Select Committee on Treasury Written Evidence


Supplementary memorandum submitted by Angela Knight, Chief Executive, The Association of Private Client Investment Managers and Stockbrokers (APCIMS)

  The Association of Private Client Investment Managers and Stockbrokers (APCIMS) provided a written submission to this Treasury Committee enquiry and we gave evidence at the public open hearing in the House of Commons on Wednesday 14 December 2005.

  At the end of that hearing, the Chairman of the Treasury Select Committee, the Rt Hon John McFall MP, asked for some further information where political decisions that should have been made during the Level 1 Lamfalussy process have been left to Level 2.[3]

 The importance of this is that Level 1 is the part of the directive making process where the Commission is creating the proposals, consulting on them with the industry and other relevant parties, where the European Parliament has a role as indeed do governments. Meanwhile the Level 2 stage is supposed to be the procedure whereby the European regulators come together at CESR, the Committee of European Securities Regulators, and work out the technical measures that are needed in order to implement the requirements of some of the clauses of the directive. These technical measures are then given to the Commission as advice and the Commission then incorporates some or all of them within the Directive. Therefore, the practical affect of not resolving all the difficult political issues in the first instance means that regulators are left to do this, consultations go further than intended and take longer than was intended and the democratic process has in part been sidelined.

  The negotiations on the Markets in Financial Instruments Directive 2004/39/EC (MiFID) provides a number of examples and some of these are as follows:

(i)   The Definition of Investment Advice

  Although in the UK investment advice has long been regulated, for the first time by including investment advice within the scope of MiFID this will become a requirement across Europe. It is surprising in fact how many of the large European countries have to date not required financial advisers to take qualifications and have not regulated this activity. Unfortunately, the definition of investment advice in the Level 1 text is not particularly clear and it still remains open as to whether what will become the regulated activity of investment advice will only relate to advice about specific financial instruments, or whether it will also include generic types of financial instruments. This has been debated for more than a year and although it is now unlikely that generic advice will be included, it has occupied a very considerable amount of time at Level 2, not least because it would have a significant impact upon, for example, those who provide asset allocation advice to institutional and other funds. The difficulties are compounded by the fact that although some countries such as the UK have a very clear definition of what financial advice is (whether or not they regulate it) in many other countries it is either undefined or defined differently.

(ii)   Article 27—Systematic Internalisers

  This has been a problematic area from the start. The basic issue here is that some large financial firms in a number of EU countries are of such a size that they can undertake business internally in a way that provides a competition to exchanges. Where this is considered to be a particular problem is when a retail customer is involved. For example, it is common in some European countries for an individual who wishes to buy or sell equities to have to go to a bank as they are precluded from going directly to a stockbroker. That bank can then elect either to execute that client's order on the national exchange or it can decide to buy it or sell it to itself, ie internalise the order. As most countries do not have a "best execution" requirement that covers all trades undertaken for individuals as the UK does, the intention in Article 27 is to make the firms who internalise orders systematically more transparent about both the orders they are receiving and the prices that they are offering. Although the terminology and the general intention was in place at Level 1, none of the details were agreed. Therefore the requirements on systematic internalisers, such as when they have to be transparent and when they do not, and under what conditions this should apply have still not been determined. Therefore there are some firms who do not know even whether they will fall into the internaliser definition or not, and if they are an internaliser what changes they will have to make in order to meet the requirements, or whether to change their business practice to avoid particular requirements. As there are also obviously some very significant competitive issues around here it is clearly an uncomfortable situation.

(iii)   Article 27—Definition of "liquid market" and "standard market size"

  This article contains these new terms which so far have been undefined. The importance of this is that under some circumstances a quote to a retail investor can be withdrawn if the market has stopped being liquid and if the order placed by the investor was of standard market size. Evidently what is a liquid market in, for example, London is likely to be significantly different to what is a liquid market in a smaller financial centre. Whilst extensive work has been carried out by a whole variety of committees to try and specify the criteria and determine what should be the definitions of these terms, the debate is no longer driven by economic or business considerations but more by concerns that some member states fear that their size and market means that many of their company shares will be deemed to be illiquid regardless. Again this matter has not yet been resolved.

(iv)   Article 21—Best Execution

  As I have previously said, best execution where firms have a requirement to choose the best price for their client's order in a circumstance where there are a number of alternatives is only a requirement in the UK. Generally speaking in other European countries the requirement to date has only been to execute orders to their local stock exchange. This is known as a "concentration rule" but MiFID removes this restriction and replaces it (and rightly so) with best execution. However the provisions of Article 21 do not specify whether the requirement is for firms to have an order execution policy, to maintain and review that policy and inform clients of material changes to that policy, or whether the requirement is to execute orders on terms most favourable to the client for each and every transaction executed. Again this is a fundamental issue as it is market transformational and should have been handled at Level 1.

(v)   Minimum or maximum harmonisation

  It is widely recognised that the process of achieving a single market in financial services has been significantly hindered in the past by individual member states putting up barriers in the form of additional local rules and regulations. Invariably this has occurred under the guise of the needs of their particular markets or for consumer protection reasons. For this reason, it was always vital that MiFID should reduce as much as possible this practice whilst recognising that a certain amount of "wriggle room" will inevitably be required due primarily to the different legal base of the different countries and some local cultural reasons.

  The conclusion therefore that the industry came to was that MiFID should be introduced under terms of "maximum harmonisation" where this means that competent authorities (that is local regulators and governments) are unable to add on any additional rules. The "wriggle room" is achieved by not absolutely specifying in the directive every conceivable action and choice under each article. Inevitably though some authorities have been working on the assumption that this would not be a maximum harmonisation directive whilst others have assumed that it will be. Our belief is that an announcement is shortly going to be made that it will be a maximum harmonisation. However, clearly this is a decision that should have been taken earlier on in the negotiations and that it should have been explicitly stated in the Level 1 text.

  I hope this gives you a flavour of our concerns in this area and we are continuing to discuss these matters with the relevant officials in the European Commission in Brussels as well as here in the UK. Should you need any further information, please do not hesitate to contact us on this or any other points of clarification.

1 February 2006





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