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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