimately outweigh the benefits.

In its formal impact assessment, published yesterday, the FSA said it estimated that the industry's collective one-off implementation costs would be between £870m and £1bn. There will also be ongoing costs of around an extra £100m a year.

The largest companies are likely to hit with one-off bills of more than £10m each, while small businesses are set to stump up in the region of at least £10,000 - and possibly much more.

But Hector Sants, FSA managing director of wholesale and institutional markets, urged City companies to focus on the positives. He said: "It is in the nature of regulation that costs are relatively easier to define and quantify for firms, while benefits can be harder to pin down. As we have already foreshadowed, it is clear that implementation of Mifid represents a substantial cost to industry, particularly in the upfront years, but it does create the potential for revenue opportunities over the longer term. We would encourage firms to focus on these opportunities."

Mifid has been designed to try to create a pan- European market for financial services, increasing transparency and value for money for investors. It also aims to break down the monopolies held by some European stock exchanges.

The directive has been a catalyst in the creation of "Project Turquoise" - a pan-European share trading platform planned by seven investment banks that promises to slash the cost of share trading and provide a serious rival to Europe's established stock exchanges.

Although the financial services industry has known about the new directive for several years, the FSA's research found that more than half of the companies that will be affected have yet to budget for the increase in costs. Between 2,085 and 2,830 businesses are expected to be affected by the new rules.

A number of companies remain sceptical that Mifid will manage to deliver the benefits for which it is designed. Roger Turner, a partner at PricewaterhouseCoopers, said that while he supported the theory behind Mifid, he remained concerned about whether it would work in practice.

"The idea is that the legislation will make the European market more and more harmonised, but I just don't think that 25 different jurisdictions are going to interpret it in the same way," he said. "So it may end up being a lot of cost for not much benefit."

Mr Turner said that most UK financial services firms that want to trade in Europe already manage to do so.