Memorandum submitted by the Association
of Private Client Investment Managers and Stockbrokers (APCIMS)
SUMMARY
1. It is too early to judge the Financial
Services Action Plan as while the measures have mostly exited
Brussels, the majority have not yet been implemented in the UK.
However:
(i) the Distance Marketing Directive has
been applied in the UK to financial services with a greater rigour
than elsewhere;
(ii) the Prospectus Directive appears to
be having an adverse impact on bond offers to retail clients;
(iii) the Market in Financial Institutions
Directive (MiFID) and its sister the Capital Requirements Directive
(CRD) will be expensive to implement;
(iv) no work on understanding how the different
markets operated, where the barriers truly were and impact analyses/cost
benefit analyses was undertaken in advance of creating the FSAP.
2. The Commission White Paper on Financial
Services Policy (2005-10) counts to the important principles
of impact assessments, transparent consultation, including pre-consultation,
the avoidance of gold plating and equal implementation. This is
a big step forward and is commendable. However:
(i) the temptation to bring forward more
measures for "retail" in the area of securities must
be resisted. Individuals use an intermediary (whether it is on
an advice or on a no advice basis) when they buy or sell investments
and their access to more cross border securities at a better price
will depend on the intermediary. In turn, that relates directly
to MiFID;
(ii) the arrangements for redress and compensation
should something go wrong is very patchy and the comprehensive
arrangements of the UK are not repeated elsewhere. Revising the
FIN-NET arrangements or similar is therefore required.
3. The Lamfalussy arrangements are
an improvement on the previous process and have resulted in more
and better consultation with the industry. However:
(i) CESR produces too many and too detailed
technical measures or rules;
(ii) there exists clear differences between
those countries who want every requirement to be exactly the same
and those who prefer principles and equivalence;
(iii) there is a desire from CESR to create
a pan-European regulator;
(iv) where political decisions are ducked
at the Directive stage, they have to be revisited at CESR;
(v) CESR has to improve its consultation
both in terms of the time it gives and in responding to legitimate
industry issues;
(vi) the Level 3 or equivalent implementation
stage and Level 4 the enforcement stage have not yet been tested.
4. The European Parliament, and particularly
the ECON Committee, have taken an active involvement in the
FSAP. ECON has amended significantly the main Directives in response
to industry requests, has produced reports from its own initiatives
and has sought to understand the issues. However:
(i) it plays no formal part after the Directive
has been created and only considers the CESR measures as a result
of an agreement between the Chairman of CESR and the Chairman
of ECON;
(ii) it is the only European institution
in the process that has a democratic mandate and as such its role
in the Lamfalussy process needs to be further extended and formally
established.
5. The implementation of MiFID will
be complex, extensive and costly affecting both wholesale markets,
firms and institutions and the nature and type of arrangements
between firms and their retail clients or customers. The UK has
undertaken to "copy out" MiFID and extensively consult
on the best way to implement its requirements. However:
(i) there will be many areas where interpretation
is required (for example, best execution) and so six trade associations
(FOA, BBA, ICMA, APCIMS, IMA and LIBA) have formed the MiFID Connect
project and hired legal advisers to write the necessary industry
guidance;
(ii) whilst MiFID is market opening for
some countries, it may well be restrictive for the UK;
(iii) it requires firms to make changes even
when they undertake no cross border business.
6. Although cross border clearing and settlement
is expensive and there are clear requirements for reducing the
costs, we are not convinced of the need for a Clearing and Settlement
Directive. The reasons for not being in favour are:
(i) firms need a rest from continuous regulatory
change;
(ii) Directives inevitably consist of a
series of compromises; they take longer than intended and they
bring about unintended consequences and unintended changes;
(iii) much can be achieved using common standards,
harmonising corporate actions requirements and through Exchanges
who are at the start of the "food chain".
7. We consider that the Better Regulation
Principles would be assisted in the UK by:
(i) An All Parry Committee of House of Commons
and House of Lords be set up to scrutinise the EU Directives once
they have been drafted for inclusion in UK law. This Committee
should have the power to call for evidence from the industry and
to determine whether the UK proposals implement the Directive
to give the intention that was required or whether there are additions
and changes which will have an adverse impact on the industry.
Such a Committee will need to have relevant powers to recommend
changes to the proposed UK draft of the legislation.
(ii) Although there are already a number
of panels and forums for industry practitioners with representatives
from HM Treasury and the FSA, we believe that a new panel needs
to be set up specifically to monitor the development of the FSAP
and to take evidence from industry on problems and issues over
implementation, including rule changes and with the powers to
recommend alteration and adjustments as necessary. This panel
would be able to take evidence from industry on problems and issues
and to come up with sensible and pragmatic solutions.
(iii) Our third recommendation is that the
FSA sets in place an information group specifically designed to
discover, discuss and determine how other countries are proposing
to implement the various FSAP requirements and how this will impact
on their existing industry practices. This information gathering
unit also needs to look at the timing of implementation in the
various states. Such information then needs to be widely disseminated
with the intention of ensuring that the UK does not go ahead of
other member states.
(iv) In view of the very technical nature
of financial services legislation, an industry/Parliament briefing
session of Ministers should take place before they attend meetings
in Brussels.
1. DEVELOPMENTS
IN RELATION
TO THE
FINANCIAL SERVICES
ACTION PLAN
(FSAP)
The main areas which have most affected the
FSAP measures and will continue to do so in future unless the
European authorities change their approach are:
— the absence of detailed market knowledge
before Directives are created;
— the extent and nature of the industry
consultation;
— whether or not legislation is tightly
targeted and used only as a last resort;
— the extent that CESR exercises its
powers to make detailed technical measures or rules;
— the absence of impact analyses/cost
benefit analyses in advance of proceeding with proposals;
— the unresolved tension between those
countries who wish to have complete harmonisation of rules and
those who want a high level principled approach; and
— to-date the unaddressed question
of differential implementation in the different countries.
Although most of the measures of the FSAP are
now through their European legislative processes the majority
have not yet been implemented. The APCIMS community is heavily
involved in all aspect of this FSAP as our member firms address
the market in institutional capacity but their client under conduct
of business rules. This means that our firms have to make the
changes which relate to "wholesale" as well as those
which affect "retail". As such, it is likely that many
APCIMS member firms will find themselves making more changes than
any other sector of the financial services industry in the UK.
Those Directives which have already been adopted
and implemented include the Distance Marketing Directive, the
Market Abuse Directive and the Prospectus Directive. At present
it is too early to assess the impact of these changes as the implementation
has been so recent. However, we are aware that the Distance Marketing
Directive has resulted in our firms making changes which have
not necessarily been replicated in other European countries. Whilst
philosophically we do not object to the cooling off periods that
the Distance Marketing Directive required, nevertheless because
the UK applied it to service contracts where other did not, they
have had extra costs as a result. In addition, it is difficult
to see that there have been any benefits gained by the implementation
of this Directive.
With respect to the Market Abuse Directive,
much of the cost of implementing this in the UK has been attributed
to the new requirements for PLCs. It is also important to note
that the UK had only recently implemented its new market abuse
regime and therefore this further change was seen as being unnecessary.
Turning to the third Directive that has already
been implemented, the Prospectus Directive, two particular issues
have arisen as a result. The first was eventually resolved by
legal opinion taken by ourselves in conjunction with the QCA—an
organisation that represents smaller quoted companies—so
that discretionary clients could in future continue to invest
in new issues where appropriate without triggering expensive additional
costly prospectus requirements.
The second issue though is "slow burning"
and at present we have not firm data with which to assess the
final outcome. When a company issues bonds, the determination
as to whether it is targeted at "wholesale" or "retail"
is decided by the size. If the bond is offered in sizes less than
€50,000 then it is deemed "retail" and triggers
an additional set of requirements whereas if the bond size is
above €50,000 then this is deemed to be "wholesale"
and the costs of issuance correspondingly much lower. Since the
Prospectus Directive was implemented in the UK, there appears
to be a noticeable movement away from issuing bonds in retail
sizes.
Realistically a full assessment of the full
impact of these three Directives will only be possible some 12
to 18 months after their live operation, and that will not be
until early 2007.
However, the two main Directives that will affect
the financial markets are the Markets in Financial Instruments
Directive (MiFID), which is part of the FSAP, and its sister Directive
the Capital Requirements Directive, which is not technically an
FSAP measure. Any firm that is inside MiFID is required to also
implement the CRD. Taken together, these will have the most far
reaching and costly impacts on our members. The Capital Requirements
Directive does not start to implement until the beginning of 2007
and MiFID has as its deadline date November 2007. This underpins
why any reasoned evaluation of the FSAP cannot take place as the
two major Directives have not even started their implementation
process—in fact, some of the detail of MiFID has not even
yet been finally decided!
The UK authorities have decided to "copy
out" these two Directives in order to avoid the risk of gold
plating. In turn, this means that there will inevitably be areas
where significant further clarification is required. This is particularly
noticeable with MiFID, and APCIMS, the Future and Options Association
(FOA), British Bankers Association (BBA), International Capital
Markets Association (ICMA), the London Investments Bankers Association
(LIBA) and Investment Managers Association (IMA), have put together
the "MiFID Connect" project which will provide coherent
and practical guidance for all financial services firms on these
interpretive issues.
2. THE EUROPEAN
COMMISSION'S
GREEN PAPER
ON FINANCIAL
SERVICES POLICY
AND WHITE
PAPER 2005-10
APCIMS considers that the fundamental principles
that should be followed by the Commission is that further action
should only be taken at EU level when the following conditions
apply:
— The industry has highlighted a problem
or barrier that still remains; and
— other methods of removing this problem,
such as competition policy, have already been tried; and
— a cost benefit analysis has been
undertaken which shows that the costs of taking action are outweighed
by the benefits that would result.
Our assessment of the Commission's White Paper
is favourable in that it is openly committing itself to the important
principles of impact assessments, transparent consultation including
pre-consultation, the avoidance of gold plating and equal implementation.
This is a substantial step forward changing the emphasis from
policy diktat to asking the industry first what actually needs
to be done, how it should be done and what are the costs involved.
If this approach is maintained then the chances of realistic and
pragmatic changes in future which target only the problem areas
is much more likely to be achieved.
Whilst we accept the need for financial integration
and the ultimate benefits of creating a true single market in
financial services, care needs to be taken to be both practical
and realistic in what is proposed for individuals, whether we
call them retail, consumers or private clients.
We do not propose to comment upon banking issues
in this context, rather our areas of attention are how will an
individual in one country be able to purchase securities cross
border, what protections will they receive, what arrangements
are in place should a problem arise and redress mechanisms are
in place? Realistically individuals are much more likely to involve
themselves in the financial services within their own country
than externally, particularly where advice is required. The model
therefore that the industry should be seeking to achieve is one
of "think pan-European; sell local". Whether an individual
requires advice or whether they purchase the financial service
from an internet site, it is the firm that takes responsibility
for that individual and therefore the key issues are whether that
firm can operate coherently on a pan-European basis. We make these
points as often confusion can arise in this area with some not
fully realising that it is barriers to firms trading which are
as important for the individual as they are for the financial
entity. Individuals are not directly connected to, for example,
stock exchanges without an intermediary. The issue is one of whether
that intermediary is execution only or whether they give advice.
In advance of any consideration to target further
measures into the retail financial services arena, serious consideration
must be given to the whole question of compensation and redress
should problems arise. The UK operates a far more extensive financial
services ombudsman arrangement than any other country and has
a compensation scheme where failure has arisen whose breadth and
depth is not replicated elsewhere. Whilst not wishing to place
similar arrangements on other European countries, nevertheless,
unless there is simple easy access to a local ombudsman and a
local compensation scheme, then it is difficult to see how the
individual can participate cross border with sufficient confidence.
The loose arrangement known as "FIN-NET" requires review
in order to meet these criteria.
Our last comment with respect to the White Paper
is that European changes must take into account the global context.
Firms do not just operate in a number of European countries but
also on other continents, multiple regulatory requirements resulting
from insufficient co-ordination between the policymakers of the
different countries has to be avoided in future as a matter of
significant priority.
3. THE OPERATION
AND DEVELOPMENT
OF THE
LAMFALUSSY ARRANGEMENTS
The intention of the Lamfalussy process was
for Directives to contain a few high level principles and the
technical measures to be created through the Committee of European
Securities Regulators and in conjunction with the industry. Equivalent
implementation would then result, enforcement if required and,
over all, a greater degree of flexibility to make and unmake technical
measures in accordance with the dynamic market place.
APCIMS supports the Lamfalussy process but nevertheless
notes that Directives such as MiFID have become enormously extensive
pieces of legislation with considerable detail in the Level 1
text of the Directive with further lengthy rules and requirements
added as a result of the technical measures advised by CESR. As
the Lamfalussy process develops, so CESR has to learn to trust
the regulators who make up its committees much more if this detail
is to be reduced. Equally, many European countries have to understand
much better what is meant by consultation with their own industries
and adopt open processes. Lastly, politicians need to be more
fully aware of both what it is that they are agreeing to and be
better able to debate some of the detailed technical issues as
and when called upon to do so.
Overall though it is too early to assess in
a comprehensive way how the Lamfalussy arrangements are operating
nor do we wish to seem too critical. The so-called Level 3 which
is the equal implementation in the various countries and Level
4, which is enforcement as and when necessary, have not yet been
tested. However it is possible to make some general observations,
and these are as follows:
(i) It is vital to keep the Lamfalussy process
under continuous review and, in this context, we support and endorse
the work of the Inter-Institutional Monitoring Group (IIMG) and
have contributed three written responses to its consultations,
in May 2003, December 2003 and January 2005.
(ii) We believe that CESR's role and the
boundaries of its responsibilities need to be defined much more
clearly. It has become increasingly apparent, especially through
the MiFID discussions, that CESR believes it has a right to have
its proposals included unchanged in the legislative process. Furthermore,
CESR is not only including too much detail in areas that should
be left to national regulators, it also has been re-looking at
issues that have already been decided at level 1, or for which
it has not been given mandates. In part, the lack of clarity over
where CESR's boundaries lie may have been caused by unclear mandates
from the European Commission over some of the MiFID mandates,
but this is an important point which needs to be resolved in the
short term.
(iii) There is little doubt CESR has included
too much detail in its advice especially on MiFID because of a
failure to agree on some important issues when the Directive was
being considered. For example, what is meant by "a liquid
share" and the definition of "investment advice".
The result of this is that all the arguments that took place over
the Directive were revisited as CESR, putting the regulators who
comprise committees in difficult positions and resulting in many
more rules than might otherwise have been the case.
(iv) The involvement and role of industry
practitioners must also be highlighted. It is our view that at
present there is insufficient practitioner involvement with the
various processes. We are very concerned that there are so few
practitioners on CESR's expert groups. Whilst we have no doubt
that CESR's consultative processes have improved, there is a long
way to go before CESR truly recognises that it is only the market
practitioners who will be able to say why a particular rule will
or will not work. It is often impossible to see that CESR has
taken on board industry comment and to see this reflected in the
final advice it has given the Commission. It is not possible to
have better regulation without additional market practitioner
involvement.
4. THE IMPACT
OF BETTER
REGULATION PRINCIPLES
We wholeheartedly welcome the commitment to
"better regulation principles" and to targeted regulation
rather than more regulation. We consider that the key steps in
ensuring better regulation are as follows:
(i) A survey needs to be undertaken on how
the markets in the different European countries are operating
in relation to the particular issue the Commission is considering.
(ii) Following that study, consideration
has to be given as whether the problem identified can be resolved
by any other method including:
— mutual agreement amongst regulators;
— competition policy; and
— market resolution.
(iii) If it is necessary to take the proposal
forward, then an impact analysis must be done next, in conjunction
with a full consultation with industry. This impact analysis must
include a cost benefit analysis.
(iv) If the impact analysis and the cost
benefit analysis both point towards a need for legislation, it
is then and only then, that a Directive or Regulation should be
considered.
(v) Any such Directive must be tightly targeted
at the problem and with considerable care given to ensure that
it does not have either a wider than intended impact or adverse
consequences to other sectors of the market place.
(vi) The Directive needs to set out high
level principles only, rather than detail.
5. THE ROLE
OF THE
EUROPEAN PARLIAMENT
IN THE
LEGISLATIVE PROCESS
When the Lamfalussy process commenced, the role
of the European Parliament was uncertain. Whilst it could participate
in the Directive process, it had not established role in looking
at the mass of measures proposed by CESR.
It has been our experience that the members
of the Economic and Monetary Affairs Committee (ECON) have taken
their work very seriously with the Directives that make up the
Financial Services Action Plan and have been prepared to amend
the Directives, put forward proposals and debate initiatives which
have significantly improved the quality of the result. Indeed,
the industry found itself not only spending time and effort with
the Commission and with CESR but also with ECON who arguably have
been more prepared to accept industry issues than the other two
institutions.
As a result, the European Parliament plays a
vital role in the assessment and review of financial services
legislation and that their proposed amendments on both MiFID and
the CRD have led to significantly better final legislation. This
needs to be properly enfranchised and it is our view that the
European Parliament needs to be fully involved with all stages
and have agreed powers to review and amend—it is, after
all, the only part of the European process where the institution
has a democratic mandate.
6. THE IMPLEMENTATION
OF THE
MARKETS IN
FINANCIAL INSTRUMENTS
DIRECTIVE (MIFID)
One of the very significant projects for the
UK financial services industry next year will be preparing for
the implementation of MiFID. Although MiFID is unlikely to go
live before 1 November 2007, as the FSA's document "Planning
for MiFID" advises, firms need to start planning now.
An industry response: APCIMS is part
of MiFID Connect, a grouping of the UK's principal trade associations,
including the Futures and Options Association, the British Bankers
Association, the International Capital Markets Association, the
Investment Management Association and the London Investment Bankers
Association which have come together in order to establish practical,
cost-efficient and market-sensitive guidance and a programme led
by the industry for implementing MiFID. It covers both the wholesale
and retail financial service sectors. This programme of work is
intended also to reduce regulatory risk and provide real and tangible
assistance to member firms in how to comply with the new requirements.
The associations have appointed Clifford Chance as lawyers to
the project. We believe it is of critical importance that the
FSA and HMT engage fully with this industry group. The group has
embarked on a series of meetings to encourage that engagement.
Involvement of HMT and FSA: Both HM Treasury
and the FSA have held regular and frank meetings with trade associations
particularly over the period of the CESR and the Commission consultations
on the draft Level 2 proposals. These range from the draft measures
themselves, to cost benefit analysis. APCIMS has warmly welcomed
this approach and the leadership shown by HMT in this area.
The remaining areas of concern: We have
a number of continuing reservations concerning both the process
and implementation.
(i) Although the FSA will have little choice
when it comes to implementing MiFID (as the obligations arise
from European Directives and regulations), it would in our view
be wrong to reach the view that FSA have had no say in what we
end up with. From Chairman level down, significant numbers of
the FSA have taken part in the workings of CESR and the preparation
of the advice which was delivered to the Commission. In our view
the advice provided by the CESR to the Commission would, had it
been adopted uncritically by the Commission, have resulted in
far greater burdens being placed upon UK firms than we now expect.
(ii) Whilst CESR is a committee of some
27 countries' securities regulators (since the EEA countries are
represented), its MiFID work relating to intermediaries was chaired
by Sir Callum McCarthy. The advice from CESR is this area would
have required all clients to consent to a firm's conflicts policy
in a manner that might have required every firm to issue new contracts
for signature ("repapering") to the millions of existing
clients in the United Kingdom. This is one of the proposals that
the Commission has to date explicitly rejected as imposing too
great a burden on industry; but repapering remains a concern.
(iii) In relation to domestic implementation,
we also think that units in regulated collective investment schemes
should no longer be treated as "packaged products".
The reason for this is that a whole raft of UK specific regulation
to do with initial disclosure documents, menus and trail commission
are applied to such products, when the marketing and information
disclosure for collective investment schemes regulated in the
UK and EU are dealt with the same way as listed shares (or other
investments) by MiFID. If the UK continues with these out-dated
systems of classification of units, then the relevant obligations
that are imposed on them will be both the MiFID requirements and
the UK requirements. The FSA are considering the position and
will announce its views early next year, but a UK-specific regime
is unjustified and will ensure that firms based elsewhere in the
EEA will be able to promote unit trust sales into the UK when
our member firms may not be able to do so (since under MiFID,
the UK may not impose requirements upon non-UK firms which are
passporting services into the UK which are in addition to those
required under MiFID).
It is vitally important that when the FSA say
that they will not gold plate, that that phrase is tested also
by reference to the rules they keep in place and not merely the
rules that they vary or bring in.
Our third reservation relates to international
comparisons. Although great play is made as to the need for CESR,
through what is called Level 3 work, to ensure supervisory convergence,
long before that, it will be essential that the FSA has regard
to the approaches taken by other regulators. Although several
countries do not normally consult publicly and so their rules
will not be visible as early as in the UK, it would be unfortunate
if UK firms faced new and unforeseen barriers to cross-border
business due to other countries implementing MiFID in a lighter
way. It is therefore vital that FSA commits resources to information
gathering on what other countries are doing.
7. THE COMMISSION'S
CONSIDERATION OF
A POSSIBLE
CLEARING AND
SETTLEMENT DIRECTIVE
We believe that there continues to be the potential
for further harmonization and that the optimal goal in the whole
debate is for firms to be able to trade on the exchange of their
choice, use a clearing system only if they wish and settle in
their home state jurisdiction—and all at a reasonable price.
Hence we believe there is considerable potential for further harmonization.
There are however many vested interested though
in this process and the difficulties that are ahead in achieving
this goal are substantial. Whilst cross border clearing and settlement
is more expensive than the ideal, these costs are much less relevant
in the wholesale market on a per basis because bargains are large
than when considering the cost to the private investor and the
private client investment manager. Although the private investor
has a smaller bargain they carry the same absolute cost penalty.
We remain unconvinced about the need for a Clearing
and Settlement Directive for a number of reasons. The significant
Directives of MiFID and CRD alone together with the other regulatory
changes and proposals are absorbing much time, energy and cost
in many firms. Continuous change in the industry reduces the ability
of firms to concentrate on developing their business and of taking
full advantage of all commercial opportunities.
The next reason for not being in favour is that
whatever is present in a draft Directive is considerably different
to that which is finally agreed. Inevitably there are compromises
on the way and equally inevitably many more things are covered
than was originally intended. They take much longer than hoped
and always end up implemented in different ways. For example,
the MiFID has ended up being twice as long as the ISD that it
replaces, and by the time the final package is produced incorporating
CESR's advice, we anticipate that it will be more than four times
in length. With this in mind, APCIMS prefers to concentrate on
what can be achieved without changes to the law.
Some of the quick wins that we would like to
see implemented are as follows:
— common messaging standards such as
the introduction of ISO 15022, and ISO 20022;
— the removal of national restrictions
that are currently in place in several countries including but
not limited to Portugal, Spain, France and Germany;
— harmonisation of the rules and processes
relating to corporate actions.
There are undoubtedly many differences in detail
and practicalities surrounding corporate actions and also that
a large country may well have more frequent and more complex corporate
actions than a small EU state. However, as the major corporate
advisers are the same in every country in Europe it certainly
is not beyond the bounds of possibilities to have much better
harmonization in corporate actions.
Two further points in all this are the role
of Stock Exchanges in Clearing and Settlement and the role of
competition authorities. In considering first of all the role
of Exchanges as they are at the start of the food chain then how
they approach flexibility and choice for their clients in clearing
(or not) and settlement is very important indeed. Secondly, much
of this is in fact a competition issue rather than a regulatory
issue.
If a country is preventing access to or alternatives
to their own infrastructure, then that country is acting anti
competitively. This is a matter which should much more quickly
and readily be dealt with by the competition authorities than
by creating a new Directive.
We consider that market regulators should be
concerned with ensuring that there is fair and open access of
markets, that there is no discrimination on account of size or
location of the applicant providing system criteria are met, and
that cost of access including capital requirements are not used
to exclude any sectoral applicant.
8 December 2005
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