Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of Private Client Investment Managers and Stockbrokers (APCIMS)

  The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is the organisation that represents those firms who act for the private investor and who offer them services that range from no advice or "execution only" trading through to portfolio management for the high net worth individual. Our 217 member firms operate on more than 500 sites in the UK, Ireland, Isle of Man and Channel Islands and following the merger of the European Association of Securities Dealers into APCIMS, increasingly in other European countries as well. APCIMS members have under management £24 Billion for the private investor and undertake some 13 million trades for them annually.

  We are attaching a series of comments designed to be helpful to the Treasury Committee as part of this enquiry. We have ordered our comments under the following headings as indicated in the invitation for evidence.

    (a)  Developments in respect of existing and proposed EU legislation.

    (b)  Progress of the Financial Services Action Plan.

    (c)  Ideas for future action identified in the May 2004 report from the EU Financial Services Committee on Financial Integration.

    (d)  Observations on the way in which relevant EU Directives are implemented in the UK.

  However, we would also like to bring to the Committee's attention our concern about the considerable burden on the financial services industry as a result of regulatory changes. The nature and scale of change caused by the establishment of the UK single regulator, the Financial Services Authority ("the FSA"), resulted in both new and amended rules from over 250 consultations by the FSA. This has been unprecedented and whilst understanding the complexity of creating a single regulator and the need for change, the industry is now faced with further large-scale change resulting from the European Commission's Financial Services Action Plan and the drive forward towards a single market in financial services.

  Although we support the objectives of a single market, the reality is that for the greatest number of firms who are affected by European change, there will be early costs while the benefits may be as long as 10 years away. With this in mind we would ask that both Government and the FSA work closely with the industry to ensure that changes are introduced in such a manner as to minimise the burden wherever possible. All change involves cost to the industry, and in many instances, the impact of the required changes can be lessened by real cooperation with market practitioners over implementation options and timescales.

  Also we urgently request that the UK goes neither further nor faster than other European countries as to do so will result in greater impact on the UK industry and therefore a reduction in its competitive position compared with other European countries.

  We trust that these comments are helpful to the enquiry and stand ready to assist in any further way.


 (a)   Developments in respect of existing and proposed EU legislation

  APCIMS has three particular examples where EU legislation has been implemented in the UK in a manner that is considerably more onerous than in any other EU member state. The three Directives of which we have knowledge are the Distance Marketing Directive (the DMD), the second Money Laundering Directive, and the EU Savings Tax Directive.

    (i)  The Distance Marketing Directive—this was introduced by the European Commission to provide safeguards, such as cooling-off periods, for people buying goods and services by means that is not face to face. If the price of the goods was volatile, it was exempted from the DMD requirements. But despite this exemption, the UK applied the DMD to the financial services industry in a way that has required rule changes involving industry cost, and the UK is the only country to have done this.

    (ii)  Money Laundering Legislation—our members strongly support a robust regime which is as effective as possible in countering terrorist and criminal activity. But the UK appears to be the only European country that does not apply a de minimis amount to its anti money laundering requirements. In practical terms, this means that the UK requires exactly the same checking to be done on £1 as on £10,000 when other countries do not. There is shortly to be a third anti money laundering Directive and the opportunity needs to be taken to bring pragmatism into the UK requirements.

    (iii)  The Savings Tax Directive—this requires information exchange on interest earned by individuals. The guidance produced by the Inland Revenue is clear and comprehensive, and how firms apply the guidance will be subject to scrutiny in the annual audit. The cost of this is substantial with even a small firm reporting that the ongoing audit check is in excess of £15,000 per annum. Elsewhere in Europe, firms are being left to decide how to apply requirements and the audit check appears to be at the very least, far from a stringent test.

  The UK authorities may claim that these are examples of the UK implementing correctly, but for UK industry it means that they have more and heavier regulations than their counterparts and competitors elsewhere in the European Union.

  Although we, and no doubt others, have made representations on many occasions to the relevant authorities with respect to these three directives, there has been little desire to make either appropriate changes nor to rethink the UK regime. We are particularly concerned therefore that when work on implementing the Financial Services Action Plan commences in the UK these faults are not repeated.

 (b)   Progress of the Financial Services Action Plan (FSAP)

  It is well documented that some 39 of the 42 measures of the FSAP concluded the legislative processes and achieved the target timetable of 2004 for completion. But it is only now that the real work on implementation must be carried out. Disappointingly, there is already real evidence that the measures will be implemented differently across member states and there is likely to be a missed opportunity for making real progress towards a single market. The reason for this lies in insufficient preparatory work being done with industry by the European Commission and by national regulators to understand how the existing regimes work at present. And it is only by understanding how different laws and indeed market practices have evolved that true harmonisation can result from new legislation and regulations.

  There are a number of specific points with respect to progress of the FSAP that we wish to make—

    (i)  Debate in the European Commission has now centred around the comments that the Financial Services Action Plan is almost complete. From the perspective of the financial industry across Europe, it has hardly started! While recognising that Commission interest will inevitably be in creating new legislation, we would urge that further work is only considered once the Financial Services Action Plan has been implemented and that Commission focus should be on equal, clear and cost-effective implementation.

    (ii)  We are concerned at the short timetable. Although consultation and consultative arrangements have improved, the requirement for the Committee of European Securities Regulators ("CESR") to make its technical measures within a twelve month period means that they have insufficient time to absorb the points that are being made to them by practitioners in all countries and make changes accordingly. CESR comments that they are constrained by the timetable placed upon them by the European Commission. In turn, the Commission states that the timetable has been decided by the politicians. Irrespective of whether it is one, some or all of these entities who have an involvement in this area, unless sufficient time is given for the true consultative process to take place, inevitably there will be decisions taken that are inappropriate, misinformed and costly.

    (iii)  Although conventionally we tend to refer to each country as having a financial regulator or regulators, at present the reality is that the only financial regulator in Europe is the FSA. Other authorities have supervisory powers and few regulatory powers. This means that although they can apply whatever the agreed regulatory requirements are, they cannot in fact make either additional rules or regulatory clarifications where gaps or lack of clarity exists. It is therefore easy to see that without equivalent powers, implementation by the various supervisory authorities will inevitably vary.

    (iv)  The intention of the Financial Services Action Plan was to have a series of high-level directives with technical measures being decided by CESR. However, we have now arrived at a situation whereby directives are noticeably detailed, for example the new Investment Services Directive (now known as MiFID) contains more than 70 Articles and is some 60 pages long, and the technical measures being decided by CESR once inserted into MiFID will have the effect of quadrupling it in length. 240 pages of detailed requirements is clearly bringing extensive changes and this is only one of the 42 measures of the FSAP.

    (v)  Within MiFID there are extensive changes both for firms who operate in the wholesale market right down to the conduct of business rule requirements that govern the relationship and the actions between a firm and an individual investor. How these changes are interpreted and implemented and implemented will be key.

    One likely change for example will be the addition of new requirements for clients who do not want financial advice, but simply require a share transaction to be carried out on an "execution-only" basis. The new requirements will be for some form of check to ensure that the client truly understands that he is not receiving advice and therefore that the execution-only service is "suitable". We also know that derivatives are expressly excluded from being execution-only business. However, Italy has decided that clients will be able to deposit a sum of money with the brokers and carry out transactions to a specific limit irrespective of whether it is in derivatives or in shares. By putting in such a limit, from an Italian perspective, this means that the service is not "execution-only" but there will be no suitability check required either. In simple terms this means that it will be easier to do execution-only business across a wider range of investments in Italy than it will be in the UK and, secondly, that it will be possible to trade derivatives in Italy on a no advice basis.

    While we support sensible consumer protection measures, we do feel that applying additional checks for "suitability" will simply make execution-only services less economic for firms to provide in the UK which will be to the ultimate disadvantage of UK clients. In addition, should the FSAP result in there truly being a single market in financial services, then clearly UK execution-only firms will be at a competitive disadvantage to their counterparts quartered elsewhere in the EU.

    (vi)  It is also important to note at this point that financial advice is regulated in the UK and that advisers are required to be professionally qualified. Elsewhere, advice is not normally regulated and professional qualifications are only starting to be introduced. This demonstrates that however well the FSAP progresses from now on, the starting points of the EU countries are different and so inevitably the end result will be different.

  There are other examples as well should the Committee wish us to provide them.

 (c)   Ideas for future action identified in the May 2004 report from the EU Financial Services Committee on Financial Integration

  One of the recommendations of the May 2004 report was for the UK to agree upon a strategy for implementing the measures of the FSAP. The UK authorities are to be congratulated for their efforts in setting out this strategy in their documents "Delivering the FSAP", and "After the FSAP: A new strategic approach". We took the opportunity of commenting on these documents and our major observation was that there continues to be much work to be done to ensure that the UK authorities really understand how the industry works, and so can avoid placing an unnecessary burden on industry through cumbersome implementation. It remains our view that there are serious gaps in the practical knowledge of regulators about how firms carry out change.

  For example, one of the undertakings in "Delivering the FSAP" was that a minimum period of three months would be given for firms to implement rule changes after final publication of new rules. But the changes from the MiFID will be extensive and this is only one measure in the FSAP. Firms will be required to send out new Terms and Conditions to clients. An average APCIMS firm has 15,000 clients so new terms and conditions will cost an estimated £45,000. If this is extended to the entire APCIMS community then the cost of this one requirement will run to several million pounds. Firms will also have to make alterations to their execution policy and to the "best execution requirements". To do this, firms will have to tell their clients whether they carry out a transaction on the Stock Exchange or some alternative trading platform—a process which is common in the UK in our open markets but not in continental Europe where so-called concentration rules have until now required all trades to be done on the relevant exchange. Again this is a change that will cost and, as with the change to terms and conditions, it will take a substantial period in time and one in excess of 3 months from final publication rules, to bring about.

  We therefore recommend that three steps be put into the proceedings from now on:

    (i)  An All Party Committee of House of Commons and House of Lords be set up to scrutinise the EU directives once they have been drafted for inclusion in UK law. This Committee should have the power to call for evidence from the industry and to determine whether the UK proposals implement the directive to give the intention that was required or whether there are additions and changes which will have an adverse impact on the industry. Such a Committee will need to have relevant powers to recommend changes to the proposed UK draft of the legislation.

    (ii)  Although there are already a number of panels and forums for industry practitioners with representatives from HM Treasury and the FSA, we believe that a new panel needs to be set up specifically to monitor the development of the FSAP and to take evidence from industry on problems and issues over implementation, including rule changes and with the powers to recommend alteration and adjustments as necessary. This panel would be able to take evidence from industry on problems and issues and to come up with sensible and pragmatic solutions.

    (iii)  Our third recommendation is that the FSA sets in place an information group specifically designed to discover, discuss and determine how other countries are proposing to implement the various FSAP requirements and how this will impact on their existing industry practices. This information gathering unit also needs to look at the timing of implementation in the various states. Such information then needs to be widely disseminated with the intention of ensuring that the UK does not go ahead of other member states.

 (d)   Observations on the way in which relevant EU Directives are implemented in the UK

  We have already commented on the implementation of three directives under section (a) above and highlighted the ways in which the UK implementation is different to other EU countries.

    (i)  There is another directive, namely the Capital Adequacy Directive, that we would also like to highlight and especially to comment on the way in which the FSA has sought to bring about changes to the capital regime in the UK. The debate over capital requirements has been driven by the banking sector, and in particular by the Basel Committee. There have been lengthy debates about how best to change to a regime whereby banks and investment firms put aside capital to cover the financial and operational risks that they run. The new Basel Accord for the banking industry was finally adopted earlier this year after successive delays and having been under discussion for some five years, and Directives quickly followed from the European Commission to be implemented by both the banking and investment firm sectors of industry. Most member states are now beginning a debate with their industries over how to change their capital rules to reflect the new risk based regime.

    In the UK however, not only did the debate begin some five years ago, but there have been successive consultations on new prudential rules which have involved seven formal Consultation Papers from the FSA and one from HM Treasury. We welcome the opportunity to comment on FSA proposals and we do consider that it is better to be prepared early as that allows good deliberation and discussion and provides the industry with the sort of timetable which it seeks to plan its changes. However, in this instance, the FSA desire to bring about an early introduction of new prudential rules and in advance of the outcome from Basel, has meant that both the FSA and the industry has been excessively involved in commenting on proposed changes that in themselves kept changing. This has been a costly exercise and a worrying one. We have now been told that despite all this work the new rules will be implemented on short timescales even though we still await the final outcome from the deliberations over the directive. This has been a muddled process and one which does need to be avoided when considering further directives. There is a clear balance between addressing issues too early and before sufficient questions have been answered and considering them too late when there is insufficient time for useful contributions to be made.

    Our last point again highlights differentials between the UK and elsewhere. The UK has always believed that not only is it necessary to implement directives fully but put in place a strong enforcement regime behind the rules. Neither have been priorities elsewhere and whilst there is undoubtedly a movement in the EU states towards more rigorous regulation post-FSAP than has been the case to date, nevertheless we see little sign of any desire to implement an enforcement regime. We emphasise that we are not asking for there to be no enforcement, rather that again we highlight this point as an example of the difference between implementation of EU directives in the UK and elsewhere.

    (ii)  In general, the UK drafting of EU requirements into law covers every eventuality and seeks to protect the client (the UK Government) from challenge. We contend that this should not be the case and that legal drafting should:

      —  go no further than the Directive unless there are specific reasons to do so agreed widely with the industry;

      —  should implement only the intent of the Directive;

      —  should specifically minimise cost burdens on the industry; and

      —  should not carry an enforcement regime greater than that of other EU countries.

    The same principles should apply to the regulations where the requirements are being implemented through the FSA.

September 2004

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