Select Committee on Treasury Written Evidence

Further supplementary memorandum submitted by the British Bankers' Association

  1.  This Submission is made pursuant to the Committee's Press Notice No 24 of 1 March 2006. The British Bankers Association (BBA) previously submitted, and subsequently gave oral evidence, in relation to the Committee's Inquiry into European Financial Services Regulation.

Whether the proposals adequately reflected prior input into the legislative process and the extent to which there were any significant "surprises" in the proposals, or whether any new requirements were included without sufficient prior consultation?

2.  In certain respects the MIFID proposals differed significantly from the advice given by the Committee of European Securities Regulators (CESR) to the Commission. However, generally speaking the differences represented improvements to the text from the perspective of UK financial services and reflected the fact that the Commission ran an open consultation process to which financial services users could contribute.

3.  There were no significant surprises in the text for those, such as the BBA, who had been following the development of the text closely. One of the main surprises for some who may have been less closely involved was Article 4 of the Directive which imposes quite tight constraints on the extent to which a member state and its regulator can impose additional regulatory requirements in relation to, for example, conduct of business requirements that are not found in the Implementing Measures. The BBA and the European Banking Federation of which it is a member are supportive of this provision provided the Implementing Measures are not substantially modified—since this is likely to lead to a more level playing field across Europe and make it more difficult for some member state regulators to impose additional requirements on firms passporting from the UK into other European member states. The BBA understands that the UK government and the FSA may wish to have some drafting changes made to this provision. So far as the changes do not change the broad thrust of the provision the BBA is neutral as regards those drafting changes.

The extent to which the proposals now provide sufficient information for a full cost benefit analysis to be undertaken at this stage and the desirability of undertaking such analysis

4.  We do not believe that there is sufficient time for a useful cost benefit analysis to be undertaken at this stage of the process and regard it as more important at this stage for the industry to be focused on preparing for UK implementation of the Directive and its Implementing Measures. There have already been significant delays in the timing of production of the text of the Implementing Measures. They were due in September 2005 and were only published by the Commission in February 2006. A cost benefit analysis at this stage would only delay their production further at a time when the Directive must be implemented by member states by end January 2007.

The identification of any elements of the proposals which are most likely to be interpreted differently across Europe and the problems that this may generate

5.  Any part of the text is capable of being interpreted differently in different member states. This is an issue with any European legislation. The means of dealing with this the EU employs is to give the European Court of Justice primacy in the interpretation of EU legislation. The European Commission can also produce interpretative communications, although these do not have the authority of an ECJ judgment and can be overruled by the ECJ. There is also scope for European Lamfalussy Committees such as, in the case of MIFID, CESR to provide guidance—although, as with a Commission communication, such guidance does not have the authority of an ECJ judgement.

6.  The provisions in a Regulation are more likely to be interpreted in a similar fashion across Europe and those in the Directive may be more likely to be interpreted differently. This is because a Regulation has direct effect and the only scope for misinterpretation arises through translation and through the need for a member state to interpret the text in the light of its own legal and cultural framework. In the case of a Directive the fact that a Directive has to be implemented through national law adds a further element where there is scope for different text to emerge. However, this does not mean that there should be a preference for Regulations, because there are many situations where there is a need for the added flexibility that a Directive gives. HM Treasury and the FSA are seeking to ameliorate the risk of different implementation by adopting a "copy out" approach in the UK ie generally simply copying the text of the Directive except where change is required for clarity or a strong case has been made for a different approach.

7.  Experience shows that, in general, even Directives are being implemented in a more similar fashion across Europe than they were 10 years ago. The City of London has recently published a research paper on the Implementation of the Market Abuse Directive which shows that, while implementation differences remain between member states, this Directive was implemented in a much more similar way by member states than the Insider Dealing Directive which was its predecessor from the 1990s.

8.  These comments do not mean that the BBA and its members are unconcerned about possible implementation and interpretative differences across Europe. Many of our members are doing business across many European jurisdictions and would value a more common supervisory and interpretative approach. At the moment we consider that this can be best developed through:

    (i)  encouraging the Commission to proactively manage the implementation process with a view to more convergent approaches emerging;

    (ii)  supporting better supervisory convergence within the Lamfalussy networks; and

    (iii)  proactive dialogue with regulators to encourage similar, rather than divergent, interpretations.

    The identification of any elements of the proposals which conflict with existing UK regulation and an indication of the costs and benefits of changing these elements to reflect the rules under MIFID

      9.  There are certain elements of MIFID which are either in conflict with existing requirements in the UK, or are additional to them. Most of these elements derive from the Level 1 text (ie the main Directive). Generally speaking the Implementing Measures are only in conflict with the UK regime insofar as they are the detail of elements found in the Level 1 text. Two exceptions are the provision relating to inducements in the Implementing Measure Directive and the possible impact of Article 4 of the same Directive.

    10.  The provision relating to inducements, although titled as such, appears to be more akin to a requirement relating to disclosure of commissions and fees. As such it is very widely, and loosely drafted and goes far wider than any obligations in UK law. In our view it should be correctly described and should accord with the UK requirements, which are properly focused on the sorts of disclosures which should be made to retail customers.

    11.  The Article 4 Directive may possibly require that elements of the UK regime that are not found in MIFID have to be removed from the UK regime unless a justification for them can be established. At present it is not clear whether this would have to occur or not—and much will depend upon the final form of Article 4. Among the aspects of the UK regime which might be affected if this was to be the case are the approved persons regime—which requires individuals working in core financial services roles to be approved by the FSA and the recently instituted arrangements relating to softing and unbundling. However, we consider that there are good reasons for having both of these requirements in place and that, accordingly it may well be possible to justify them.

    12.  There are a range of requirements at Level 1 which are additional to, or different from, UK requirements and are likely to result in additional cost to the industry. Among the most significant are:

    (i)  the pre-trade transparency requirements and the transaction reporting requirements;

    (ii)  the best execution requirements;

    (iii)  the customer classification requirements and the associated need to send new information and terms and conditions to existing and new customers; and

    (iv)  modifications to existing requirements relating to the suitability and appropriateness regimes when dealing with customers and to the way in which execution only business will be conducted.

    The identification of areas in which the UK would benefit from rules additional to those included in the Commission's draft proposals and areas in which such "super-equivalence" should be avoided

      13.  The BBA's members consider that while other European member states do not have an approved persons regime that this is an important element in the UK's regulatory system. In particular it is important in instilling senior management responsibility and a good compliance culture within financial institutions and, as such, also helps to safeguard customers of financial institution.

    14.  An area where the UK has traditionally had more detailed requirements than many other European jurisdictions is in relation to dealing with retail customers. The implementation of MIFID means that the FSA will review their retail conduct of business rules for compliance with MIFID and it is likely that they will consider the extent to which superequivalence is needed.

    Whether the UK financial services sector is prepared for the domestic implementation of MIFID and the extent to which the proposed MIFID implementation timetable is realistic for UK firms

    15.  While the banking industry has already begun preparing to implement MIFID and many of the largest institutions have hired MIFID project managers and are bringing together significant teams to implement they still await the final text of the Implementing Measures and the FSA Rules and cannot carry out much of their implementation activity until they have these.

    16.  The Implementing Measures are unlikely to be available before July 2006 at the earliest and the FSA Rules will not be available before the end of January 2007. Consequently while the industry can, and will, make some preparations during 2006 the bulk of the implementation activity by banks, including, in particular much of the vital IT work, will have to take place during 2007.

    17.  At this stage it is difficult to say definitively whether or not the timetable can be met or not. However, the timetable is unquestionably tight and there are concerns, in particular, about the extent to which it will be possible to develop IT requirements and test them in time for the deadline of 1 November 2007. This is particularly so as the European and national authorities do not appear to have a clear and agreed idea at this stage about the way in which some of the requirements can be met. For example there is still considerable uncertainty about what is meant by the requirements relating to "systematic internalisers", precisely how pre-trade transparency in equities can be given and the implications of the requirements relating to "liquid shares" and the obligations attaching to firms dealing in such shares.

    18.  In addition there is still a possibility that the EU legislative timetable for the Implementing Measures and/or the FSA's consultation timetable might slip. Were either of these to happen it is almost certain that it would not be possible to implement by the 1 November 2007 deadline.

    19.  To ease this difficulty the BBA has been working closely with its members, the wider financial services industry and the FSA and HM Treasury. In particular in the summer of 2005 the BBA proposed to the FSA that it should publish a document alerting the financial services industry to the implications of MIFID. This document "Planning for MIFID" was published in November 2005 following close co-operation between the financial services trade associations and the FSA in its development and has been very well received. It is designed to encourage financial services firms to think about the implications for their firm and customers and to plan and budget for the implementation process.

    20.  A second important implementation project for which the BBA is secretariat is MIFID Connect. This is a project designed by the trade associations to assist their members with implementation of MIFID. As at the time of writing it comprises eleven trade associations—the Association of British Insurers, the Association of Foreign Banks, APCIMS, the Bond Markets Association, the British Bankers' Association, the Building Societies Association, the Futures and Options Association, the International Capital Markets Association, the Investment Management Association, the International Swaps and Derivatives Association and the London Investment Banking Association.

    21.  MIFID Connect is intended to provide help to financial services firms in a variety of ways. This will include the development of:

    (i)  a MIFID Survival Guide which the firms can buy and which will assist them with implementation;

    (ii)  interpretative guidelines and practical advice on requirements of the legislation;

    (iii)  seminars and training; and

    (iv)  information about the progress of implementation.

    March 2006

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