Select Committee on Treasury Written Evidence

(Ahead of oral evidence on 14 December 2005)

Memorandum submitted by the British Bankers' Association


  The BBA firmly supports the development of a single-market in financial services. An integrated market however is characterised by open competition, it cannot be achieved by regulation alone.

  In terms of the specific topics highlighted in the press notice our comments are as follows:

  Lamfalussy—The BBA has from the outset strongly supported the development of the Lamfalussy arrangements. Over the next five years, we consider that supervisory convergence activity should be focused on making the Lamfalussy network operate better.

  Better Regulation—The BBA wholeheartedly endorses the Commission's pledge to deploy "the most open, transparent, evidence-based policy-making based on a dual commitment to open consultation and impact assessments." The EU should also encourage self-regulation where possible and look at co-regulatory options.

  MiFID—Recognising the importance to financial services firms of minimising the costs and uncertainty of implementing MiFID, the BBA has recently, with five other trade association announced a project to provide assistance and guidelines to members.

  Clearing and Settlement—The BBA is still unconvinced that a directive is the right vehicle to effect change. The BBA supports the market developing its own solutions rather than having these imposed through law or regulation.

  Green Paper on Mortgage Credit—We believe that the Commission should concentrate its efforts in reducing macro barriers to market entry and the creation of a pan-European funding market followed by infrastructure issues.

  In addition, we have commented briefly in the attached paper on issues such as barriers to cross-border mergers and acquisitions, retail financial services market, DG Competition's Sectoral Review, Capital Requirements Directive, Consumer Credit Directive and the External Dimension.


  The BBA is pleased to provide evidence to the Treasury Committee on European Financial Services Regulation.

  With 220 member banks from over 60 countries, the BBA is the authoritative voice of the banking industry in the UK, and represents members' interests in both wholesale and retail markets. BBA members have a particular interest in EU legislation and the British Bankers' Association has been closely involved in lobbying on behalf of its members.


  The BBA firmly supports the development of a single market in financial services. However, an integrated market is characterised by open competition; it cannot be achieved by regulation alone. Banks and other financial services organisations operate in global markets. Therefore, the EU markets must be competitive.

  We welcome the work being undertaken by the European Commission to identify and assess the obstacles to cross-border mergers and acquisitions in the financial sector. Action, legislative or otherwise, to remove them all would not only be burdensome but would be unlikely to be successful. The focus should be on the true obstacles eg legal structures that prevent some institutions from being taken over. We consider the top barriers to be:

    —  Legal Structures.

    —  Limits or Controls on Foreign Participants.

    —  Employment Legislation.

    —  Misuse of Supervisory Powers.

    —  Political Influence.

    —  VAT.

  We note that the Commission has announced in its recently published White Paper Financial Services Policy 2005-10, its intention, after a broad consultation process with all stakeholders, to present a legislative proposal to adapt the rules on VAT in financial services to the evolution of the single market.


  The BBA and the EBF have, from the outset, been strong supporters of the development of the Lamfalussy arrangements. The arrangements should be seen as evolutionary and will continue to develop over time as the EU institutions, the regulators and market participants work together to achieve the correct balance between regulatory oversight and economic growth.

  Considerable work needs to be done in relation to the development of Lamfalussy Levels 3 and 4. Over the next five years we consider that supervisory convergence activity should be focused on making the Lamfalussy network operate better, using the regulators' current powers, together with the new powers given to them by the FSAP legislation. We are pleased to note the Commission's stated intention to keep faith with this process and develop it over the next five years to fulfil its maximum potential. We concur fully with the Commission, that the debate on comitology reform is particularly important.


  The White Paper on Financial Services 2005-10 sets out the Commission's pledge on deploying "the most open, transparent, evidenced-based policy-making based on a dual commitment to open consultation and impact assessments" in order to ensure that regulatory requirements are drawn up on a sound basis and add value to the financial services sector and consumers. Open consultations will play a central role before legislation is deemed necessary and impact assessments will accompany any new Commission proposal. These will focus on costs and benefits across the broad economic, social and environmental dimensions, and, where appropriate, the impact on financial stability, proper functioning of markets and consumer protection. The Commission will also work intensively with member States to monitor progress during implementation and enforcement to ensure accurate implementation and the avoidance of regulatory add-ons—so called "gold-plating".

  The BBA wholeheartedly endorses these intentions and, on behalf of the UK banking industry, commits to engaging constructively in the open dialogue that will form the bedrock of better regulation.

  The EU should also encourage self-regulation where possible and also look at co-regulatory options whereby even when legislation exists there may be means by which regulators and industry can work together to produce joint initiatives which serve both public policy and industry objectives.


  This will be a very significant exercise within the UK and will involve significant uncertainty and costs for the financial services industry. The precise costs are difficult to predict while the Implementing Measures remain unpublished (and will continue to be for a considerable time after this). Some very large figures have been bandied about in the press—but they are likely to be overstated.

  The BBA already has significant experience of working with its members, the FSA and government on the implementation of EU Directives in the UK. Recognising the importance to financial services firms of minimising the costs and uncertainty of implementing MiFID the BBA has recently, with five other trade associations, announced a project to provide assistance and guidelines to members to help them with MiFID implementation.

  The BBA also encouraged the FSA to develop the recently published document: "Planning for MiFID", which explains the main areas of MiFID likely to require firms to change their procedures and IT arrangements and exhorts firms to start MiFID implementation planning.


  The Commission are still in the throes of deciding the content of a prospective measure (possibly a Directive). They are due, although this is subject to some uncertainty, to make a statement about their intentions in Q1/Q2 2006, when the results of an accompanying Regulatory Impact Assessment will also be published. The BBA, and indeed a significant number of other interested parties in the UK, is still unconvinced that a Directive is the right vehicle to effect change. It will be hard to focus the content of the Directive on the key areas, with the propensity to unnecessarily affect (custody) banks as well as infrastructure providers (clearing and settlement entities proper). The BBA supports the market developing its own solutions, rather than having these imposed through law or regulation. Indeed there has already been a significant amount of market consolidation of infrastructure providers, with the mergers effected by the Deutsche Börse, Euroclear, Euronext and LCH.Clearnet Groups. And the London Stock Exchange is still in play. Another way of breaking down perceived difficulties is through more assiduous use of EU Competition Law.


  The BBA supports the Commission's high level aim to develop an internal market for residential mortgages and ensure a consistent baseline level of protection for consumers. We do not see cross-border sector growth to be demand led at least in the first instance. As such, we are encouraged by the Commission's view that cross border trade does not manifest solely as consumers purchasing mortgage products from other Member States, but equally this could potentially extend to establishment, merger or joint-venture type activity.

  Our preference is for the Commission to concentrate its efforts in reducing macro barriers to market entry and the creation of a pan-European funding market, followed by infrastructure issues such as the standardisation of valuation procedures and mutual database access on a reciprocal basis.


  A comprehensive programme of new legislation in this area is neither justified nor desirable. There are few retail financial products that lend themselves to true cross-border integration and the percentage of consumers interested in purchasing products cross-border is currently very small. However those consumers who wish to should be able to do so with confidence.

  Our members support targeted harmonisation (sometimes referred to as "targeted full harmonisation") of those elements necessary to foster cross-border competition.

  We remain to be convinced that legislation is the key to opening-up the fragmented Retail Financial Services Market. We are supportive of the Commission's intention of adopting a targeted and consultative approach in this area.

  We note with interest the Commission's announcement in the recently published White Paper on Financial Services 2005-10, that it will create an expert group, consisting of industry and user representatives, to identify problems associated with user mobility (eg cross-border opening of accounts, closing fees, and transfers between banks) and consider the usefulness of an optional standard bank account. We look forward to participating in this initiative. It will be important that any harmonisation proposals are subject to a rigorous cost-benefit analysis.


  Questionnaires issued by DG Competition as part of its Sectoral Inquiry into Retail Banking are detailed and require a significant amount of data to be collected. Concern has been expressed that respondents are not being given adequate time to respond. In addition, due regard is not being given to issues such as banks' year ends. It is the same personnel that provide the data and complete the financial results.


  The Capital Requirements Directive (CRD) will implement Basel II in the EU and we are pleased that the Directive made its way through the European Parliament in a single reading in September. MEPs were helpful in listening to industry comments and proposing amendments to ensure the Directive can be appropriately introduced by our member banks.

  Implementation (which is required by 1 January 2008) is likely to be a non-trivial process and banks are working with the FSA on technical implementation issues and there is a good level of industry /regulator dialogue.

  The recent announcement of a one-year delay by US regulators in implementing the Basel II advanced approaches will create transition problems but these should be resolvable if there is a good level of dialogue between UK and the four US regulators.

  The CRD is a high-level directive and there could still be room for differential national implementation although we look to the Committee of European Banking Supervisors to foster convergent harmonised CRD implementation. The initial signs are good.


  The Commission published its modified proposal on 7 October 2005, and we are presently assessing the implications, although it is immediately apparent that a number of concessions have been made that are conducive to the arguments made by the UK financial services industry in the months before the proposal was re-published. These issues are broadly mirrored by the industry across Europe. The industry has not sought to gain legislative change to its advantage through this initiative, rather to establish that the directive will (i) create a genuine single internal market for consumer credit and (ii) does not impinge on prevailing Member States' legislative arrangements. This latter point is important to the UK as it has the most developed and mature credit market in the EU.

  We are involved in a constructive dialogue with DTI who are also considering the implications of the Directive and we will look to support them as they undertake a formal regulatory impact assessment—an aspect of the law making process that has thus far not been pursued by the Commission.


  As the White Paper on Financial Services Policy 2005-10 observes, there is a significant external dimension to the regulatory dialogue when it comes to financial services, with international bodies such as the International Accounting Standards Board, the International Auditing and Assurances Standards Board and the Basel Committee on Banking Supervision playing a pivotal role in developing accounting, auditing and bank capital requirements. To these we can add international bodies leading the fight against corporate and commercial fraud, money laundering, terrorist financing, tax evasion, corruption and other malpractices. In each instance there is a need for strong European representation and the need to influence the direction in which the debate is taken. It is also imperative that these bodies be brought to account on the basis of Better Regulation principles in order to maximise their impact and ensure that the initiative is not simply side-stepped.

December 2005

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