Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20-39)


14 DECEMBER 2005

  Q20  Peter Viggers: The White Paper states that ex post evaluation of the FSAP and of all new legislative measures are a top priority for the Commission—if specific legal texts have not worked, they would be modified or repealed in the framework of the legislative procedure. What parts of the FSAP do you think have not worked and what more would you like to see?

  Mr Sklaroff: Picking up on what Angela said earlier, it is a little early to tell which parts of the FSAP, which is the most recent batch of legislation, are going to have worked. We have some early signs that some of the directives that were grouped under the FSAP have been implemented in very different ways across the EU, which is perhaps a sign that the Directive will not necessarily achieve its objective—but it is probably a bit early to say! Having said that, this statement in the White Paper, is, from our point of view, a very important one. If the Commission is serious about that, and we hope that they are, this could be a very important departure in terms of the way the Commission goes about monitoring the legislation that is already on the statute book, because if we are serious about going back and asking how it worked in practice and whether it achieved its objectives, and if it did not maybe we should change it—that is something that we would very much welcome.

  Ms Knight: I agree entirely with what Stephen has said. Your view about the FSAP depends where you sit. If you are in the Commission, from your perspective you have more or less completed the FSAP. If you are the industry, you have not really started implementing the big directives, so you have a different view. If we look to the Commission to see how they have done with the FSAP, the answer is that they have learnt a lot as they have gone through it. They have learnt such things as it is necessary to find out how the market works before creating a directive; that it is necessary to do cost benefit analysis first. The White Paper actually recognises that. However, from the industry's perspective, because we have not yet implemented the major Directives, MiFID (the Market in Financial Instruments Directive) which is the big framework that changes everything and its sister, the Capital Requirements Directive which is outside the FSAP but inextricably linked—we cannot say that now is the time to evaluate the actual operation of the FSAP, because it is not yet in place.

  Q21  Peter Viggers: Then a specific question to the Investment Management Association: you have noted the need for a change of culture and mindset within the Commission, and you said that you wanted to improve the attractiveness of working with them in implementation and enforcement rather than legislation and negotiation.

  Ms Nicoll: Yes.

  Q22  Peter Viggers: Have you noticed any changes since the appointments of the current President Barroso and McCreevy?

  Ms Nicoll: I certainly think there is a very different approach by both of those Commissioners, in that they are taking very much a pragmatic commercially-orientated approach rather than a philosophical one. That is very important. The issue is that both the Commissioners are saying the right things, but we now need evidence that that is permeating down through the officials. It is too early to say at this stage, but that is the important point.

  Q23  Mr Todd: Turning to the role of the British authorities, how well do you think the FSA is looking after British interests in this exercise?

  Mr Mullen: I think the FSA is a competitive advantage to British industry as far as the wholesale markets are concerned. It is a well-respected institution, particularly in looking at consolidation of co-operation of regulators. The FSA, I would say, leads global opinion.

  Q24  Mr Todd: An opinion shared by you all?

  Mr Sklaroff: It is fair to say that in the insurance sector the FSA starts with a similar advantage in that it is regulating about a third of the entire EU market for insurance because the UK is a third of the EU market. I think it does a pretty good job. I would qualify that by saying that we are in new territory now with these new so-called Lamfalussy committees that have been created, which are aimed specifically at getting Europe's regulators to work together in a different way. I think this is not an FSA-specific point, but it would be fair to say that we have not yet seen that college of regulators approach working practically in a way that has made a difference, so we have a way to go there. We have now got a situation in the last two or three years where, for the first time, the regulator of the UK industry is both a regulator and a negotiator in a very complex set of EU negotiations, and that is a big challenge for all the regulators.

  Ms Knight: We do have one college of regulators of course that has been working for some time, and that is CESR (Committee of European Securities Regulators). How that has bedded down has presented to some extent a model for the banking and insurance regulators to come. We think that there are some issues. The FSA has had the dual role of negotiator and has had to be involved and come to collective agreements with its other regulators; and we have won some arguments and lost some on the way. The big question mark in my mind is this. If CESR's role is to provide the technical advice in relation to filling out the detail within the directives, how has CESR done? The answer certainly in many areas is that it has been too detailed. Regulators have got to bear responsibility for that.

  Q25  Mr Todd: I am going to come to the point about how to convert these into UK legislation because I have a particular concern on that, but what is the role of the Treasury in this?

  Ms Knight: Good.

  Q26  Mr Todd: I think that one of the submissions drew attention to the fact that people are of very high quality but there was a bit of concern as to whether there were enough of them dedicated to this process.

  Mr Mullen: Thought leadership is hugely important when one is looking to influence law and regulation within not only the European environment but within a global environment. Again in wholesale markets, where we have such a strong position then it is essential that we are there with thought leadership. The way in which the industry, the regulator and the Government, through the Treasury, co-operates today is near exemplary to where we were four or five years ago. This ability to combine and realise thought leadership on a global or European basis is hugely important to us in our competitiveness.

  Ms Knight: In terms of the staff, they have started to reduce staff.

  Q27  Mr Todd: I hinted at that. There was a question of quality and quantity.

  Ms Knight: We think the quality has been good, as is how they have interacted with the industry, but for preference we would not say now is the time to step down; we would like to see that involvement maintained post presidency.

  Q28  Mr Todd: Perhaps I can explore the dividing line between political direction and technical management of this process because obviously they cannot be entirely disentangled. Do you think that that division is being appropriately addressed so that the discussion of the technical detail had been done at a point where political direction has already been established, or has there been some confusion?

  Mr Sklaroff: I think it is getting better, but from a pretty low base. I think there have been confusions of the kind you have just suggested in the past, which have led to not terribly sensible negotiating positions for UK plc, and that in turn has led sometimes to directives which are not as good as they could be.

  Ms Nicoll: There has also been an issue specifically in the context of the Markets and Financial Instruments Directive because there were a number of political issues that were sidestepped at the framework level, and they were devolved down to the technicians; so the technicians found themselves in a very difficult position because they were having to sort out what should have been sorted out at the political level.

  Q29  Mr Todd: The hint is that it is getting better, but there is still some disentangling of accountability to be done.

  Ms Nicoll: One would hope that it will be better. MiFID started quite some time ago and it was written in a non-consultative mode, so there was no real consensus as it went into the negotiation process as to the direction it should be going in.

  Q30  Mr Todd: Then we have the final stage, which is nailing this into a UK legislative framework in which Britain has a reputed position of gold-plating what is sent down from Brussels and where there is also an argument of failure of engagement in that final critical process, but all of a sudden some knobs and whistles have been added in that the practitioners have not been asked about. How do you want that addressed? We are not there yet on this matter.

  Ms Knight: As an industry we have sought to address this ourselves. The promise that has been made by regulators and indeed government alike is to do what is called "copy out" the directive; that is that they just copy out the text into UK requirements. On the one side that is good because, clearly, it just says, "this is what is in the directive" and bells and whistles are not attached. On the other side of course the Directive is written in fluent European, so there is an interpretive issue; and it is not just interpretive for us it is the same elsewhere. A Group of Trade Associations put together something we call the MiFID Connect Project, which in effect will look at the grey areas and the areas where variable interpretation is possible, and collectively write the guidance for different types of firms as to how that part of the Directive should be interpreted. The Treasury and the FSA are fully supportive of this approach, and therefore if in the future we shout about gold-plating, in fact we have done it to ourselves—and that is something we are not going to do. This project takes a very practical view, which is an essential point. To take one example, clearly "best execution" if you are a private client firm is going to be different than if you are one of the asset management firms. By writing guidance from an industry perspective, one can get the blush right for the different types of business model while meeting the requirements of the Directive.

  Q31  Mr Todd: Is there any suggestion of a change in the parliamentary process to ensure that we get this right here, because very few of us are technicians in this area and most of these matters are signed through in the briefest possible way? Is there anything that you feel should be done to ensure this critical area is addressed properly in this House?

  Mr Mullen: We have the All-Party Group of Wholesale Markets, which was started some three years ago and which is very well supported by both Houses of Parliament. It is the case that particularly on matters European there is a dearth of interest and involvement in the European process from Parliament heretofore.

  Q32  Mr Todd: I think most of us would concede the process is perfunctory—

  Ms Knight: We made two specific recommendations for the involvement of Parliament, we hope, more fully in the process, because it is very easy for complex European legislation simply to pass its way through on the nod. That is well understood, and I can see why. The recommendations that we have made to you is first that there should be some form of established all-party committee we would- suggest the House of Commons and House of Lords but that would clearly be for you to decide—which would have the power to call for evidence from the industry and which examines directives once they have been drafted and has sessions with the industry to see where it has gone further or been interpreted in a different way. That is the first one.

  Q33  Mr Todd: That is the first one.

  Ms Knight: Yes, and that committee would have to have powers to amend. The second is that one of the issues with legislation of European complexion is that you have to get it right in Brussels, and there is the considerable involvement of ministers as well as a lot of others in the process- and that process does not lend itself to too much clarity. We would like to see an industry/Parliament briefing session of ministers before they go to negotiate. I do not wish in any way to imply that the Treasury has not done a good job; the officials within the Treasury have been very good at getting the opinion of the industry; and then the Treasury has created a synopsis that it has passed on. We think that more direct contact with the negotiating ministers would be an improved way forward.

  Q34  Mr Todd: Finally—this is a discussion with technicians or their representatives—do the consumers have a voice in this process?

  Ms Knight: There needs to be better consumer involvement actually. Again, to give credit to the Commission, it has tried to get consumer involvement; but whilst firms are pretty well organised into their trade associations—and indeed that has improved elsewhere in Continental Europe-consumers tend not to be. We do have certain exceptions in this country with our Consumer Association, but they tend to be elsewhere. Although one tries to look at these things from a consumer perspective—and I hope as an organisation we do because our firms have 3 million individuals as their clients. I hope we look at it as well as we can from that direction. There is nevertheless a real need to try and form consumer forums and consumer discussions, otherwise associations do it technically and we do it firm-wise, and we say, "we think we have got the consumer in there" but we can miss the point too. I would like to see consumers much more involved.

  Mr Sklaroff: I would very much welcome that, and I think it is good that this White Paper contains, if only a couple of sentences, a couple of quite important sentences on capacity-building on the consumer side in this debate.

  Q35  Jim Cousins: Could I ask the ABI representative: the Investment and Life assurance Group drew our attention to the Insurance Mediation Directive, which does not figure largely in the evidence from your organisations. They said that it was causing a capital flight to Bermuda. Would you agree with that? Why does that come about?

  Mr Sklaroff: It is certainly the case that the Insurance Mediation Directive is an example of the kind of not terribly well-researched or thought-through directive, and one that was not terribly well consulted on, that we have been talking about and hoping was a thing of the past. It has been implemented in vastly different ways across the EU. It has had the effect we believe—and it is very early days—of adding costs and therefore making the cost of capital higher than it would otherwise be. If you have a choice as to where you are going to put your mobile international insurance capital, you will tend to put it in a jurisdiction where you do not have the extra costs associated with, for example, the IMD. What I could not off the top of my head just now is give you a figure and say, "this has caused the flight of X, Y or Z volume of capital"; but anecdotally we hear what you have heard.

  Q36  Jim Cousins: It would be interesting if you could put a little bit of flesh on that.

  Mr Sklaroff: We can certainly do that for you.

  Q37  Chairman: At the moment it is a theoretical point.

  Mr Sklaroff: We have some practical data from the UK market and indeed from other EU national markets on how the IMD has been implemented in very different ways, with potentially distortive effect. We would certainly be very happy to give you a note on that.[2]

  Q38 Chairman: It is the flight to Bermuda we are interested in, particularly at Christmas time!

  Mr Sklaroff: We shall look into that in the same spirit.

  Q39  Jim Cousins: There is nothing more attractive than the thought of a bit of insurance mediation at Christmas! If I could ask the British Bankers' Association representative, you had said in your submission that you set out a number of obstacles to the consolidation of firms across borders. The most important of those was the issue of legal structures. Do you think that the impediment is legal structures, or simply that there is no market desire to consolidate across borders?

  Mr Mullen: I think the legal structure is a major impediment. The three pillars of retail banking are the garnering of deposits, payments, and then, having garnered the deposits, the on-lending of those monies effectively. These are the three pillars. The most demanding of those in terms of expertise and market knowledge is the on-lending. In order to have an effective lending capability it requires years, indeed decades, of customer information and customer data in order to be able to lend effectively. It therefore is extremely difficult to enter a market and grow organically. Therefore the way in which one traditionally expands within retail banking is to acquire. As long as there are barriers to the ability to acquire banks across borders in many countries in Europe, then this will be a major inhibitor to the expansion of retail banking in Continental Europe.

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