Select Committee on European Scrutiny Ninth Report


COM(01) 280

COM(01) 281

Draft Directive on the prospectus to be published when securities are offered to the public or admitted to trading.

Draft Directive on insider dealing and market manipulation (Market Abuse).

Legal base: (a) Articles 44 and 95 EC; co-decision; QMV

(b) Article 95 EC; co-decision; QMV

Documents originated: 30 May 2001
Forwarded to the Council: 1 June 2001
Deposited in Parliament: 20 June 2001
Department: HM Treasury
Basis of consideration: (a) EM of 6 July 2001

(b) EM of 2 November 2001

Previous Committee Report: None; but see (22154) 6554/01: HC 152-i (2001-02), paragraph 24 (18 July 2001)
Discussed in Council: No date set
Committee's assessment: Legally and politically important
Committee's decision: Not cleared; further information requested


  2.1  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."[3] 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.

  2.2  The Lamfalussy report was published in February 2001 and was cleared by us on 18 July.[4] We noted that the Lamfalussy Committee had identified the lack of commonly agreed guiding principles underlying financial services legislation. For example, disclosure rules, the degree of consumer protection and rules on market manipulation varied considerably between Member States. Consequently, trading costs for securities were higher in the EU than necessary and higher than those in the US. Under the FSAP the target date of 2005 was set for completing the legislative programme of reforms for integrating financial services. The Lamfalussy report recommended the priority measures from the FSAP to be adopted by the end of 2003, including a single prospectus for issuers.

  2.3  The Lamfalussy Committee also recommended a streamlined legislative process, with four-levels, for approving legislation on financial regulation.[5] Under level 1, the Commission, European Parliament and Council adopt the framework or principles underlying any EU legislation on regulation. As part of level 2, a committee of national regulators (the European Securities Regulators Committee — ESRC), the European Commission and a committee of Member States (the European Securities Committee — ESC) would fill in technical details by means of secondary legislation.[6] Under level 3, ESRC would work on strengthening co-ordination, such as by carrying out peer reviews. Under level 4, the Commission would strengthen compliance with EU rules. This new structure was planned to be in operation by the end of 2001, with a target of 2005 for completing the legislative reforms. The first two directives to be proposed under the new streamlined procedures would relate to prospectuses for new capital issues and insider dealing and market manipulation (market abuse).

The documents

  2.4  Document (a) will allow new public issues of securities to be issued throughout the EU on the basis of a single offer document (i.e. prospectus) instead of producing prospectuses to satisfy up to 15 different sets of regulations. By avoiding the costs of issuing different prospectuses in each individual capital market in the EU, the "single passport" for issuers of securities is expected to reduce the cost of raising capital in the EU for all types of companies. According to the Government, the key features of the new system for the issue of prospectuses would be based on the following:

"—  The introduction of enhanced disclosure standards for the public offer of securities and admission to trading, that are in line with international standards;

—   The introduction of a registration document system for issuers whose securities are admitted to trading on regulated markets in order to ensure a yearly update of the key information concerning the issuer;[7]

—   The possibility to publicly offer securities, or admit securities to trading, in other member states, on the basis of a simple notification of the prospectus approved by the home competent authority;

—   The concentration of the responsibilities in the home administrative competent authority for approving prospectuses and disclosure information connected with admission to trading on a regulated market; and

—   Use of the comitology process, following the Stockholm European Council s endorsement of the Lamfalussy Report."

  2.5  The draft directive on prospectuses replaces two existing directives: 89/298/EEC of 17 April 1989, which concerns the prospectus to be published when transferable securities are offered to the public; and 80/390/EEC of 17 March 1980, which relates to the listing particulars for the admission of securities to official stock exchange listing.

  2.6  Document (b) seeks to set in place throughout the EU common standards against market abuse and to enhance investor confidence by updating the existing insider dealing regime. It covers all financial instruments accepted for trading on regulated markets within the EU. Whereas the current definition of insider trading refers to transferable securities, the proposed new definition would broadened this to cover financial instruments and commodities, thus including within the scope of insider dealing such financial derivatives as options on equity, futures and options on index. In her Explanatory Memorandum of 2 November 2001, the Economic Secretary to the Treasury (Ruth Kelly) points out that the definition of insider trading in the proposal

"is restricted to two types of behaviour (engaging in transactions or orders to trade, or the dissemination of information), which have, or would be likely to have, certain effects (for example, the giving of misleading signals as to the demand for, or supply or price of, financial instruments)."

  2.7  Articles 2, 3 and 4 define the types of behaviour, related to insider information, that are prohibited. Article 5 contains a general prohibition of manipulative behaviour and an exclusion (journalistic purposes). Article 6 requires that Member States ensure that issuers of financial instruments make fair disclosure and also sets out a number of specific exemptions to the rules laid down in Articles 2 to 4. Articles 7 and 8 set out the transactions exempted from the prohibition of insider dealing or market manipulation. Article 9 sets out the general scope of the directive. Article 10 covers the territoriality provisions. Article 11 requires that each Member State designate a single competent authority to ensure that the provisions implementing the directive are applied. Article 12 sets out a minimum list of requirements for powers to be given to the competent authority for the detection and investigation of market abuse. Article 13 requires members of the competent authority to exercise professional secrecy. Article 14 requires that Member States ensure the taking of appropriate measures (to be determined by them) where provisions of the directive have not been complied with. Article 15 requires that Member States ensure that decisions of their competent authorities are subject to the right to apply to the courts. Article 16 sets out the ways in which competent authorities should co-operate. Article 17 refers to the European Securities Committee and sets out the procedure by which this directive may be amended to take account of new developments in the markets and to ensure that co-operation between competent authorities remains effective.

The Government's view

  2.8  As regards the single passport prospectus, the Economic Secretary to the Treasury told us in her Explanatory Memorandum of 6 July 2001:

"The proposed directive does indeed provide for a single passport for companies wishing to raise capital across the EU. Other positive features include the following:

—   Home state control of processes in respect of prospectuses;

—   The use of shelf registration and incorporation by reference;

—   The inability of host countries to insist on the translation of documentation (other than a summary note) into their domestic language; and

—   The option for electronic dissemination of prospectuses.

"However, in spite of the stated aim of improving the framework for raising capital, the proposed directive makes the regulatory framework less clear. In particular, there is a great deal of ambiguity about the links to other related directives and their implications. Nevertheless, it does seem clear that the directive as it stands does not properly take account of the realities and complexities of the European securities' markets. There are, therefore, a number of issues that will require further careful consideration.

"First, the directive partially conflates three concepts that are linked but have, until now, been distinct;

—   Official listing,

—   Admissions to a regulated investment exchange, and

—   Offers of securities to the public.

"As a result the distinction between the ongoing information requirements applicable to companies that are officially listed, and such requirements applying to those which are not, would be reduced.

"Second, the directive provides for a number of exemptions. For example, exemptions are available for offers made to 'qualified investors'. However, both the scope for claiming exemptions, and the definition of qualified investor, are relatively narrow.

"Third, the use of shelf registration is mandatory rather than voluntary for companies which admit securities to trading. There will be some companies (particularly SMEs who want to raise capital infrequently) for whom shelf registration is more burdensome than producing a full prospectus each time they make an offer.

"Fourth, at present companies making public offers of securities in the UK must comply with the Public Offers of Securities Regulations. If these regulations are contravened, then investors are able to seek legal redress. There is ex post liability rather than ex ante regulation. The directive as worded would oblige the UK to set up a mechanism for approving all prospectuses and related adverts in advance of an issue."

  2.9  Underlying much of the criticism is the manner in which the consultations were conducted. The Minister told us that the Commission cites the consultation process carried out by FESCO (the Forum of European Securities Commissions) which issued a consultation paper in mid 2000 and then submitted a report to the EU Commission in January 2001. However, the Minister pointed out that:

"at the time it was not suggested to the financial services industry that FESCO was carrying out a consultation process on behalf of the Commission. Furthermore, the proposed directive differs from FESCO's consultation paper. As a result, the Government is concerned that the Commission has not consulted sufficiently with stakeholders in the EU's financial services industry.

"The Government has discussed the issues covered in the proposed directive with the UK Listing Authority and is conducting ongoing consultation on the directive with representatives of the financial services industry."

  2.10  The Regulatory Impact Assessment (RIA) indicates that, despite its intentions, the draft proposal on prospectuses makes the regulatory framework less clear and, amongst other things, could lead to substantial costs being imposed on companies. For example, the need for the regulatory authorities to approve prospectuses in advance could cause costly delays, possibly resulting in companies missing attractive opportunities to raise finance; the recurrent cost of shelf registration for companies listed on the regulated market, but not on the Official List, could lead to companies leaving the OFEX and AIM;[8] and the narrowing of exemptions and definitions of qualified investor means that more securities would require a prospectus, encouraging important markets, such as the eurobond markets, to move off-shore to less regulated financial centres. Overall, the RIA concludes,

"as the directive is currently worded, there is a danger that the additional costs on companies not raising capital outside of the UK could substantially outweigh the likely benefits, particularly for SMEs".

  2.11  As regards document (b) on market abuse, the Minister told us

"The Government has recently introduced a rigorous new regime to counter market abuse in UK markets.

"The Government supports the Commission's objectives of developing the single market in financial services and promoting the integrity of the single market. The proposal for the directive creates for the first time an EU­wide regime to counter market manipulation and updates the existing insider dealing provisions to enable them to benefit from the enhanced co­operation measures. The Government welcomes the emphasis in the new proposal on improved co­operation between competent authorities.

"However, the proposal offers an effects­based regime without the balance of safeguards to protect those acting in good faith or in accordance with accepted norms of market behaviour.

"The proposal also takes a different approach to territoriality to that of the UK regime. The proposal takes the view that the country where the alleged abuser is located should have responsibility in taking enforcement actions. However the UK view is that the country where the alleged abused-market is located should have responsibility, as it would be most affected and more likely to recognize the abuse.

"The Government will examine the proposal carefully to ensure that there is no diminution in the level of protection from market manipulation currently enjoyed by UK markets, that the level of regulation proposed is proportionate and consistent with the goal of advancing the single market in financial services, and that any consequent changes to the UK's new market abuse regime are kept to a minimum.

"This is one of the first directives proposed by the Commission following the Lamfalussy Report on regulation of European financial markets. The two relevant Lamfalussy recommendations were:

—   for greater consultation on directives before they were proposed; and

—   for increased use of comitology provisions in directives to enable quicker passage of more flexible single market legislation. The principles of legislation should, however, still be laid down by the Council and European Parliament in measures subject to co­decisions.

"The Commission's consultation was not as extensive as Lamfalussy envisaged and the views of stakeholders will therefore need to be sought and reflected upon. The Government will also look carefully at how the Directive seeks to implement the Lamfalussy recommendations on comitology."


  2.12  When considering the Lamfalussy report earlier this year, we were mindful that the Lamfalussy procedures had the potential to allow poorly-drafted legislation to be adopted without adequate consultation and reflection. We said that we would assess how the process worked in practice. We now consider the first two pieces of draft legislation from the Commission following the Lamfalussy procedures.

  2.13  On the face of it, the prospect of replacing 15 different regulatory regimes with one harmonised framework should provide unambiguous benefits in terms of reduced costs of raising capital and wider access to capital markets. Unfortunately, the Commission has managed to produce directives on prospectuses and market abuse that could prove so burdensome that they could have the opposite effect to those intended. There are widespread concerns that, as drafted, the directive on a "single passport" prospectus could deter companies, typically SMEs that make only occasional use of capital markets, from using capital markets. The proposal could also have the unintended effect of encouraging the eurobond market to move "offshore" to countries offering a less burdensome regulatory regime. As the Financial Times recently made clear, "unified rules on prospectuses improve capital markets only if they avoid imposing an excessively additional regulatory burden."[9] In this respect, these Commission's proposals have failed.

  2.14  A potential problem of the streamlined procedure recommended by Lamfalussy, as has been recognised, is that, without proper consultation and reflection, poorly-drafted legislation could be adopted. The documents now before us highlight this possibility. Indeed, as currently drafted, it seems that the proposal for a "single passport" could result in the potential benefits being overwhelmed by unnecessary extra costs.

  2.15  We request further information on how negotiations have been proceeding on both directives and a detailed account of the discussions in ECOFIN. We would also like the Government to set out more fully the concerns it has referred to about the prospectus directive and its relationship with other existing directives.

  2.16   Meanwhile, we leave both documents uncleared.



   LEVEL 1




3  Financial services Action Plan, Progress Report (20749) 13305/99; see HC 23-v (1999-2000), paragraph 12 (19 January 2000). Back

4  (22154) 6554/01; see headnote to this paragraph. Back

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

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

7  Known as shelf registration. Back

8   OFEX (market for unlisted and unquoted securities off-exchange) and AIM (Alternative Investment Market)  Back

9  Financial Times, "Poor Prospect", 21 November 2001. Back

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