Select Committee on Treasury Written Evidence

Memorandum submitted by the Financial Services Authority


  1.  When we gave evidence to the Committee on 14 December last year, we undertook to provide further information in a number of areas. This memorandum covers:

    —    the territorial scope of the FSA's regulatory regime;

    —    the role and operation of Lamfalussy Level 3 committees; and

    —    the Insurance Mediation Directive and incorporation of underwriting firms in Bermuda.


    2.  The Committee asked for further details about our obligations towards consumers who do not live in the UK but use the services of UK-based financial services institutions.[6]

      3.  Our statutory consumer protection objective makes no distinction between UK and non-UK consumers who deal with UK-based financial services businesses. Most of our rule-making powers also make no such distinction, including our power to set the compulsory jurisdiction of the Financial Ombudsman Service for authorised firms and to set the coverage of the Financial Services Compensation Scheme. In exercising those powers, we must comply with EU Directives; EU requirements in this area continue to evolve. We must also have regard to various principles, including that the benefits of regulation should be proportionate to the burdens imposed.

    4.  In many cases, we have exercised our powers to apply the protections of the regulatory regime when a non-UK consumer obtains regulated services from a UK establishment of an authorised firm. For example:

    —    The Financial Ombudsman Service is normally available.

    —    The Financial Services Compensation Scheme covers many claims of this type. But there are exceptions. For example, UK branches of European firms may instead be covered by the compensation scheme of the firm's Home State under EU Directives, and special rules for insurance apply.

    —    Many of our conduct of business rules apply. Again, there are exceptions. For example, under EU Directives our cancellation and product disclosure rules may not apply when consumers take out insurance relating to a non-UK risk. Another example is that we do not require firms to provide "key features" documents to non-European consumers when selling regulated collective investment schemes. A further example is that we have limited power to make financial promotion rules protecting overseas consumers.

    —    Our prudential rules will generally apply if the firm has its registered or head office in the UK.

    5.  On the other hand, most of these protections do not apply when a non-UK consumer deals with an overseas branch of a UK-based firm (e.g. a UK citizen living in Germany dealing with a branch of a British institution in Germany). In general terms, it will often not be proportionate to apply UK rules since the branch will be subject to local rules. Consumers would probably expect to be protected under the local rules in any event. There are exceptions, many of them derived from EU Directives. Non-UK consumers may also benefit from prudential regulation which applies to the whole firm.

    6.  The FSA makes its own services available to non-UK consumers. For example, our consumer website is accessible to non-UK consumers and our Consumer Contact Centre answers general queries from non-UK consumers where the matter falls within our jurisdiction.


    7.  The Committee asked for further details on certain aspects of the work of the Lamfalussy Level 3 committees in the light of the Committee of European Securities Regulators' (CESR) experience in advising the European Commission on the Markets in Financial Instruments Directive (MiFID).

    8.  This note:

    —    identifies some limitations on the operation of the Lamfalussy Level 3 committees;

    —    considers what can be done to prevent the Level 3 committees being asked to deal with political issues; and

    —    reports on the potential use of Qualified Majority Voting at Lamfalussy Level 3.

    Annex A provides background information on the Lamfalussy arrangements.


    9.  The Lamfalussy Level 3 committees have been established to perform three main functions. First, they are to advise the European Commission on technical implementing measures relating to framework directives or regulations. Second, they should contribute to the consistent implementation of Community directives, and may develop standards, guidance and recommendations to enhance supervisory convergence. Third, they facilitate information exchange and co-operation between national supervisory authorities in the supervision of financial institutions.

    10.  The FSA firmly believes that for the foreseeable future the Lamfalussy structures offer the best prospect for improving the European legislative process and for Member States to achieve supervisory convergence. Supervisory convergence involves securing a reasonable level of consistency in the way that supervisors monitor compliance with regulations in the day-to-day operations of firms and other authorised entities, and can only partly be achieved through legislation.

    11.  The balance between providing advice to the European Commission on new legislation and pursuing practical initiatives to achieve supervisory convergence has varied quite widely across the Level 3 committees since their establishment. While the Committee of European Banking Supervisors (CEBS) has been working mainly on a series of level 3 measures relating to the implementation of the Capital Requirements Directive, CESR has to date been limited to spending most of its time on providing level 2 advice on MiFID. The priority for the Committee European Insurance and Occupational Pensions Supervisors (CEIOPS) since its creation has been the development of advice to the Commission on the Solvency II framework directive. In effect two of the three committees have been required to concentrate on new legislation rather than convergence work. For CEIOPS this will remain the case for some time, while in the case of CESR the FSA has been very keen to emphasise the importance of shifting the agenda further in the direction of convergence as the burden of providing technical advice on MiFID diminishes.

    12.  Providing advice to the Commission has put a considerable strain on the limited resources of the relevant Level 3 committees and their members. In sending calls for advice and mandates to the Level 3 committees, the Commission needs to be conscious of what is achievable within the timeframe allowed and to set realistic deadlines. The Level 3 Committees are committed to consultation and to operating in an open and transparent manner. The pressure to deliver advice to unrealistic deadlines can undermine this commitment, and may mean that high level compromises are pursued when further technical work and a more measured approach might deliver a better result. In this context, it is essential that the Level 3 Committees can carry out appropriate impact assessments and Quantitative Impact Studies on key initiatives, and that the results of these assessments inform the development of policy advice by the Level 3 committees.

    13.  The Commission has said that it will only embark on new legislative initiatives where there is robust evidence of market failure and that failure can be addressed cost- effectively through regulation. If fewer legislative measures are proposed by the Commission this should permit the Level 3 committees to concentrate on consistent implementation, convergence and practical co-operation, as the FSA would wish. There is considerable scope for productive work in the area of supervisory convergence, particularly in developing more collegiate and efficient approaches to the supervision of major groups and conglomerates. Working with the grain of market developments, and with the way in which groups and conglomerates seek to organise their own activities, there may be potential benefits for firms in terms of the alleviation of some of the supervisory burdens on them. The development of peer review processes by the Level 3 committees should also encourage the convergence of supervisory practices.


    14.  The four level approach under the Lamfalussy structure (see annex A) is intended to deliver a more accountable and efficient regulatory structure, and introduces a clear division of responsibilities. In respect of legislation, it distinguishes between core, framework principles to be dealt with at level 1, and practical day-to-day implementing rules (which are informed by the committees' advice at level 2). At level 1, the Commission adopts the formal proposal for a Directive or Regulation after a full consultation process. Once the European Parliament and the Council reach agreement on the framework principles and the definition of implementing powers contained in the proposal, the detailed implementing measures are developed through level 2 processes.

    15.  While the allocation of responsibilities is, in principle, clear, there can in practice be some overlap between the political and technical agendas. For example, the degree of prudence that a capital or solvency regime should seek to achieve is clearly a political decision, but one that benefits from technical advice on the implications of adopting different levels of prudence. For the Lamfalussy structure to work effectively at levels 1 and 2, the key political decisions in relation to any new initiative need to be identified quickly, and, where necessary, relevant technical advice sought from the Level 3 committees to inform those decisions. Once the political decisions have been made, and a framework agreed, the Level 3 committees may be asked to provide technical advice on implementing measures. In none of these stages should the Level 3 committees themselves be pressed to try to resolve political issues. This is particularly the case where Member States have been unable to resolve them at level 1.


    16.  All the Level 3 committees operate by consensus in relation to their work on supervisory convergence, including work on level 3 standards, recommendations and guidance. This is appropriate since convergence measures which have no legal force in individual Member States will clearly not be effective unless they command general support.

    17.  There are, however, differences between the three committees in how advice in response to Commission mandates is dealt with. Although each seeks to achieve consensus, in CESR, if no consensus is available, the advice to the Commission will identify and elaborate any dissenting opinions of individual members. CEBS and CEIOPS can apply QMV in a similar situation.

    18.  In each of the committees the pressure to achieve a consensus creates the risk of providing advice at a high level of generality which accommodates all opinions and existing legislative arrangements. The rules of CEBS and CEIOPS provide the opportunity for these committees to agree advice which does not rely on consensus—but clearly still commands wide support. CESR is currently reviewing its own procedures to determine whether it too should have the possibility of QMV. The FSA would support this.


    19.  During the oral evidence session with the trade associations, also on 14 December, the Committee raised the concern with Mr Sklaroff of the Association of British Insurers that the Insurance Mediation Directive (IMD) has caused capital flight of insurance firms to Bermuda. We would like to take this opportunity to respond to this concern.

    20.  We do not consider the IMD to be a driver in the new underwriting firms setting up in Bermuda. The Directive, as applied in the UK, does not impact insurance firms underwriting reinsurance or large, international risks, which constitute the vast majority of the business underwritten in Bermuda, particularly by the start-ups of 2005.

    21.  More broadly, anecdotal feedback from regulated firms suggests that there are a number of factors at play in firms choosing in which centre to incorporate, an important one being the comparative tax regimes.

    January 2006

    6   Q78 Back

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