5. INVESTMENT SERVICES AND REGULATED MARKETS
(24025)
14796/02
COM(02) 625
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Draft Directive on investment services and regulated markets.
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| Legal base: | Article 47(2) EC; co-decision; qualified majority voting
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| Document originated: | 19 November 2002
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| Deposited in Parliament: | 27 November 2002
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| Department: | HM Treasury
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| Basis of consideration: | EM of 9 December 2002
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| Previous Committee Report: | None
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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: | Not cleared; further information requested
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Background
5.1 The 1993 Investment Services Directive (ISD), 93/22/EEC,[12]
established the legal framework in the EU for investment services
and organised trading of financial instruments. The Directive
set 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 gave the right
of direct or remote access to any authorised ISD firm to trade
on regulated markets in other Member States. The Financial Services
Action Plan pointed to the need to revise the ISD to reflect ongoing
structural change in EU financial markets and to make it more
responsive to future developments. The Commission has concluded
that the existing Directive is no longer an effective framework
for undertaking cross-border investment business in the EU.
The document
5.2 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.
5.3 The three substantive titles of the draft Directive
— authorisation and operating conditions for investment
firms; regulated markets; and competent (that is implementing)
authorities — include provisions covering:
- conditions and procedures for authorisation of investment
firms;
- their operating conditions, including client protection and
market transparency and integrity;
- rights of investment firms;
- organisational requirements for regulated markets;
- requirements for operators of regulated markets;
- designation, powers, resources and redress procedures for
competent authorities; and
- cooperation between competent authorities of different Member
States.
The Government's view
5.4 The Financial Secretary to the Treasury (Ruth Kelly)
tells us:
"A key objective of Government policy is to create an effective
and dynamic European financial services market that links efficiently
the sources of capital — investors and savers — with
the firms and individuals seeking to use it. An effective single
market would:
- reduce the cost of accessing capital and improve the efficiency
of capital allocation across the EU; and
- give retail customers access to a wider range of more competitively
priced financial services products.
"A recent report conducted for the European Commission suggested
that full integration of EU markets would result in a 0.5 per
cent reduction in the cost of capital for EU business and a one-off
increase in GDP over ten years of about 1.1 per cent for the EU
as a whole.
"The Government believes that the proposed Directive has
the potential to contribute to achieving the objective of promoting
an efficient, effective and dynamic single market in investment
services. Particularly welcome are:
- the general move to country of origin regulation based
on home state authorisation and supervision for all cross-border
business, and the prevention of host Member States from imposing
additional requirements on incoming services. These measures should
help improve the effectiveness of the 'passport', without which
there can be no single market in investment services;
- the removal of the concentration rule, which currently
gives countries the option of forcing certain orders to be executed
through the lead national stock exchange. This should facilitate
more effective competition between trading venues, leading to
greater efficiency, innovation and better outcomes for investors;
and
- the post-trade transparency regime, as proposed, should
have a positive effect on the efficiency of the European capital
market overall.
"However, there are a number of areas where further work
is required, notably:
- the introduction of a mandatory quote disclosure rule
for trades executed off-exchange as proposed risks undermining
competition between trading venues, leading to less efficient
markets and worse outcomes for retail investors. Even without
such a rule, the proposal represents a radical extension of the
pre- and post-trade transparency requirements compared to the
existing ISD;
- the proposed approach to investor classification and,
in particular, the ability of host states to determine whether
professionals can be treated as eligible counterparties risks
subjecting informed market participants to inappropriate conduct
of business requirements and, hence, unnecessary additional costs;
- the proposed changes to the conduct of business regime
raise the prospect of adding significant costs to execution-only
activities, such as on-line share trading or where investors purchase
standard investment products without advice. Many retail customers
are happy to make use of low-cost, efficient, execution-only services
without advice;
- the restriction of access to regulated markets and multi-lateral
trading facilities (MTFs) to eligible counterparties
as proposed risks preventing any form of direct retail access
platform from operating and disadvantaging those regulated markets
and MTFs that currently have large corporates and non-EU authorised
entities as members and/or participants;
- the proposed default rule that investment firms must
regularly obtain the consent of their clients before internalising
their orders creates a presumption in favour of on-exchange order
execution and, therefore, risks impeding competition between investment
firms and regulated markets. It would consign investors to poor
execution if firms were deterred by the prohibitive costs imposed
by the obligation to seek the client's permission;
- the effect on market participants of the inclusion of commodity
derivatives within the scope of the Directive needs to be
carefully considered;
- the structure of the proposed Directive needs further
consideration, in particular regarding its consistency with the
Lamfalussy principles for EU financial services regulation."
5.5 In relation to the financial implications of the
document the Minister says:
"The cost to the FSA of the proposed Directive is unclear
at this stage. It is unlikely to be substantial, but will ultimately
fall on the financial services industry given the way that financial
regulation is funded in the UK."
5.6 The Minister encloses a short Regulatory Impact Assessment
(RIA) which, whilst noting that its costs are as yet uncertain,
generally gives a positive view of the proposal, saying: "This
Directive ... has an important contribution to make to the implementation
of the Financial Services Action Plan and the completion of the
single European market for capital".
Conclusion
5.7 We are grateful to the Minister for her assessment
of the value of this document and note her general, albeit qualified,
welcome for the draft Directive. But we note also, both from her
Explanatory Memorandum and from the Regulatory Impact Assessment,
that the Treasury has had extensive consultations about the proposal
with interested parties. However, she does not tell us what their
views are. Before considering the document further we should like
to have from the Minister an account of those views. Meanwhile
we do not clear the document.
12
OJ L 141, 11.6.93, p.27. Back
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