Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by the British Bankers' Association

  The BBA has been asked to provide the Committee with examples of political decisions left to Level 3 of Lamfalussy and this supplementary submission responds to this request.

  1.  First it is important to set out what we understand by Level 3 of Lamfalussy for these purposes—as we believe there is widespread confusion about what is, and what is not, Level 3 of Lamfalussy. There are two main situations where the European Commission asks Level 3 Committees to advise it. The first is where the Commission asks for advice prior to developing Level 2 Implementing Measures. The second is where the Commission asks for advice prior to considering what measures if any it should propose in relation to an area of financial services policy eg how it should approach developments relating to hedge funds. We consider the first of these situations to be an example of Level 2 work—even though the advice is given by a Level 3 Committee. Similarly we consider the second situation to be an example of Level 1 work. In both cases the Level 3 Committee is advising and the advice is given in a context which is political. The ultimate decisions on what proposals are then put forward are taken by the Commission and the adoption of any proposals are for the Council and, so far as the process requires, the European Parliament.

  2.  We believe that many of the circumstances where Level 3 Committees are accused of taking "political decisions" fall within one or other of the situations described above. The reality is that any advice given by a Level 3 Committee in such circumstances is not a "political decision" but simply advice. If it was found that the advice was invariably followed without significant modification then there might be grounds for concern that a Level 3 Committee was usurping the political prerogative—but the evidence to date does not support such a conclusion.

  3.  Another important consideration is the subjectivity of the characterisation of a decision or a piece of advice as "political" or as "technical". In reality the extent to which a particular decision is "political" depends upon how important it is perceived to be by politicians or interest groups. Generally if a decision is regarded as uncontentious or not having a significant effect on the industries or consumers of one or more member states it is accepted as being technical. Otherwise a decision is at risk of being described as political by one or more interest groups or by politicians. In reality some very "technical" issues are very political but it is often extremely important for them to be decided with the benefit of expert technical advice.

  4.  A good example of this is the definition of "liquid shares" in the Markets in Financial Instruments Directive—which is to be defined in a Level 2 Implementing Measure. Strictly speaking the question of what is a liquid share should be capable of being given a technical solution—and on a legal analysis of Article 27 of MIFID it would have been possible to conclude that "shares . . . for which there is a liquid market" meant shares for which there is a pan-European liquid market—rather than a small local market which is "liquid" in a particular member state but would be regarded as illiquid in, for example, the London, Frankfurt or Paris markets. Industry (eg most European financial services trade associations) argued for a pan-European definition (and consequently for a smaller number of shares to be deemed to be "liquid") but CESR's advice did not follow this—and member states have been arguing for a significant number of shares to be included within the definition which would not be regarded as liquid in a pan-European context. This is an example of a case where CESR's advice was undoubtedly affected by political considerations of what would be acceptable to the national regulators and the national finance ministries. However, it is not a case of a "political decision at Level 3"—rather it is an example of advice provided in the context of Level 2 which was affected by considerations of what was considered likely to be politically acceptable.

  5.  Strictly speaking Level 3 is, in our view, the situation where a Level 3 Committee sets standards or takes interpretative decisions which strictly speaking are not legally binding in EU law but, nonetheless, have an important impact in practice either because national regulators act in accordance with the interpretation or, in some cases, because the national regulator—or its legislature—then turns the standards into national regulatory rules/laws.

  6.  There are a number of cases where CESR has developed standards or draft standards which have proved contentious but as yet no other Level 3 Committee has developed standards. The standards which CESR has produced that have proved contentious have been their "Investor Protection" standards and the draft European System of Central Banks/CESR standards on clearing and settlement. In the case of the Investor Protection standards there were a range of aspects of these standards which the BBA and the European Banking Federation, for example, considered to be burdensome and impracticable. However, implementation of these standards by CESR members was, quite sensibly, deferred pending adoption and implementation of MIFID and will now be superseded by MIFID and the Implementing Measures made under it. Similarly the ESCB and CESR have deferred finalising the clearing and settlement standards pending the European Commission's decision on what it will propose in relation to clearing and settlement. These would be the two examples we would cite of Level 3 activity which were potentially politically sensitive.

January 2006

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