Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by the Financial Services Authority


  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.



  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.


  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 requirements—we 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.


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 possible—in a way that meets the requirements of the Directive, but that also makes sense for UK markets—both 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.


  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 firms—many 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.


  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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 8 June 2006