Supplementary memorandum submitted by
the Financial Services Authority
INTRODUCTION
1. This note sets out, in response to a
request from the Treasury Committee:
our initial views on the European
Commission's draft text for the MiFID Level 2 implementing measures;
our plans for implementation;
and
our approach to assessing the
costs and benefits of MiFID.
2. The key milestones in implementing MiFID
are as follows:
Member States will have to introduce
implementing legislation and rules by 31 January 2007.
Firms will have to implement
the MiFID requirements by 1 November 2007.
INITIAL VIEWS
ON LATEST
LEVEL 2 DEVELOPMENTS
General
3. We welcome the publication on 6 February
of the European Commission's formal draft of the Level 2 measures.
In the main, we are able to support the draft proposals; in many
respects they embody principles that are already part of the regulatory
regime in the UK. However, we believe that there is room for further
improvement, particularly in relation to the impact on retail
consumer protection. For example, some changes to the measures
dealing with the provision of information to retail clients could
usefully be made so that there is flexibility for us to ensure
that consumers receive the right information at the right time
during the sales process, and in the most useful format. Amendments
to ensure that obligations owed to professional (as opposed to
retail) clients are not set at an unduly onerous level would also
be desirable.
4. The text is now being considered by the
Economic and Monetary Affairs Committee (ECON) of the European
Parliament, and by the European Securities Committee (ESC) . Currently,
the ESC is scheduled to vote on the text in June and formal adoption
by the Commission is likely in July. Some changes are likely to
result from consideration of the text by the ESC and ECON. It
is unclear at this stage what the nature and extent of these changes
will be. However, our working assumption is that the Commission's
February draft will more or less be adopted by the Commission
and the European Parliament in the summer. We are basing our implementation
plans on that assumption.
HARMONISATION STATUS
OF THE
LEVEL 2 TEXT
5. As signalled publicly by Commissioner
McCreevy before Christmas, the text has been drafted largely as
maximum harmonising. Flexibility for Member States to add or retain
other national requirements is limited generally to "exceptional
circumstances" in which the risks arising are of particular
importance to the market structure of that Member State, as set
out in Article 4 of the draft Level 2 Directive.
6. We agree in principle with the Commission's
objective of limiting the scope for Member States to "goldplate"
the implementation of the directive. As we said in our Better
Regulation Action Plan, published in December 2005, we will implement
directives in a sensible and proportionate way. We will not "goldplate"
EU requirementswe will add national measures only when
they are justified in their own right (including through the use
of cost-benefit analysis (CBA) and market failure analysis (MFA))
and where consistent with directive provisions. In implementing
MiFID, we plan to "copy-out" the directive's requirements,
and do not envisage at this stage including significant new requirements.
7. However, we do not think that Article
4 should require us automatically to remove existing FSA rules
that address risks to investors or to the integrity of UK markets,
particularly where these risks are not fully covered by the Level
2 measures. There may well be areas of our existing regime that
it will be prudent for us to retain, where that is consistent
with MiFID provisions, so that we can continue to provide an appropriate
level of protection for retail consumers. But we believe that
the drafting of Article 4 and the associated recitals to the Level
2 directive needs to be improved to make clear the nature of the
test that Member States would need to meet in making these judgements.
As drafted, we believe it could prevent us taking action that
would otherwise be objectively justified and proportionate.
THE FSAS
IMPLEMENTATION PLANS
General approach
8. Implementation of MiFID, including the
Level 2 measures, is the responsibility of the Treasury and the
FSA. In late April, we will publish with the Treasury a Joint
Implementation Plan, which will set out how we will work together
to implement MiFID in the UK. It will outline our consultation
programme and the timetable for making necessary changes to legislation
and rules, and will explain how we propose to involve industry
and other stakeholders in that process. The plan will build on
our November 2005 "Planning for MiFID"a well-received
short guide to the key areas which we believe senior management
should be thinking about and budgeting for in preparation for
MiFID.
9. Our aim is to implement MIFID in as pragmatic
and cost-effective a way as possiblein a way that meets
the requirements of the Directive, but that also makes sense for
UK marketsboth wholesale and retail.
10. In our Business Plan for 2006-07, published
in February, we made clear that we would use the implementation
of MiFID as the opportunity for a radical overhaul of parts of
the FSA Handbook, rationalising existing requirements not superceded
by copy-out of the Directive's requirements, when it is sensible
to do so.
11. However, the scope of MiFID cuts arbitrarily
through certain markets. It does not, for example, cover the sale
and distribution of insurance products. We will therefore need
to consider the impact that the implementation of MiFID will have
on the current UK regime that applies to business falling outside
the scope of MiFID. It may be appropriate to align some of our
requirements in this area with what is required by MiFID.
12. These issues will be addressed in our
planned radical revision of our retail conduct of business requirements,
marking our commitment to move more in the direction of principles-based
regulation. They will be subject to full consultation, including
relevant MFA and CBA, as part of our consultation programme.
CONSULTATION PROGRAMME
13. In our Business Plan, we set out a revised
consultation programme that takes account of the timetable for
the adoption of the Level 2 measures described above. Given the
range of issues raised by implementation, and the fact that Level
2 measures, whilst near final, still have to be agreed and adopted,
we have decided that to allow sufficient consideration of those
issues we should publish four consultation papers (CPs), phased
over the year, as follows:
A CP in May 2006 on systems
and controls, setting out a single body of requirements arising
from both the Capital Requirements Directive (CRD) (which is to
be implemented by 1 January 2007) and MiFID. Dealing with both
Directives in one document is helpful for firmsmany of
whom are caught by both Directives.
A Discussion Paper on Best Execution
in May 2006. This will explore the new MiFID requirements relating
to best execution. It will examine practical issues around execution
policies and arrangements and how firms will monitor and review
those policies and arrangements.
A CP in July 2006 covering MiFID's
provisions on markets transparency, transaction reporting, authorisation
and enforcement and co-operation.
A CP in October 2006 on Conduct
of Business (CoB) rules. This will combine implementation of the
MiFID requirements with the results of our CoB simplification
work including the application to non-MiFID scope business as
described above.
A second CP in October 2006
covering MiFID provisions on marketing communications, set within
a wider review of our current financial promotions regime.
COST BENEFIT
ANALYSIS
14. We have a statutory obligation under
the Financial Services and Markets Act (FSMA) to publish a cost-benefit
analysis of any new rules, including those which we must introduce
to implement European directives. We have undertaken a substantial
amount of analysis and are committed to publishing a straightforward
account of the costs and benefits in the UK arising from MiFID.
15. The precise implementation costs and
benefits of MiFID will depend on the ultimate outcomes at Level
2, and on decisions about application and interpretation. However,
we think that the Commission's draft proposals provide a sufficient
basis for us to carry out a cost-benefit analysis consistent with
our FSMA obligations. We continue to work closely with industry
stakeholders to establish as clearly as we can the likely scale
and nature of those costs. In doing so, we may also be able to
draw implications from the results of our study into the Costs
of regulation, which we plan to publish in May 2006.
16. On costs, we do not underestimate the
one-off cost for firms of revamping existing, or introducing new,
systems, procedures and business or trading models, particularly
given the understandable desire of many firms to minimise their
legal and compliance risk. We recognise that many firms are concerned
about the possible scale of these costs. However, our judgement
is that the Level 2 text has improved significantly during negotiations,
such that some implementation costs may be lower than first thought.
For example, the need for costly "repapering" of existing
clients (re-issuing revised client agreements) now appears less
likely.
17. We also believe that MiFID could bring
benefits, and we have commissioned some focussed work to assess
their potential nature and extent. For example, it will simplify
and streamline the "passporting" regime for firms doing
cross-border business, increasing competition and enabling greater
EU financial integration, both of which may act as mechanisms
for lower prices. MiFID will also abolish the so-called concentration
rule, which has allowed Member States to give preference to regulated
markets as distinct from other execution venues as venues for
the execution of transactions. MiFID compensates for this by setting
a best execution obligation, which should enhance investor protection
and price formation. MiFID will also allow a range of firms to
realise the economic value of their trade data.
18. Each of the CPs described above will
contain a CBA relevant to its content. Our overall CBA of MiFID
implementation will be set out in our October CP on CoB.
March 2006
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