Examination of Witnesses (Questions 100-105)
MR JOHN
TINER AND
MR PAUL
WRIGHT
14 DECEMBER 2005
Q100 Jim Cousins: You will have heard
the previous discussion around payment systems, clearance and
settlement. Do you think the belief that our earlier witnesses
had that market-driven solutions will become available and that
is the only and correct route to follow? Do you think that that
is going to work out?
Mr Tiner: There are two distinctive
issues here. One is the whole question of clearing settlement
in the securities, equity bond markets, and the other is the point
that was made about having bank accounts which you can operate
throughout Europe. On the former, I would hope that the industry
can get that together and to work out sensible market solutions
that would lower the costs of clearing and settlement. Clearing
and settlement is a sensitive subject because it is systemically
important to each individual country, by definition: payments
systems, securities clearing systems, the derivative markets and
so on. They are systemically important to individual economies.
In any liberalisation, that needs to be recognised. It is very
important from the UK perspective. Should there be extensive liberalisation
of clearing and settlement that resulted in overseas ownership
of UK clearing and settlement houses, nonetheless in the UK we
would have some means of ensuring systemic stability of those
organisations here. It is a complex issue, but there is no doubt
that directionally I agree with your sentiment; that the industry
needs to have a good look at this and see how they can really
lower the costs of transaction settlement across Europe. It is
quite high, and I think Commissioner McCreevy is on to the right
subject.
Q101 Jim Cousins: That is a distinctly
different tone that you have adopted from the tone that was adopted
by our previous witnesses; and you will, I am sure, be aware of
that. Are we picking you up correctly on this point?
Mr Tiner: Absolutely. Our appetite
for a directive in this area is mildly positive, I would say;
but we would much rather see the Commission and the regulators
putting pressure on the industry to sort this out. We should not
underestimate the influence we have over the companies that can
make the changes that are necessary in the market. We have done
that successfully here. We started using market solutions as a
tool to solve market failures quite successfully. We have done
it in a number of areas now where you do not have to reach for
the rule book or legislation; the market can sort the problem
out. It is a great opportunity here for the European financial
markets to sort this out. I would hope that the industry would
come to the table.
Mr Wright: The cautious welcome
or mildly positive stance of course is subject to the impact assessment,
and that is the point really. The purpose of the Commission's
impact assessment is precisely to demonstrate why a regulatory
solution is likely to be more satisfactory than a market-driven
one, because you cannot regulate your way to a market structure
by and large; so it is all rather dependent on that.
Q102 Peter Viggers: What are the
levers by which influence can be brought to bear upon market practitioners?
We share the concern that the market does not seem to have the
appetite for change that we would like to see.
Mr Tiner: If I may give you an
example to show you what the most effective piece of leverage
that we can exercise is, about this time last year, just as we
were taking responsibility for insurance intermediation in this
country, we observed that the whole question of issuing policies
once a policy had been written was a very slow process—not
in the retail market but in the corporate market, in Lloyd's and
in the London market. Sometimes it took months or years to issue
a policy way beyond the period when the cover had run out, and
sometimes a policy was never written. We coin this deal now "detail
later". We said to the industry: "this is not good practice;
it is not good for London's competitive position, and it is not
good for operational risk, not good for legal risk, and not good
for all sorts of reasons. We invite you to go and sort that out
in two years, so get the brokers, the underwriters, the Lloyd's
people and all the players together and try and come up with a
solution to this; otherwise we will write some rules for you."
That is the leverage. We do not want to write rules here; we want
the market to design a solution that works for the market, but
we have got the big stick of rules in our back pocket, which we
will use as necessary. That is the piece of leverage.
Q103 Chairman: I would like to look
at the Lamfalussy process because you said recently in a speech
that it should be recognised that there are limitations to the
Level 3 committees and what they can achieve. First, can you tell
me what these limitations are? Secondly when we saw Commissioner
McCreevy, he made the point to us that CESR provided guidance
to the Commission, which it rejected on the grounds that it was
bureaucratic and full of red tape. Here we have a body of regulators
that is set up to make things easier, and yet the Commission says
it is bureaucratic; it seems to be a reversal of roles.
Mr Tiner: What I had in mind in
my speech was that the Level 3 committees are well set up to deal
with the technical issues that are put to them by the Commission
or which they feel themselves need to be resolved. I do not think
they are the right bodies to deal with the political questions
that are sometimes sent down from the Commission on the basis
that those political issues could not be resolved in the European
parliamentary process or through the Council or whatever. I think
they are there to provide technical answers. On the advice on
the MiFID, to some extent the detail of that was a consequence
of the consensus-driven style of the Lamfalussy committees, or
at least of CESR, and it is necessary to look at that in the light
of MiFID to say, "if we are going to give crisp, clear advice
to the Commission, do we need to work on the basis other than
consensus where everybody has their little piece of legislation
in there. We should also remember that the MiFID is the first
major piece of legislation that is testing the Lamfalussy process.
I think we should learn things from MiFID for Solvency II and
for any other directive where we are providing advice.
Q104 Chairman: I would not mind a
note from you on that[5]5.
It would give us a deeper appreciation. During our visit we heard
that FSA was giving particular weight to wholesale issues—where,
as we know, the UK is a major player—but less so in retail
financial services. Is that consistent with your understanding
of the work of CESR?
Mr Tiner: No. CESR's agenda so
far has largely been driven by wholesale issues because it has
been supporting the Financial Services Action Plan, which is a
wholesale political agenda. It is not surprising therefore that
CESR has been focused on wholesale rather than retail. That is
the mandate it has been given.
Mr Wright: It is an important
point to go to the first point you made about the limitations
of these committees, and to emphasise the point that CESR has
been entirely preoccupied with MiFID pretty much up to now. Remember
that the Lamfalussy committees have two roles: one is to help
streamline the introduction of new legislation through advising
on implementing measures. The other role is meant to foster real
supervisory convergence, and they have not really had any time
to do that. It is important that CESR does take that opportunity
to do precisely the things you are talking about.
Q105 Chairman: There are a number
of other issues, which you could address to us in your written
communication about the Lamfalussy Level 3 committees resorting
to political level. What could be done to prevent that unwieldy
process? Secondly, would the issue of qualified majority voting
at Lamfalussy Level 3s be a way forward?
Mr Tiner: We are very happy to
do that.
Chairman: Your evidence today has been
very helpful to us and we look forward to receiving written communication.
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