Examination of Witnesses (Questions 20-39)
MS ANGELA
KNIGHT, MR
IAN MULLEN,
MR MICHAEL
COOGAN, MS
SHEILA NICOLL
AND MR
STEPHEN SKLAROFF
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 Commissionif
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repealed in the framework of the legislative procedure.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 objectivebut
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
itthat 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 linkedwe 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 ourselvesand 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 decidewhich
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: Finallythis is
a discussion with technicians or their representativesdo
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 associationsand
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 perspectiveand
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 believeand it is very early daysof
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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