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
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 economy30.5%.
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 legislationessentially level 2 of
the Lamfalussy Process (LPsee 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 institutionsCouncilto 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
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
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.
CESR CHARTER, SEPTEMBER
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
(i) improve coordination among European Securities
(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
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"
latersee 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.
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 explicitlyand 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
THE FOUR LEVELS OF THE LAMFALUSSY PROCESS
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
Technical advice prepared by the
Committee of European Securities Regulators (CESR); following
mandates issued by the Commission and based on consultation with
Favourable vote of Member States
(qualified majority) as represented in the European Securities
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.