Select Committee on Treasury Written Evidence

Further supplementary memorandum submitted by Guy Sears, Deputy Chief Executive, The Association of Private Client Investment Managers and Stockbrokers (APCIMS)

  The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is the organisation that represents those firms who act for the private investor and who offer them services that range from no advice or execution only trading through to portfolio management for the high net worth individual. Our 217 member firms operate on more than 500 sites in the UK, Ireland, Isle of Man and Channel Islands, and following the merger of EASD into APCIMS increasingly in other European countries as well. APCIMS members employ 21,000 regulated staff, they have under management GBP290bn for the private investor and undertook last year 18.6 million trades on their behalf.

We would like to thank the Treasury Committee for providing this opportunity to make further comments concerning MiFID. We have in our response attempted to follow point by point the particular requests for submissions that you made in your Press Notice No 40.


In summary our comments are as follows:

    (i)  level of consultation: the level of consultation on MiFID has been considerably greater than we have experienced with other EU financial services legislation. This has been true both in terms of the drafters of the legislation in Brussels, and in terms of the UK authorities.

    (ii)  super-equivalence: the introduction of a specific Article, designed to prevent individual member states from "gold plating" the legislation, has attracted criticism from some member states but it is one which we strongly support. Much further work will have to be undertaken to review those FSA rules which go beyond MiFID requirements and which could not be imposed on incoming non-UK firms. The risk is that the UK could otherwise be put at a competitive disadvantage by having a more onerous regime than other EU states.

    (iii)  data consolidation: this is an area where a European solution is needed, and some standardisation of how transactions are reported and consolidated needs to be achieved. It is important that the solution is simple and cost-effective because this is an area where any change will involve systems changes and could be expensive.

    (iv)  timetable: the UK is on schedule, just, to meet the timetable for implementing MiFID, and for the most part UK industry is well advanced in its knowledge of, and planning for the new rules. We are aware that planning has essentially not yet begun in some other member states, and several states have told their industry that they will not meet the timetable requirements.


    As an opening remark, as the Treasury Committee will be aware, the Level 2 measures which were published on 6 February 2006 are still being heavily debated with a considerable number of amendments or refinements proposed, by the member states individually and the European Parliament. Additionally, we are aware that CESR and the European Central Bank have made suggestions for amendments.


    We think the proposals as published more than adequately reflected prior input into the legislative process. There has been, certainly in European terms, unprecedented consultation both formally and through meetings with Commission staff and drafters which has meant that for those trade associations engaged in the process, there has been little of true surprise in what has come out on 6 February 2006. Some of the points were unresolved before that date and some remain slightly more fluid than others.

    If there was a significant surprise on 6 February 2006 it related to the provision at Article 4 of the draft Level 2 Directive which commonly is referred to as the "super equivalence provision". This provision was not debated at any earlier time and did not appear in any earlier draft, which itself has been a cause of some adverse comment from some of the member states and CESR. In December we became aware from the Commission and from HM Treasury that there was a move to constrain excessive additional rule making by member states above and beyond MiFID's requirements so as better to achieve harmonisation and the purposes of the Financial Services Action Plan. The actual provision was trailed by a speech by Commissioner McCreevy at the London Stock Exchange on 16 December 2005 in which he committed to ensuring that extensive gold plating by individual nations would be firmly addressed. To some extent the inclusion of this provision is a good example of when consultation is not always the most valuable thing to do when there is a clear political agenda. We have welcomed the inclusion of this provision as we think it is entirely consonant with the intent of MiFID.


    As and when the FSA implement MiFID by exercising any discretion, they will then be required to carry out a cost benefit analysis. Strictly speaking we think cost effective analyses may be more suited in some cases at this stage; that is to say that different options should be proposed which are costed rather than a single option to which a cost benefit analysis is attached. FSA have commissioned cost benefit analyses already and these will be presume be published in due course, further cost benefit analyses would not greatly assist industry at this time.


    We think the list of elements that might be interpreted differently across the EU could be long and is somewhat unpredictable. By differential interpretation, we think there will both be a different interpretation in the way that the Directive is legally transposed and different interpretation in the way that supervisors and regulators respond to particular business situations. As an example, where measures have within them some form of calibration, such as requiring internal systems and controls "appropriate" to the size and nature of the business, there is a greater likelihood that individual countries will set the standard at different levels. However, the Lamfalussy process does recognise this risk and the expectation is that CESR will be far more committed to what is called Level 3 work, that is to ensuring supervisory convergence. It is key that this does occur if the potential benefits of a harmonised regime are to be realised.


    As far as proposals which conflict with existing UK regulation, we think it is likely that the United Kingdom will have to consider afresh some of the more detailed rules applying in the area of financial promotion; and differing regulatory treatment of economically similar (but legally different) investments, particularly as regards information obligations.

    More particularly as regards proposals which conflict with existing UK regulation, we have informed HM Treasury that we consider that the proposal in their consultation paper on MiFID implementation to retain sections 238 and 240 of FSMA in their current form is inconsistent with the implementation of MiFID. These provisions prohibit the promotion of unregulated collective investment schemes, broadly put, to the retail market. We consider that the statutory banning of any category of investments within MiFID is not envisaged by MiFID. Even if the United Kingdom wanted to continue with this, the UK would both have to determine that it wished to impose it locally and that it was free to do so under MiFID. The reason for this dual requirement is that FSA is not allowed to impose restrictions beyond MiFID's requirements on incoming passported business from other member states of the EEA.

    We consider that the FSA is the appropriate body for determining the extent to which marketing should be subjected to particular protections and the extent to which suitability and advice tests should have regard to any particular risk characteristics associated with unregulated collective investment schemes.

    We are not convinced at this stage that there are any particular areas in which the UK could benefit from rules additional to those included in the Commission's draft proposals. This is not to say that the draft Level 2 proposals always capture the optimum balance between the sometimes conflicting objectives except for the FSA under FSMA. The difficulty is, as said above, that if the UK imposes legal rules then they will not generally be allowed to impose them on incoming passported businesses. So, for example, if there were particular additional requirements in terms of marketing or financial promotion imposed upon online execution only brokers based in the United Kingdom, they would only operate to restrict access from the point of view of that firm because investors themselves would be able to access other online brokers which were in fact headquartered in the Netherlands or in Dublin. The fact that there are already a considerable number of businesses which are internet based is an important factor to consider when determining whether there should be additional local rules. The obvious risk is that the UK may be put at a competitive disadvantage and have to comply with a more restrictive set of rules than its EU neighbours.

    We have said to the FSA that as they come to review certain areas in which there has been a national approach to a particular area of regulation, we will not approach that review in the belief that the United Kingdom could never put forward additional rules. Nevertheless, at this stage, we are unconvinced that there would be benefit to investors from additional rules. As regards areas in which super equivalence should be avoided, we have made some points above.

    There is an additional important area in our view in which there needs to be a European rather than a UK solution. This is the area of data consolidation across all the trading spaces in the EU. MiFID permits a much wider range of reporting channels to be used for post-trade data. It is important that that data can be consolidated and made available on a cost-effective basis to a wide range of users. For example, having a reliable reference price for a wide range of instruments is valuable both for ensuring and evidencing best execution and also for having a consistent basis that is independently verifiable for the valuation of, and consequent assessment of performance of, portfolios and other investments.

    We do not believe that as of 1 November 2007 there will be widespread data fragmentation. But if liquidity pools do fragment or significant other competitive markets offer trades in, for example, shares on the London Stock Exchange, there may be a much greater need to access data from a wide range of sources. The United Kingdom, through the FSA, have rightly identified this as a risk area. CESR themselves have now called for evidence in relation to this issue of data consolidation. It is important in our view that a European solution is sought which also reflects the fact that Europe is but one of several major markets in the world.


    At the risk of sounding complacent, we think that whilst the UK financial services sector currently reflects a very wide range of level of preparation for the domestic implementation of MiFID, that sector is on the whole in very good shape compared to most if not all of the other member states. The early publication by the Treasury of its implementation consultation paper, and the clarity of its drafting, has set the scene for a series of pre-consultations and planned consultations by the FSA which in our contacts with other European trade associations is universally admired.

    It is our experience that the sort of questions that this Committee have asked could not be addressed in the vast majority of the other member states at this stage because the industry have little understanding of what their finance ministries and regulators propose (in contrast to the position here).

    The timetable is fantastically tight and it is notable that several other member states have already effectively told their industry that they will not meet the timetable requirements. The UK is still just about on timetable in our view and it will be possible to implement most of the requirements by the firms on time. By "most of the requirements", we have in mind that the information and document side of the process ought to be deliverable and so, as regards direct measures for investor protection, the UK will implement on time. Some of the market transparency and market data issues which rely upon other member states implementing on time may get disrupted. For example, the ability to provide transaction reports only to the FSA for firms which operate in several member states, might be put at risk by a need to maintain other systems for countries that do not implement MiFID on time and require continued reporting under legislation that should have been repealed.

    There is one serious note of caution in our assessment. Some of the member states are pressing still for amendments to the Level 2 measures which include a more explicit requirement for written agreements between firms and their clients. Naturally we do not oppose written agreements but in some member states this may be read as a proxy for demanding two-way agreements, that is to say agreements to which the investors themselves have assented by the application of a wet signature or some other explicit consent. It is vital that if this is a route that is gone down for all firms and all clients, that care is taken to ensure that existing agreements can be grandfathered. If the industry was required to repaper, that is to say to send out fresh contracts and obtain signatures to them all for every existing client, then this could not be done, in our view, in time and would impose very considerable costs upon the industry at no significant additional benefit for existing clients. To be clear, the resigning of a contract ought not to be necessary to provide clients with any additional protections that MiFID gives them. A firm is generally well able, under its agreements, to notify the client of the additional obligations that the firm will take on and to allow the client to assent or object by continuing business or taking it away.

    The preparation of the UK financial services sector will, we hope, be assisted by the work being carried out by MiFID Connect, a grouping which may have, by the time that this paper is considered, a dozen of the UK's trade associations within it. The work of MiFID Connect is focused upon providing, where practicable, guidelines for investment firms both as regards implementation and application of MiFID in the areas not addressed by the regulations or Directives. So, for example, guidelines are likely to be proposed to assist firms in understanding the process of and obligations within best execution; the handling of conflicts of interest; and other such matters. The work will not be a substitution for the rule making that FSA will engage in, but will, we trust, greatly assist firms in their preparations, particularly those who do not have the resources themselves to set aside strategic implementation teams within their existing staffing.

    We thank you again for this opportunity to provide written evidence and remain, as ever, more than willing to assist you with any clarification or further observations as you may require.

    April 2006

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