Select Committee on Treasury Written Evidence


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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