Select Committee on European Scrutiny First Report



Final Report of the Committee of Wise Men on the regulation of the European securities markets (the Lamfalussy Committee).

Legal base:
Document originated: 15 February 2001
Forwarded to the Council: 23 February 2001
Deposited in Parliament: 2 March 2001
Department: HM Treasury
Basis of consideration: EM of 1 March 2001
Previous Committee Report: None
Discussed in Council: March 2001 European Council
Committee's assessment: Legally and politically important
Committee's decision: Cleared, but request to be kept informed


24.1  The EU Financial Services Action Plan (FSAP) was published in May 1999. According to the European Commission the Action Plan "details the work that has to be accomplished to reap the full benefits of the euro and to ensure the continued stability and competitiveness of EU financial markets."[41] Our predecessors reported on the Action Plan on 23 June 1999 and recommended it for debate. It was debated in European Standing Committee B on 25 November 1999, along with documents relating to taxation. Subsequently, our predecessors considered successive progress reports, most recently on 13 December 2000.[42]

24.2  Under the FSAP the target date of 2005 was set for completing the legislative programme of reforms for integrating financial services. However, it became widely perceived that the pace of implementation of the FSAP was too slow and a Committee of Wise Men, under the chairmanship of Alexandre Lamfalussy, was formed to address this.

The document

24.3  The main focus of the Lamfalussy Committee's report is reform of the securities sector of the EU financial services industry. The Lamfalussy Committee notes that:

    "An almost consensual view has emerged that the European Union's current regulatory framework is too slow, too rigid, complex and ill-adapted to the pace of global financial market change. Moreover almost everyone agrees that existing rules and regulations are implemented differently and that therefore inconsistencies occur in the treatment of the same type of business, which threatens to violate the pre-requisite of the competitive neutrality of supervision."

24.4  According to the report, some necessary European legislation is missing. For example, the Lamfalussy Committee identified the lack of commonly agreed guiding principles covering all financial services legislation. Disclosure rules and the degree of consumer protection and rules on market manipulation vary considerably between Member States. Consequently, trading costs for securities are higher than necessary and higher than in the US. In order to achieve greater integration of European capital markets and hence greater efficiency, the report recommends that:

  • the Commission conducts and publishes research quantifying the benefits of a single European market in financial services;

  • the Commission constructs indicators that could be used to benchmark progress towards the single market in financial services;

  • for completing a single European market in securities, the following six priority measures from the FSAP be adopted by the end of 2003:

      (a)  a single prospectus for issuers, with a mandatory shelf registration system;

      (b)  modernisation of admission-to-listing requirements and the introduction of a clear distinction between admission-to-listing and trading;

      (c)  generalisation of the home country principle (mutual recognition) to cover wholesale markets, including a clear definition of the professional investor;

      (d)  modernisation and expansion of investment rules for investment funds and pension funds;

      (e)  adoption of International Accounting Standards;

      (f)  a single system document ("passport") for providing authorisation for recognised stock markets (on the basis of the home country control principle).

  • all EU financial services legislation and regulatory work be governed by a set of over-arching objectives or principles;[43] and

  • regulation of the European securities markets be improved by the creation of a four-level approach, with measures being adopted using the EU's comitology procedures.[44]

Proposed regulation of the European securities market

24.5  The Lamfalussy Committee recommends a streamlined legislative process, involving four-levels, for approving legislation on financial regulation.[45] Under level 1, the Commission, European Parliament and Council adopt the principles underlying any EU legislation on regulation. As part of level 2, a committee of national regulators (the European Securities Regulators Committee - ESRC), European Commission and a committee of Members States (the European Securities Committee - ESC) would fill in technical details.[46] Under level 3, ESRC would work on strengthening co-ordination, such as carrying out peer reviews. The Report also proposes that, where appropriate, standards should be set by national regulators working together, rather than through legislation. Under level 4, the Commission would strengthen compliance with EU rules. This new structure is planned to be in operation by the end of 2001, with a target of 2005 for completing the legislative reforms.

24.6  The Lamfalussy Committee decided against creating a super-regulator, such as the powerful US Securities and Exchange Commission (SEC), citing the incompatibility of the legal systems and business cultures in different states.

24.7  The Lamfalussy proposals were endorsed at the Stockholm Council in March. However, individual members of the European Parliament and the Economic and Monetary Committee of the European Parliament (EP) have raised concerns about the proposed 4-level approach for speeding up the adoption of new rules, and specifically the use of comitology procedures. Their complaint is that, under this procedure, the role of the EP, specifically its right of co-decision, is reduced. A continuing dispute between the Commission and the EP will not help efforts to complete the legislative programme by 2005. The first two directives (market manipulation and prospectuses) that will use the proposed procedures have been proposed by the Commission. The response of Members of the EP to these directives may indicate how the dispute with the EP is likely to affect the legislative programme.

24.8  The Lamfalussy Committee also proposes a range of supporting measures, including: more Commission staff (especially to help with Level 4) and European Parliament staff (to deal with its oversight); an independent monitoring group to review progress; a full review in 2004 (or earlier if necessary); and extensive consultation on new measures under levels 1, 2 and 3.

The Government's view

24.9  In her Explanatory Memorandum of 1 March 2001, the then Economic Secretary to the Treasury (Melanie Johnson) told us:

    "The Government believes that the Lamfalussy Committee's recommendations are encouraging. This is subject to further consideration as they are taken forward and developed in the run­up to the Stockholm European Council."

The Minister set out the Government's response in terms of three important considerations:

    "(a)  The need to accelerate the implementation of the Financial Services Action Plan. This is the Report's main goal. Quantifying the benefits of a single European market in financial services will assist by focussing participants on the importance of the single market. By analysing the benefits it should also assist in prioritising Action Plan measures - determining which are the most important to take forward on the basis of their economic outcomes. The Report also proposes establishing quantitative indicators to act as benchmarks of progress towards a single market. These proposals on benefits and indicators are similar to ideas put forward in the Treasury's 17 July 2000 paper Completing a dynamic single European market in financial services and are welcome. The six priorities that the Report identifies are also similar to securities market priorities identified in the Treasury paper. The 4­level framework aims to deliver accelerated implementation of the Action Plan for the securities sector. Without such a framework this could be very difficult, and the 4­level framework is therefore also welcome.

    "(b)  In such a way that the specific Action Plan measures help UK business, customers and markets. The Action Plan's overall programme is helpful to UK businesses, customers and markets because of the benefits it aims to bring them through creation of a single market. The Report proposes sensible overarching objectives for EU financial services work. These will help ensure that the economic benefits of regulation exceeds its economic costs. The Government will, of course, need to continue to evaluate each EU measure very carefully. But the overarching objectives should assist in orienting them in helpful directions. The focus on quantifying benefits will also assist in ensuring that EU financial services measures are beneficial for the UK. And the Report's emphasis on transparency and consultation is also welcome in this respect.

    "(c)  Without harming the institutional balance within the EU, as set out in the Treaty. The Report has avoided proposals that would require Treaty alterations or otherwise upset the institutional balance. In particular, the comitology proposals are consistent with the 1999 Council Decision on comitology and with the Treaty. The transparency and consultation built into the process will assist in keeping the European Parliament informed about comitology proposals, enabling the EP to offer comments. And the EP will, of course, maintain its powers of co­decision for the Level 1 measures that will define the scope of the Level 2 comitology powers. The transparency and consultation will also assist national Parliamentary scrutiny. In particular, they will assist the Scrutiny Committees in evaluating how the Level 2 comitology powers have worked generally and in the identification of which specific Level 2 measures are particularly significant and should therefore be individually scrutinised (following established scrutiny practice in respect of comitology). The Wise Men recommend that, early in the development of a Level 1 measure, the Commission should also indicate the likely scope of the measure's Level 2 implementing powers. This would also assist in facilitating parliamentary scrutiny."


24.10  We welcome the endorsement of the Lamfalussy report at the Stockholm Council and look forward to seeing the creation of an efficient, single European market in financial services. We also welcome the proposals for greater transparency and consultation, which the Government says will assist national parliamentary scrutiny committees. We look forward to assessing how this actually works in practice. However, the hope that the Lamfalussy Committee's proposals will hasten moves towards an integrated single market can only be dampened by the continuing dispute between the Commission and the European Parliament over legislative procedures.

24.11  We look forward to considering the individual pieces of legislation under the new procedures. Meanwhile, we wish to be kept informed should the dispute between the Commission and the European Parliament continue. We have no further questions about the document and clear it accordingly.

41   COM(99) 630, Financial Services Action Plan, Progress Report.  Back

42  COM(00) 692/2, Financial Services Priorities and Progress, Third Report. Back

43   For example, to maintain confidence in the European securities markets, high levels of prudential supervision, ensure appropriate levels of consumer protection, respect subsidiarity, promote competition, encourage innovation. Back

44   The EU's comitology procedures are set out in Council Decision 1999/468/EC of 28 June 1999 and regulate the exercise by the Commission of implementing powers conferred on it by the Council and the EP. They are essentially intended for detailed measures to implement Community legislation. The complaint of the Economic and Monetary Committee of the EP is that where implementing measures are delegated under the comitology procedures the role of the EP is severely limited. Moreover, the distinction between what the Lamfalussy Committee calls 'core political principles' and therefore a matter for level 1, and technical implementation under level 4, is not always clear cut.  Back

45  The four-level approach recommended by the Lamfalussy Committee is shown in Annex 1. Back

46  On 6 June 2001, the European Commission announced the creation of European Securities Committee (ESC) to help create an integrated EU securities market by the end of 2003. Back

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Prepared 30 July 2001