Select Committee on Treasury Written Evidence

Memorandum submitted by Futures and Options Association

Following the announcement of the above-mentioned Treasury Committee inquiry into European financial services regulation, we would make the following observations on the topics which are to be the subject of review.


  1.1  The FOA's views on each of the topics identified by the Committee for inquiry are set out in abbreviated form in this response and may be summarised as follows:

    (a)  the Lamfalussy process (see Section 2), although still in its infancy and untested as regards a number of its core objectives, has resulted in a much more open and transparent process of consultation and generated an expedited approach to the EU legislative process;

    (b)  the Commission's initiative in assessing the impact of the clearing and settlement infrastructure (see Section 3) is to be welcomed, but the FOA believes that it is:

  (i)  difficult to comment meaningfully on the prospects of a directive until such time as its contents are known;

 (ii)  that shaping the clearing and settlement infrastructure should be a matter for the market, subject to the constraints of competition law;

    (c)  the FOA is strongly supportive of the "better regulation" agenda (see Section 4) of the Commission, providing that the motivations for that agenda are simplicity, cost efficiency and regulatory coherence;

    (d)  MiFID (see Section 5) has an immediate and significant impact on the shape of the UK financial services and on the role of London as the world's leading financial services centre and, as such, the process of implementation—which has economic, commercial and social, as well as regulatory, implications—must be taken forward on a collegiate basis between industry and the FSA regulators to ensure that, in addition to meeting FSA's statutory objectives and complying with overarching EU regulations, those other objectives are attained (and it is for these reasons that a major group of industry associations have combined together to develop a pan-industry approach to implementation: the "MiFID Connect" project).


  2.1  Following its trialling in the securities markets, the Lamfalussy process now governs the legislative process in the banking and insurance and pensions sectors and is monitored by an Inter-Institutional Monitoring Group (IIMG) established in 2002. To date, it has been applied to a number of directives in the securities sector, including the Prospectus Directive, the Transparency Obligations Directive, the Market Abuse Directive and the Markets in Financial Instruments Directive (MiFID). The Commission recently issued a Green Paper "Financial Services Policy (2005-10)" in which it emphasised the importance of "simplifying and consolidating" financial services regulation. The Lamfalussy process provides a very appropriate mechanism for fulfilling this objective, providing the original Directive has been produced through that process.

  2.2  The third report of the IIMG (November 2004) stated that "the Lamfalussy process is working well over all and has led to swifter preparation of legislation. There is better inter-institutional working and transparency." While there have been problems regarding the amount of detail that has often sought to be included in Level 1 legislation (and even in Level 2), the FOA supports that view and believes that the process has brought about a major improvement in legislation and the quality and standard of consultation, particularly when measured against the EU's pre-Lamfalussy legislative process. That said, it should not be forgotten that the Lamfalussy process is, in itself, a fairly protracted and multi-tiered legislative process and it has yet to be proved (a) in the context of Level 4 (ie enforcement and monitoring of compliance with EU law); and (b) as a vehicle to deliver fast track legislative change which may be either market or events driven.

  2.3  The FOA believes that the existing framework for monitoring the effectiveness of the Lamfalussy process is adequately provided for under existing monitoring arrangements. However, there are inter-institutional tensions over the issue of legislative/democratic sovereignty and one of the consequences of the failure to agree on a European Constitution has meant that the Lamfalussy process at Level 2 is subject to a four year parliamentary approval which, if not forthcoming, would effectively bring it to an end. However, the FOA believes that positive steps are being taken to regularise the situation and improve transparency of the process and it is worth noting that the Commission has confirmed in its recently issued White Paper "Financial Services Policy (2005-10)" that "the central policy of the Commission is to keep faith with this process and develop it over the next five years to fulfill its maximum potential" (page 9).

  2.4  The FOA remains strongly supportive of the continuance of the Lamfalussy process and has no doubt about the positive impact it has had on the EU's legislative and consultative processes.


  3.1  The FOA shares the general concern that cross-border clearing and settlement costs are greater than those that apply at the domestic level and supports therefore the Commission's current consultation and impact assessment.

  3.2  That concern should not be construed as suggesting that the FOA supports the need for a framework directive and that regulation should be used as a vehicle for shaping the clearing and settlement infrastructure. This has to be market-driven, subject to the constraints of competition law.

  3.3  In view of the fact that the Commission is not proposing to make any final decision until 2006 on whether or not this is a matter that needs to be addressed via a directive, the FOA believes it is difficult to comment until such time as that directive is brought forward and its contents are known. However, the FOA believes instinctively that a directive should not be necessary.


  4.1  The FOA is strongly supportive of Commission McCreevy's focus on post-FSAP targeting on the need for a more simplified regulatory structure (see para 2.1), providing the "watch word" for ongoing regulatory change is simplification and greater regulatory coherence. This is the only basis on which the majority of firms would tolerate yet further regulatory change. If that is not the motivation, the prevailing sense of serious "regulatory fatigue" and the need for a period of regulatory stability will take precedence.

  4.2  The Commission has clearly committed itself to simplifying the regulatory environment under the nomenclature of "better regulation" and recognises that post-implementation analysis of the FSAP will almost certainly result in the modification of existing requirements and that some of the governing factors that stand behind that process will be avoidance of independent member state "gold plating", evenhanded implementation of the requirements and avoidance of any "splintering" of the single market.

  4.3  In its White Paper on Financial Services 2005-10, the Commission committed its policy to deploying "the most open, transparent, evidence-based policy-making based on a dual commitment to open consultation and impact assessments, so as to ensure sound rules are drawn up, adding value to the EU's financial services sector and consumers".

  4.4  The FOA applauds this commitment, but believes strongly that this policy should be hard coded into a statutory commitment in the same way that the principles of good regulation are hard coded into UK legislation in the Financial Services and Markets Act 2000. After all, EU regulatory authorities regard it as fundamental to the good behaviour of those they regulate to impose principles of good business practice. Is it not perfectly logical and equitable to expect them to acquiesce to similar standards of good behaviour placed on them in carrying out their own business?! Like the providers of financial services, regulatory authorities are engaged in the business of providing a service to the public at large. In fact, adoption of those principles would not only further facilitate the process of mutual recognition, but it would (a) help to establish a common regulatory culture within the EU towards rules development; (b) affirm industry expectations that EU regulatory authorities, whether acting collectively or individually, will take into proper account the economic and commercial needs of financial service providers and consumers; and (c) will contribute to the setting of common standards across 25 member states (and a multiplicity of regulatory authorities).

  4.5  It is particularly welcome, in the context of better regulation, that the Commission has committed itself to completing a full economic and legal assessment, wherever possible, of applicable FSAP measures on the basis that if they are found to be deficient, they will be modified or repealed as appropriate.

  4.6  As can be anticipated, the FOA is a strong and committed supporter of the concept of "better regulation", but believes that the evolution of this approach should be conducted on a Transatlantic basis, particular insofar as the benefits of that approach (identified in para 4.4 above) would then operate on a Transatlantic basis to the greater benefit and facilitation of the US/EU dialogue on the regulation of financial services.


  5.1  MiFID has an immediate impact on the shape of UK financial services and, in particular, on London as the world's leading financial services centre. In November, the Corporation of London published "The Competitive Position of London as a Global Financial Centre" which placed London marginally ahead of New York, but rather more significantly ahead of Paris and Frankfurt. The most important competitive factors identified by respondents to the survey were, at number one, the availability of skilled personnel and, at number two, the regulatory environment. The importance attached to the regulatory environment demonstrates the impact that disproportionate implementation of MiFID could have on the City's international and EU competitiveness. In order to reduce that risk, it is critical that the process of implementation:

    —  meets the vital criteria of being—as well as compliant with the overarching EU requirements—market, product and service-sensitive to the City's unique and internationally important market, product and service diversity, which is not replicated elsewhere in the EU;

    —  is taken forward on the basis of a level of engagement with the industry that has to be of a significantly higher order of magnitude than has traditionally been the case in the past, if the intended economic, commercial and social (as well as regulatory) benefits are to be attained and the potential threat to the City's competitiveness is to be avoided;

    —  should not disturb accepted market and trading practices, save only where it is specifically required by the overarching EU requirements or where there are sound public policy reasons justifying change; and

    —  should be monitored carefully by HM Treasury to ensure that there is a proper balance between attainment of the statutory objectives of the FSA and observance of the statutory principles of good regulation.

  5.2  For information, the FOA has initiated, in association with the BBA, APCIMS, LIBA, IMA and ICMA, a pan-industry approach to MiFID implementation ("MiFID Connect") (see Appendix 1—not printed) with a view to mitigating the high degree of legal and regulatory uncertainty and risk that surrounds some of the MiFID'S more ambiguous requirements and assisting the financial services industry to come into compliance with the new obligations in a practical and cost-efficient manner. The project will go forward under the chairmanship of the FOA and with the secretariat being based at the BBA, Pinners Hall, 105-108 Old Broad Street, London EC2N 1EX. The international law firm, Clifford Chance are the appointed lawyers to the project.

  5.3  The FOA welcomes FSA's assurances that its approach will be "copy out" of MiFID, unless there are sound reasons to adopt a superequivalent approach in any aspect of implementation, but questions the extent to which that policy can be sustained where, for example, its colleague EU regulators, through CESR, decide collectively to adopt a superequivalent approach—an approach which may be significantly damaging to the international competitiveness of some of London's unique markets (and for which that approach may never have been designed in the first place).


  6.1  In closing, we would welcome the opportunity of providing the Treasury Select Committee with any further information on the MiFID Connect project and, while we recognise that we may not have the opportunity of given oral evidence on 14 December, we would urge the Treasury Select Committee to hold a further hearing on the subject of implementation of MiFID in Q2/Q3 2006.

  6.2  The FOA has sought, consistent with the invitation, to keep its response as brief as possible, but would stress that the remit of the inquiry does cover four major topics, each of which merit substantial review—although it could be argued that the Lamfalussy process is already the subject of intensive monitoring and the position regarding clearing and settlement will not become clear until later in 2006, which, in our view, leaves better regulation and MiFID implementation as the two critically important areas meriting further and more detailed consideration.

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