Select Committee on Treasury Written Evidence

Memorandum submitted by Mr Graham Bishop

  I am responding to the Call for Evidence of 22 July on this subject.

  By way of background, you will recall that I have advised this Committee (and several predecessors) on the implications of UK membership of the European Monetary Union. Last year, I also had the honour of advising Sub-Committee B of the House of Lords European Committee about the Financial Services Action Plan ( FSAP). I am nominated by the European Parliament as one of its members of the Inter-Institutional Monitoring Group ( IIMG) on the progress of the Lamfalussy Process and am acting as Rappotuer for the Group's third report scheduled of publication in October.

  1.  I welcome the Committee's decision to review this subject as it is vital to a significant part of the UK's economy. The "business and financial services" sector now accounts for almost one-third of the UK economy—30.5%. This sector is growing at 120% annually and is now virtually twice the size of manufacturing. Virtually all the major legalisation in financial services is likely to originate at the European level.

  2.  For practical purposes, the primary legislation of the FSAP is now complete and a major effort is underway to fill in the secondary legislation—essentially level 2 of the Lamfalussy Process (LP—see the annexed chart for a summary explanation of this 4-level regulatory process). Whilst these details are being completed, the Commission has undertaken a substantial survey of what major work remains to be done to achieve the final goal of a genuinely single financial market. The Financial Services Committee (FSC) report should be seen as the contribution of one of the institutions—Council—to this analysis. A broad consensus seems to be emerging amongst the institutional, as well as market, participants about what is necessary for the future. In recent times, the Commission has repeatedly emphasised that it will only propose legislation if there is clear evidence to warrant it.

  3.  In common with market participants, the FSC report highlights the need for effective implementation of the agreed measures, which could be facilitated by "convergence of supervision". This is basically level 3 of the LP and requires a careful definition of the role of the Committee of European Securities Regulators (CESR)—of which the Financial Services Authority (FSA) is a member, but plays a role that is usually seen as more important than merely one vote at the table.

  4.  Listening to the evidence submitted to the House of Lords enquiry a year ago and observing subsequent developments leads me to the opinion that many UK market participants have fundamentally misunderstood the process that is underway.

  5.  In its December 2003 report, the 11MG explained extensively that there are two somewhat competing concepts about what level 3 of the Lamfalussy Process should deliver:

    On the one hand, it should lead to more flexibility in regulation;

    On the other hand, it should enhance the consistency of application of law in daily supervisory practice.

  The Securities Expert Group set up by the Commission which reported in May clearly favoured level 3 as focusing on co-ordination of daily supervisory practice across regulators and not as a way for further standardisation of securities markets law.

  6.  But that raises the question of how to achieve "common and uniform implementation of Community legislation" that it called for without standardising the legislation itself.

  Some market participants appear to want "flexibility in regulation" to mean that there are differences between Member States, rather than a uniform system across the EU that can be changed flexibly. This crucial distinction is often left blurred, but the extracts below from the CESR Charter make it clear that CESR is constructed to achieve the tasks that were specified in the original Lamfalussy Report.


  Having regard to the importance of greater supervisory and regulatory convergence for the achievement of an integrated internal capital markets in Europe;

  Having regard to the need to base all its actions around a common conceptual framework of overarching principles for the regulation of the European securities markets to be established by the European Union;

  Having regard to the importance of involving all market participants in the regulatory process; Considering that the role of the Committee of the European Securities Regulators is to:

    (i)  improve coordination among European Securities Regulators;

    (ii)  act as an advisory group to assist the Commission, in particular in its preparation of draft implementing measures in the field of securities;

    (iii)  work to ensure more consistent and timely, day to day implementation of community legislation in the Members' States;

  the members of the Committee resolve to adhere, both in principle and in practice, to this Charter

  4.3  The Committee will foster and review common and uniform day to day implementation and application of Community legislation. It will issue guidelines, recommendations and standards that the members will introduce in their regulatory practices on a voluntary basis. It will also undertake reviews of regulatory practices within the single market.

  4.4  The Committee will develop effective operational network mechanisms to enhance day-to-day consistent supervision and enforcement of the Single Market for financial services.

  7.  Any attempt to permit significant differences between national regulatory regimes might risk under-cutting the whole notion of a single market. CESR published a consultation paper on level 3 in April 2004 and this reviewed some of the thoughts which the IIMG described. But the collective aim of CESR's members (ie including FSA) is clear from the Foreword "The objective of CESR at level 3 is to ensure convergent application of EU securities law." The paper elaborates the full meaning of "convergence" later—see extract below.

2.3  Regulatory convergence

  Regulatory convergence is the process of creating common rules. The legitimacy of the role of CESR at level 3 comes from the fact that CESR members take individual decisions on a daily basis that create jurisprudence. This "bottom up" approach relates to the normative nature of concrete decision making activities of the supervisors. The impact of precedents on decisions is determined by the law and cannot be fully controlled by legislators. In addition, in an integrated European market, the jurisprudence created by supervisors produces effects that cannot be limited to national jurisdictions and therefore must be faced at EU level . . .

  Supervisory convergence can also be found in responses to supervision and enforcement actions. Sharing common experiences in the field of enforcement actions is crucial to ensure that similar cases are treated consistently and in an equivalent manner across Europe.

Source:   "Role of CESR at Level 3" CESRI April 2004

  8.  If CESR members are successful in getting "similar powers" to make rules (does this imply any change in the FSA's powers?), then the eventual, and logical, outcome of the process underway will be a close harmonisation of rules as the simplest way "to ensure that similar cases are treated consistently and in an equivalent manner across Europe. If this analysis of CESR's policy is correct1 then the FSA is likely to implement EU legislation in a manner which arouses continuing concerns amongst some UK market participants.

  9.  If some market participants wish to take an alternative approach and retain significant national differences, then they should say so explicitly—and explain how it can be consistent with the entire drive for a single financial market.

  Note: Members of the Committee will be aware that the Lamfalussy Process stems from an compromise agreement between the three European institutions on power-sharing that was cobbled together for this limited purpose. However, the proposed Constitutional Treaty clarifies these issues in Article 1-35 (as numbered in the original text). If this Treaty is not brought into force, then significant uncertainty will hang over the LP's future. If the UK did not ratify it, the uncertainty for the UK's financial services industry might be even greater.

26 August 2004




  Community legislation adopted by the Council and the European Parliament upon a proposal by the European Commission, under the co-decision procedure: Legislation should be based only on framework principles and definition of implementing powers for the Commission.


  Community legislation adopted by the Commission to lay down the technical details for the principles agreed at Level I under the so-called Cornitology Procedure. Particular features:

    —  Technical advice prepared by the Committee of European Securities Regulators (CESR); following mandates issued by the Commission and based on consultation with market users.

    —  Favourable vote of Member States (qualified majority) as represented in the European Securities Committee (ESC).

    —  European Parliament may adopt resolutions (a) within three months on the draft implementing measure; (b) within one month after the vote of the ESC if level 2 measures go beyond implementing powers.


  Committee of European Securities Regulators (CESR) in which the national supervisory authorities are represented, to facilitate consistent day to day implementation of Community law. CESR may issue guidelines and common, but not binding standards.


  Commission checks compliance of Member State laws with the EU Legislation. If necessary it takes legal action against Member States before the Court of Justice.

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