Select Committee on Treasury Seventh Report

Conclusions and recommendations

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. (Paragraph 6)

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 non-regulatory barriers. (Paragraph 9)

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. (Paragraph 10)

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. (Paragraph 13)

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. (Paragraph 15)

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. (Paragraph 17)

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 organised 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. (Paragraph 19)

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 committees—with genuinely technical input provided by the Level 3 committees at this stage—rather than leaving them for the FSA and other European regulators to debate later in the Level 3 discussions. (Paragraph 26)

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 considers unacceptable. (Paragraph 31)

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. (Paragraph 32)

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. (Paragraph 39)

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. (Paragraph 42)

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. (Paragraph 43)

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. (Paragraph 47)

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. (Paragraph 53)

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