14. INVESTMENT SERVICES AND REGULATED
MARKETS
(24025)
14796/02
COM(02) 625
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Draft Directive on investment services and regulated markets, and amending Council Directives 85/611/EEC and 93/6/EEC and European Parliament and Council Directive 2000/12/EC.
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| Legal base: | Article 47(2) EC; co-decision; qualified majority voting
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| Department: | HM Treasury
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| Basis of consideration: | Minister's letter of 8 January 2003
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| Previous Committee Report: | HC 63-v (2002-03), paragraph 5 (18 December 2002)
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| To be discussed in Council: | Not known
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| Committee's assessment: | Politically important
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| Committee's decision: | Cleared
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Background
14.1 The 1993 Investment Services Directive (ISD), 93/22/EEC[35]
sets the conditions for authorised investment firms and banks
to provide investment services in other Member States on the basis
of home state authorisation and supervision, and gives the right
of direct or remote access to any authorised ISD firm to trade
on regulated markets in other Member States. As part of the Financial
Services Action Plan the Commission has proposed a revised ISD
with the objective of providing for an integrated EU securities
market and for the effective cross-border provision of investment
services. Two main regulatory principles underlying the draft
Directive are: the protection of investors and market integrity;
and the promotion of fair, transparent, efficient and integrated
financial markets.
14.2 We considered the draft Directive last month[36]
and left it uncleared whilst awaiting more information from the
Financial Secretary to the Treasury (Ruth Kelly) about the views
of the interested parties consulted by her department.
The Minister's letter
14.3 The Minister has now written to us with a helpful
account of the views of those consulted. She says it seems that
the overall feeling of the industry is one of qualified support.
The industry generally welcomes:
- the move towards country of origin regulation, which is seen
as a robust approach to creating a single market in investment
services;
- the abolition of the concentration rule (which effectively
requires order execution only business[37]
to take place on-exchange); and
- the robust post-trade transparency regime and the limiting
of it to equity transactions.
These are the points that the Minister had earlier highlighted
to us as being particularly welcome to the Government.[38]
14.4 However the Minister also tells us that some market
participants are very concerned and important reservations have
been expressed. These include the following points, some of which
the Minister had already highlighted to us in her Explanatory
Memorandum of 9 December 2002 as government concerns:
- the possible impact of the proposed conduct of business
rules on execution-only business. There is a preference for
retail customers to be able to continue trading on an execution-only
basis where they do not want investment advice;
- on the client order handling rules the general view
is that, if there is a strong 'best execution rule'[39]
to protect retail customers, there is no justification for either
a 'default rule' or a 'limit order handling rule'.[40]
The default rule is seen as inappropriately implying that on-exchange
execution is best — and therefore effectively reintroduces
the concentration rule;
- the mandatory quote disclosure rule - requiring publication
of price and volume details of off-exchange trades - is thought
at best unnecessary and at worst totally unworkable. The rule
risks reducing liquidity and market efficiency, leading to worse
outcomes for investors. It could put EU markets at a competitive
disadvantage compared to other major markets. The preferred option
is for the rule to be removed in its entirety;
- the restriction of access to regulated markets to eligible
counterparties (authorised financial intermediaries) is seen as
unjustified and potentially very damaging to EU markets as it
would make it harder for them to gain more business. The ability
of home state regulators, rather than the regulator where the
business is being transacted, to determine whether or not a firm
qualifies as an eligible counterparty is also seen as inappropriate;
- on the definition of 'professional investor' it is
thought that the threshold for large companies and other institutional
investors to be defined as professionals (and so to be relieved
of inappropriate investor protection measures) is too high;
- the effect on market participants of the inclusion of commodity
derivatives within the scope of the Directive, especially
the potential application of disproportionate capital requirements;
and
- appropriate convergence of rules is generally seen as desirable
and necessary for the creation of a single market in investment
services. But there is concern that harmonisation at too
detailed a level —through mandatory measures of the Commission
and the European Securities Committee[41]
— may well disadvantage investors by disrupting well-functioning
markets. The preference is for more regulatory convergence through
permissive, rather than mandatory, comitology provisions.[42]
Conclusion
14.5 We thank the Minister for the further information
about the attitudes of interested parties towards this document.
We note that the Government's qualified welcome for the proposal
is seconded by interested parties. We are content to clear the
document, but urge the Minister to pursue vigorously the correction
of the flaws in the draft Directive.
35
OJ L 141, 11.6.93, p.27. Back
36
See headnote to this paragraph. Back
37 That
is fulfilling clients' orders without offering advice. Back
38
See headnote to this paragraph. Back
39
That is obliging terms of execution of orders most favourable
to the client. Back
40
A 'default rule' would require regular client authorisations and
a 'limit order handling rule' making public an order with a price
limit which cannot be implemented promptly. Back
41
The second level of the Lamfalussy comitology process for financial
regulation and composed of high level representatives of Member
States and the Commission. Back
42
The third level of the Lamfalussy process involving the advisory
Committee of European Securities Regulators, composed of high
level representatives of Member States. Back
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