Select Committee on European Scrutiny Fifth Report


5. INVESTMENT SERVICES AND REGULATED MARKETS


(24025)

14796/02

COM(02) 625


Draft Directive on investment services and regulated markets.

Legal base:Article 47(2) EC; co-decision; qualified majority voting
Document originated:19 November 2002
Deposited in Parliament:27 November 2002
Department:HM Treasury
Basis of consideration:EM of 9 December 2002
Previous Committee Report:None
To be discussed in Council:Not known
Committee's assessment:Politically important
Committee's decision:Not cleared; further information requested


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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