Memorandum submitted by the British Bankers'
Association (BBA)
1. The BBA is pleased to provide evidence
to the Treasury Select Committee on the EU and financial services.
With over 240 member banks from over 60 countries, the BBA is
the authoritative voice of the banking industry in the UK, and
represents members' interests in both wholesale and retail markets.
BBA members have a particular interest in EU legislation and the
British Bankers' Association has been closely involved in lobbying
on behalf of its members in relation to key elements of the Financial
Services Action Plan (FSAP) and we have made many individual submissions
to the EU institutions and others. This submission will address
the current situation regarding a single market in financial services;
UK implementation of EU legislation; EU wide implementation and
some future developments.
FINANCIAL SERVICES
INTEGRATION IN
EUROPE
2. Europe has made significant progress
towards integration of wholesale banking, cash fixed income products
and over-the-counter (OTC) derivative products. Equity markets
are undergoing structural change which is likely to lead to further
integration and the FSAP legislation may also encourage further
integration.
3. Insurance and asset management, with
the exception of UCITS, products are not, in general, integrated
and significant work is needed to evaluate the extent to which
it is feasible to improve integration, and how best to do it.
4. There are deep-rooted practical, cultural
and legal barriers to cross-border integration of retail markets
across all sectors. Significant question marks exist over the
value of attempting such an integration, by way of harmonisation,
except on a limited and targeted basis following careful cost
benefit evaluation.
5. One of the areas which could merit more
interest is the extent to which Member State's markets are actually
open to competition. There is concern that some markets maybe
structured so as to reduce the possibility of new entrants making
an impact or have other, non structural, requirements which significantly
favour present incumbents. It could also be argued that some Member
States have on occasion acted transparently in the interests of
their national markets.
UK IMPLEMENTATION
OF EU DIRECTIVES
6. Last year we indicated to HM Treasury
that it would be helpful for the financial services industry to
have some form of overall impression of the Government's plans
for implementing the FSAP and this has now been forthcoming in
the form of the publication "The EU Financial Services
Action Plan: Delivering the FSAP in the UK" published
in May 2004.
7. We have also had early dialogue with
both HM Treasury and the FSA in relation to many specific Directives
including, for example, the Market Abuse Directive and the Distance
Marketing Directive. We welcome the fact that HM Treasury has
begun to institute implementation Roundtables for specific Directives
to which the industry is invited and at which HM Treasury reports
on its thinking in relation to implementation. We also welcome
the FSA's consultation processes which are, of course, required
under the Financial Services and Markets Act 2000. In general,
the FSA's consultation processes are very good and go beyond the
minimum that might be expected.
8. We do have some observations on areas
in which improvements could possibly be made. These are as follows:
(a) It is important that the authorities
consult the industry at the earliest possible point and that formal
consultation is published as soon as practicable. The FSAP processes
put a considerable strain on the UK authorities, industry representative
bodies and individual firms because key implementing measures
are often only adopted by the EU months before a particular Directive
is due to be implemented. We consider that both HM Treasury and
FSA are working hard against difficult timeframes to publish consultations
quickly but due, primarily, to limited resources we believe that
the speed with which consultations are published could still be
improved by several weeks and possibly in some cases longer. This
may seem very little but where timetables are tight having several
weeks more for implementation can be extremely helpful.
(b) The first point leads to the second point—which
is resourcing of implementation. We are aware that Government
is, at present, seeking ways to reduce the number of Government
officials overall. However, in the context of implementation of
EU legislation it is extremely important to the UK financial services
industry, and to the City of London as an international financial
centre, that EU legislation is implemented in the UK in a practical
and flexible manner—avoiding "gold plating" and
"superequivalence" as far as possible. In our experience
the HM Treasury team for implementing a Directive is typically
small with one Treasury lawyer assigned to assist one or more
officials. Often the Treasury lawyer is only working part time
on the implementation project and has a number of other tasks
to perform as well. We have no concerns about the quality of the
staff involved. In our experience they are usually of high calibre.
We are concerned, however, that there is a need for more lawyer
time to be allocated to the implementation of significant Directives.
We consider that it will be particularly important to allocate
significant staff to the implementation of the Markets in Financial
Instruments Directive (MFID) which is the key framework Directive
underpinning the European capital markets.
9. Around 60% of UK legislation is derived
from the EU yet there is inadequate scrutiny of legislation by
the European Standing Committees. Scrutiny of EU legislation should
be on an equal footing with domestic UK legislation rather than
seen as an optional extra. For example, our experience with the
FSAP has shown that the biggest threat to UK interests is that
some of the legislation is too narrowly European in focus and
potentially could damage the competitiveness of global markets
based in the City of London. Excepting the EU Select Committee
of the House of Lords inquiry into FSAP, this largely occurred
without any serious scrutiny or influence by the Commons/UK Parliament.
10. Problems in the lack of proper scrutiny
of EU policy development are also mirrored in the implementation
of EU legislation in the UK. Implementation tends to over elaborate
and "gold plates" EU directives and we can only agree
with Robin Bellis in his report on the implementation of EU legislation:
"I was given instances of provisions of
directives which were intended to be applicable in the same terms
throughout the Community being given greater precision in United
Kingdom rather than being copied out."[3]
11. We appreciate that "gold-plating"
could be the result of the UK's traditional faithful and literal
interpretation of legislation compared with the purposive approach
adopted by Napoleonic code countries but there are times when
UK implementation is incompatible with the purposes of the directive
and breaches the uniformity principle of EU legislation. During
work on the current MFID (formerly known as ISD 2) it became apparent
that the UK had implemented the existing ISD in much more detail
than many other EU member states.
EU WIDE IMPLEMENTATION
AND ENFORCEMENT
12. The European Commission will be responsible
for effective enforcement and implementation of FSAP. It is planning
to work more closely with member state governments on implementation
issues. We support this in principle. It is too early to say how
successful this new approach will be—but if properly resourced
it should be more effective than current practice. Competition
regulators will have a continuing role in helping to break down
inappropriate barriers within the internal market. It is impossible
to give definitive views about issues which will arise as the
single market framework is implemented and enforced. One could
expect, however, that closer attention to enforcement could produce
resistance in some areas due to a wish to protect sectors or institutions
which may be regarded as economically vulnerable in a truly integrated
single market.
By way of illustration, in Germany equity capital
owned by foreigners is worth 12.1% of GDP, in France 11.9% but
in the UK it is 24%.
The position is even worse when considering
bank assets, in the UK 51%v are foreign owned but in Germany the
proportion is just 4.7%.
At a more general level the latest single market
scoreboard reveals that France is the worst member state for Directives
overdue by more than two years and France also has the longest
delay (14 months ave.) in implementing Directives beyond the deadline
and the most outstanding infringement cases.
13. It is extremely important to avoid a
flood of new EU financial services legislation. The FSAP measures
which are being adopted and will soon be implemented will create
a heavy burden of change on EU financial institutions. Furthermore,
constant regulatory change creates uncertainty as well as costs,
both for firms and their customers. We would oppose significant
new measures and wholeheartedly agree with paragraph 8 of the
recent Securities Expert Group report[4].
We support what is said there, and the rationale given:
"The FSAP has prompted a significant overhaul
of Community legislation affecting securities markets. The Group
therefore believes that the main emphasis should now shift from
introducing and agreeing legislation to implementation and enforcement.
This should be coupled with a review of how existing legislation
and new FSAP measures are working, with a view to identifying
gaps and deficiencies or any areas where legislation could be
reduced or removed. The aim should be to allow investors, issuers,
market participants, regulator and supervisors to adapt to the
new rules and make them work in practice. This `breathing space'
will be particularly important in the 10 new Member States, where
ensuring that the acquis is fully functioning should remain a
priority."
FUTURE DEVELOPMENTS
14. The BBA firmly support the development
and delivery of a single market in financial services, however
an integrated market is characterised by open competition, it
cannot be achieved by regulation alone. We strongly support the
call for the Commission and other EU institutions to use all means
and measures at its disposal, including those in the context of
competition policy. A competitive financial services industry
will naturally lead to the benefits of integration by providing
consumers with a wide variety of innovative products at keener
prices.
Self-Regulation and Other Non-legislative tools
15. The EU should encourage self-regulation
where it already exists and is working well. Where possible it
should be extended. Self-regulation can either take the form of
codes and guidance which set standards that are not enforced by
the industry itself (but may, for example, be enforced by a regulator
which has set more general principles underlying the code) and
codes which are also monitored and enforced by the industry (for
example, the UK's Banking Code which is enforced by the Banking
Code Standards Board).
16. The EU should also look at co-regulatory
options, whereby, even when legislation exists there may be means
by which regulators and an industry can work together to produce
joint initiatives that serve both public policy and industry objectives.
17. Other important tools include using
competition law or market-driven approaches, whereby, economic
policy good is achieved through the opening up of a more competitive
economic environment. Within the EU not all member states' banking
members are equally competitive. In some jurisdictions, parts
of the financial sector receive either direct or indirect state
aid and there are issues as to how far this hinders a truly competitive
market. Therefore the EU Commission should take a more active
stance in examining the extent to which state aid is being given
in different jurisdictions. Generally, where state aid is given,
financial sector recipients of this aid are not subject to the
same competitive pressures to deliver a commercial return on capital
as their commercial competitors. This acts as a barrier to entry
into those member states that have particularly large sectors
or sub-sectors where this form of aid occurs.
Global Competitiveness of EU markets and the importance
of Innovation
18. The development of EU regulation must
take account of its impact on Europe's international competitiveness
ie the Chancellor's concept of "Global Europe": both
by ensuring that European firms can access international financial
markets in an environment that represents a level playing field,
as well as by recognising the needs of non-EU market participants
carrying out business in Europe. Innovation is also an essential
part of a vibrant financial services market and regulatory measures
must not impede the innovative process.
Making the Lamfalussy arrangements work better
19. We support improving regulatory convergence
through the Lamfalussy arrangements and the BBA supports the extension
of the Lamfalussy procedure to the banking, insurance and UCITS
sectors and considers this to be the right framework within which
to develop financial services legislation and supervision for
the foreseeable future. As is inevitable with a new procedure
it is capable of improvement as experience of working with it
develops. The BBA considers that the Lamfalussy arrangements are
evolutionary, rather than static, and will develop over time as
the EU institutions, the regulators and market participants work
together to develop more effective ways of striking the right
balance between regulatory oversight and encouragement of economic
growth.
Better EU institutional regulation
20. The BBA supports emphasis on evidence-based
policy making. It is important that policy is informed by the
realities of how business is conducted and what consumers and
market participants want. Good quality research is needed and
the use of forum groups and early consultation is extremely important.
21. The BBA strongly supports suggestions
to develop the use of impact assessment and cost/benefit analysis
before a legislative proposal is made. We know that the Dutch
Presidency has also emphasised this element. If EU policy and
legislation is to be effectively targeted, robust but proportionate,
and its implications fully appreciated by all concerned, then
it is essential that good quality assessments of the likely benefit
and impact of a policy change are made. We believe that it is
also reasonable to expect this assessment to explain the main
changes that would be required in each member state. This is an
important aspect of the development of the policy and should be
explained by policy makers. Change should primarily result when
there is a clear need for it—either to provide public good
or to enhance legislative or business infrastructure in a way
which assists market participants, post implementation review.
22. In our view the development of Lamfalussy
has shown the benefits of wide consultation preceding, and during,
the development of legislation and regulatory rules. This approach
should also be encouraged in those member states where it is not
yet used and it should be a key aspect of all EU policy making
in the financial services sector going forward.
6 September 2004
3 "Implementation of EU Legislation-An independent
study for the FCO" by Robin Bellis December 2003. Page
16. Back
4
"Financial Services Action Plan: Progress and Prospects-Securities
Expert Group final Report" May 2004.
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