Appendix: Government response |
The Government welcomes the publication of the Committee's
report and notes its conclusions.
European Commission's financial services policy
1. The FSAP was a wide-ranging and ambitious programme
of new legislation. As the FSAP comes to an end, the Commission
has placed greater importance on ensuring consistent and workable
implementation of the existing financial services legislation.
We welcome this change of emphasis under President Barroso.
We agree. The Government has consistently supported
the consistent, proportionate and timely implementation of the
FSAP. This is essential if the FSAP is to deliver its full benefits.
Creating an EU Single Market in Financial Services
2. Based on the evidence that we received, there
is some evidence of financial institutions expanding through the
acquisition of banks and insurers in other European countries.
However, a single market in European financial services, with
comparable products and services available to consumers direct
across borders, does not appear to be a realistic proposition
in the near future. The industry should look for ways to manage
the non-regulatory barriers to cross-border sales of retail financial
services products, particularly in areas in which the UK market
has a product offering that is unavailable elsewhere in Europe.
However, we recognise that, in some markets, such as the mortgage
market, the non-regulatory barriers are significant and so, even
in a consistent regulatory environment, there is unlikely to be
significant cross-border growth. In these circumstances, the Commission
should ensure that, in evaluating the likely costs and benefits
of future proposals, it takes account of the fact that growth
in cross-border sales is likely to be limited as a result of the
The Government believes that facilitating greater
cross-border consolidation in the EU represents an effective means
by which to increase integration in retail financial markets.
The Government welcomes Commissioner McCreevy's pledge
to conduct rigorous ex ante impact assessments ahead of
considering any new regulatory proposals, especially in retail
markets. Such impact assessments should consider the costs and
benefits of both legislative and non-legislative options for action.
European cross-border consolidation
3. It is essential that the United Kingdom, through
the European Council, supports moves by the Commission to prevent
countries from erecting artificial barriers against consolidation
in the financial services sector and exerts pressure on European
countries that attempt to thwart cross-border merger and acquisition
activity for unacceptable reasons.
The Government will support the Commission in attempting
to prevent Member States blocking cross-border mergers and acquisitions
on non-prudential grounds, both through a revision of existing
EC legislation in the financial services sectors and in the robust
application of competition rules.
4. A change in the working culture at the Commission
towards more proportionate, risk-based, policy making will not
happen immediately. We welcome Commissioner McCreevy's assurances
that the Commission will prove that new regulation will have a
clear benefit to the European economy. It is essential that European
policymakers ask and receive answers to the simple questions that
McCreevy is posing: Is there a case for action? Is it the EU that
is best placed to act? Is a regulatory proposal the only possible
solution? To ensure growth and competitiveness in the European
financial services industry, the Commission must now deliver on
its promise to ensure better regulation principles are followed
in its policymaking.
The Government strongly welcomes Commissioner McCreevy's
emphasis on the Better Regulation agenda, and will continue to
press for the use of market-led or non-legislative solutions to
be considered ahead of any proposal for EU legislation.
5. National parliaments, national governments,
the Lamfalussy committees, the Commission, the Council, the European
Parliament and businesses themselves must all recognise that we
have a joint responsibility towards ensuring that European financial
services legislation is justifiable and proportionate.
The Government agrees that Better Regulation is a
shared responsibility for public administrations at all levels
and business has a key role to play in providing evidence to them.
Implementation and enforcement
6. We are encouraged by Commissioner McCreevy's
work to place greater emphasis on enforcement and implementation
across the European Union, which entails a cultural change within
the Commission. It is essential that the implementation and enforcement
of MiFID and the other existing legislation become the priorities
of the Commission in relation to financial services, rather than
focusing on drafting and negotiating new legislation. We believe
that there is the need for a period of 'bedding down' of European
financial services legislation.
Implementation and enforcement of financial services
legislation is an essential element in realising the FSAP's benefits.
The Government fully supports the Commission's efforts to implement
and enforce the agreed FSAP measures in a consistent, proportionate
and timely manner, and has consistently argued this should be
the top priority for the next five years.
Consumer representation and protection
7. As European retail financial services markets
become more open, it is important to ensure that consumers have
the chance to have more input into the European legislative process.
Presently, companies are organized into their trade associations,
generally articulate and strong lobbyists, whereas consumers,
particularly in Brussels, tend to be less well represented. We
welcome the move in the Commission's recent White Paper on Financial
Services Policy towards establishing a permanent group of consumer
representatives from across Europe and would commend the Financial
Services Authority's Consumer Panel as a possible framework to
enable the consumer voice to be heard at all levels.
The Government welcomes the Commission's announcement
that it intends to establish a permanent consumer panel, underlining
the importance of ensuring the interests of consumers are represented
in the policy making process. (In the UK, the FSA Consumer Panel
provides an excellent and necessary input to policy formation
in the UK, particularly in respect of EU proposals where it is
difficult to secure evidence based user input.)
The Lamfalussy structure
8. Based on the evidence received by the Committee,
the Lamfalussy structure appears to be functioning reasonably
effectively. The main difficulties appear to stem from the tight
timeframes that the Commission has typically imposed on the Lamfalussy
committees to deliver advice. The Commission should consider slowing
the legislative process where necessary, in order to ensure that
the committees are able to fully investigate and resolve the issues
involved. In addition, it is essential that the Treasury attempts
to ensure that any clearly political matters are resolved in the
Level 2 committeeswith genuinely technical input provided
by the Level 3 committees at this stagerather than leaving
them for the FSA and other European regulators to debate later
in the Level 3 discussions.
The Government welcomes the Treasury Committee's
assessment that the Lamfalussy arrangements appear to be functioning
reasonably effectively. Like the Committee, the Treasury believes
it is important that the Commission allows adequate time for the
so-called Level 3 Committees to consult and to prepare their advice
taking into account the principles of better regulation. Nevertheless,
it is also important to balance this against the need for timely
changes to legislation.
The Government also agrees with the Treasury Committee
that political agreement on European Directives should be brokered
through co-decision at Level 1, leaving detailed implementing
measures to be agreed at Level 2. To the extent that some of these
measures take on a degree of political importance, we agree that
decisions should be taken at Level 2, not Level 3.
The Role of the European Parliament
9. It appears to us that the Lamfalussy structure
is developing well. We consider it important that the present
ambiguity regarding the role of the European Parliament in the
process is removed. The evidence we have received indicates that
the European Parliament is playing a constructive role in the
legislative process for financial services, particularly in its
contribution to scrutiny of delegated implementing measures in
the Lamfalussy structure. We consider that the European Parliament
should have a formal role in examining Lamfalussy level 2 implementing
measures within a reasonable timeframe, with the ultimate sanction
of blocking or "calling back" any measures which it
The UK Presidency was instrumental in establishing
the work on a new comitology decision which would reflect the
informal agreement between the EU institutions (as set out in
the so-called Prodi declaration) within the current treaty. We
therefore welcome the fact that an agreement has been reached.
This will permit responsive and flexible regulation of the financial
sector through the Lamfalussy process, which is essential to ensuring
that the EU's financial markets remain competitive, liquid and
10. We recommend that the Government should, in
its response to this report, provide full details of the draft
inter-institutional agreement on comitology procedures, together
with the Government's assessment of the agreement and its application
to the Lamfalussy process.
The Foreign Office has detailed the new Comitology
agreement in EM 10126/1/06 Rev 1 laid before Parliament on 10
July 2006. It will apply to the Lamfalussy process in the same
manner as in other policy areas.
Case Studies: Markets in Financial Instruments
11. Whilst we recognise the difficulty in estimating
the costs and benefits of one part of an overall policy framework,
the work involved in undertaking a cost-benefit analysis undoubtedly
furthers and enriches the debate around what a measure is supposed
to achieve and what changes firms will need to make to implement
the measure. Accordingly, we are concerned that, to date, there
has been no formal evaluation of the costs and benefits of MiFID
by the Commission and will be extremely interested in the cost-benefit
analysis on MiFID to be prepared by the FSA. We also welcome the
new approach to cost-benefit analysis being taken at the Commission,
which will require full assessments to be carried out on future
proposals of this sort.
The Government also believes the cost-benefit analysis
is central to making progress with better regulation in respect
of EU financial services work. Whilst acknowledging the significant
efforts the Commission has made to consult on MiFID and its implementing
measures, without a proper cost-benefit analysis it can be difficult
to weigh the merits of particular arguments. Such analysis needs
to be at the core of decision making.
MIFID IMPLEMENTATION IN THE UK
12. Whilst we applaud the leading position that
has been taken by UK-based financial services companies with regard
to MiFID, there is a clear risk that the Directive will not be
promptly and fully implemented in all other European countries.
It is also important that 'passporting' rights are recognised
across Europe, in order to more readily allow UK-based firms to
set up branches in other European countries and to ensure that
the responsibilities of home and host regulators are clearly delineated.
It is therefore essential that the Commission demonstrates its
new focus on implementation and enforcement through ensuring that
MiFID is implemented consistently across Europe.
The Government agrees that in respect of MiFID, the
challenge now facing the Commission and Member States is to achieve
a prompt and consistent implementation of the directive. In this
respect, we welcome the transposition workshops that the Commission
has convened for Member States to discuss issues connected to
the implementation of the directive. In this forum we have had
useful discussions of a number of issues, including how best to
ensure the transition between the passporting rights under the
existing directive and those under MiFID.
13. Furthermore, the implementation of MiFID by
national regulators will be a strong test of the Lamfalussy framework.
Following the implementation of MiFID, we would encourage the
FSA to consider reviewing the way in which the Lamfalussy process
has worked in order to identify lessons for the future.
The key aspect of the Lamfalussy framework that MiFID
has tested so far has been the arrangements for implementing measures.
Overall the Government believes that the arrangements here have
worked well. The Committee of European Securities Regulators produced
serious and comprehensive advice. This formed the basis for the
legislation agreed by the European Securities Committee which
strove to find a political compromise which took proper account
of the need to protect investors and minimize burdens on business.
This approach was endorsed by the European Parliament's Economic
and Monetary Affairs Committee, and subsequently, by the plenary
of the European Parliament itself. The challenges will be different
once the directive is implemented and regulators have to use it
as the basis of their supervisory work. We would expect the FSA
and its colleagues in CESR to strive to ensure that they work
together in the most effective ways possible to help ensure its
consistent application and enforcement.
Possible directive regarding mortgage credit in
14. It would be undesirable for the UK mortgage
sector to implement new regulation as a consequence of European
legislation if it has little or no incremental benefit to consumers.
The case for a new mortgage directive remains unproven.
The Government supports the Commission's continuing
focus on the principles of better regulation in this area. As
stated in the UK's response to the Commission Green Paper, alternatives
to regulation should be fully explored before any decisions are
made on legislative interventions. Rigorous cost-benefit analysis
will be required to justify any specific action. Without this
analysis, the case for a Directive on mortgages remains unproven.
Possible directive in the area of cross-border
clearing and settlement
15. It is therefore important that the additional
cost associated with clearing and settlement across borders is
reduced over time. We are pleased with the approach taken by the
Commission in this area, which appears consistent with their 'better
regulation' agenda. The Commission has indicated that it is willing
to step aside if a market-led solution starts to appear in this
area, and the Commission must deliver on this promise if a sensible
solution emerges. We note that clearing and settlement has a systemic
importance to a financial services market, although this is not
a reason for inaction within a single European market for financial
services. If the market cannot or will not address the high costs
of clearing and settlement in Europe, it can have no complaints
when policymakers start to become involved.
The Government agrees with the Committee's preference
for a market-based solution, and endorses the challenge outlined
by Commissioners Kroes and McCreevy to industry to bring forward
proposals that would obviate the need for legislative action.