We look at whether investors should be concerned.
One of the best things to happen to private investors in recent years has been the spread of cheap execution-only share dealing services. These let us buy and sell shares for a very small commission, usually in the region of £10 per trade, in contrast to the pre-internet days where the same deal might have cost several hundred pounds.
So when I heard rumours that the European Union (EU) was planning to ban execution-only share dealing we decided to investigate the matter.
Wearing my law student's hat I reckon that a complete ban is highly unlikely, but not totally out of the question thanks to the peculiarities of English law. Here's why.
The MiFID
A hornets' nest has been stirred up by the European Commission's consultation paper for the proposed "Markets in Financial Instruments Directive" (MiFID). Directives like this are intended to harmonise the single European market in all manner of goods and services. You can find the official copy of the proposal here (PDF file, 321K).
The Commission wishes to prevent firms from selling certain types of financial products to investors who have not received advice. Their intention is to ban the execution-only sale of "complex financial instruments"; derivatives and products which incorporate derivatives.
The part of the paper which is causing concern is section 7.2.1. Here the Commission has asked for feedback concerning the definition of "complex financial instrument" and it presents two options. They favour option A which treats shares as "non-complex financial instruments."
The problem is that option B implies that it is possible for shares to be classified as "complex."
So if option B applied then in theory we could no longer buy or sell shares on an execution-only basis. You'd have to pay an IFA, or other intermediary, for advice every time that you wanted to place a deal, even if you didn't need any advice!
Fun and games with European Law
One of the ways in which the EU passes laws is by creating directives like the MiFID. Directives are not laws in their own right; they must first be turned into national law by member states.
Directives create a minimum legal standard which all EU member states must follow. However, they also allow countries a considerable degree of leeway in how they are interpreted to allow for their different cultures and customs. This is where the problem starts.
The law of unintended consequences
Britain has an excellent record when it comes to implementing directives. Some might say too good since our legislative draughtsmen have developed the habit of "gold plating" directives when converting them to English law, creating laws which were never intended in the first place.
One of the best examples of gold-plating was the 12-page directive on abattoirs which the French slimmed down to a mere seven pages. In contrast the English version was 96 pages long! Extensive gold plating meant that this directive caused the closure of hundreds of abattoirs, even though the directive did not intend for this to happen.
So whilst the MiFID clearly doesn't intend not to ban execution-only share dealing, there is the chance that it might be banned thanks to gold plating!
A clash of legal cultures
You may have heard of the apocryphal newspaper headline which read: "Fog in channel, Europe cut off." But Britain isn't just separated from Europe by the English Channel and the North Sea; we are also divided by our very different legal systems.
Britain is one of two EU member states (Ireland is the other) that operates a "common law" legal system. In a common law system, judges can create new laws with their judgments. A considerable amount of English law, particularly contract law, was and is made by judges.
In contrast all other European member states (and the EU) follow the "civil law" tradition which has its origins in Roman law, specifically the Corpus Juris of Emperor Justinian I. In civil law systems, judges do not make laws and when their legislatures pass laws these are not be written with the same degree of precision as our Acts of Parliament.
If you want a further example of the differences between the two systems, in civil law judges play a major role in law enforcement. If you've seen the French TV series Spiral you'll know what happens; the investigating magistrate and prosecutors control much of the police investigation and often interview witnesses before the police.
In Britain the closest we have to a civil law judge is the BBC's fictional Judge John Deed. But a real life judge who acted like Deed would have been dismissed from office!
Different strokes for different folks
Britain also has a very different financial services market from most other EU member states. We prefer to buy our houses and have personal and company pensions. In contrast, Europeans prefer to rent and rely on the state pension. And a far lower proportion of continental Europeans directly own shares than in Britain.
So if the directive did end up banning execution-only share dealing, there wouldn't be much of a fuss from continental Europe, with the possible exceptions of Ireland and Holland whose financial service markets are much closer to those of Britain.
However, unless it is heavily gold-plated, the directive (when it appears) is unlikely to ban execution-only share dealing since it's targeted at products which contain derivatives. But it could catch some exchange-traded funds which use derivatives.
However, if the directive does classify shares as complex financial instruments, I'd expect that there will be a tremendous outcry from the financial services industry, private investors and a few MPs and MEPs.
The last time a ban on execution-only trading was suggested, back in 2003, a vigorous campaign quickly halted it in its tracks.
More from Tony Luckett:
> Try The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here for more details or to open an account.
