Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of Private Client Investment Managers and Stockbrokers (APCIMS)


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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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