Select Committee on Treasury Written Evidence

Memorandum submitted by HM Treasury


  HM Government strongly welcomes the European Commission's White Paper on financial services policy 2005-10. We believe it to be a pro-competition, pro better-regulation package of measures that sets the development of Europe's financial services on solid ground for the next five years.

2.  This White Paper is the result of almost two years of debate between Europe's institutions, Member States and financial services industry, on the next steps in financial services policy, and we commend the Commission for the open and transparent way with which it has pursued this dialogue.

3.  For their part the UK Authorities (HM Treasury, FSA and Bank of England) have set out to influence this debate, most notably through the publication, in May 2004, of After the EU Financial Services Action Plan: a new strategic approach, which set out five priorities which we believe should underpin financial services policy. We are pleased that all five of our priorities are well reflected in the European Commission's White Paper. In addition, in January 2005, the UK Authorities set out in Supervising financial services in an integrated European Single Market: a discussion paper, their views on how to optimise the functioning of the EU's supervisory arrangements. Again we are pleased that the European Commission's proposals for enhancing the EU's supervisory arrangements draw so heavily upon the ideas set out in this paper.

4.  We believe the European Commission's White Paper on financial services policy 2005-10 is an excellent result for the UK's financial services industry and provides a solid basis for the further integration of Europe's financial services market.


5.  The regulatory structures set up under the Lamfalussy framework and designed to make the regulatory process more rapid, effective and transparent, are now in place. Although the process is relatively young and still evolving, the Lamfalussy arrangements do appear to be streamlining the EU legislative process, and will result in a higher degree of regulatory convergence than has hitherto been the case. We envisage that the involvement of finance ministries and regulators in the process will also contribute to "buy-in" in terms of implementation, ongoing application and enforcement of legislation. Consequently, we view the Lamfalussy process as a significant step forward.

6.  Certain aspects of Lamfalussy's four-level approach remain largely untested, for example, Level 4 dealing with enforcement issues, and to a lesser extent Level 3 dealing with supervisory co-operation. Moreover, there are some areas that might benefit from further attention. One example is that excessive detail in Level 1 can lead to over-prescription in Level 2 implementing measures.

7.  In this respect, the UK authorities endorse the Commission's stated view that "[the Commission does] not favour overregulation or excessive detail in measures adopted either at Level 1 or Level 2. The level of detail included should be limited to that required to ensure the smooth functioning of markets. Level 2 rules should be sufficiently precise and transparent to ensure the effective functioning of the Level 1 Directive they are intended to underpin, while avoiding unnecessary burden." [8]

  8.  The workload of the Lamfalussy Level 3 Committees has varied. The Committee of European Securities Regulators' (CESR) workload has been dominated by the need to provide advice on Level 2 implementing measures including the Market in Financial Instruments Directive (MiFID), the Market Abuse Directive and the Prospectus Directive. The Committee of European Insurance and Occupational Pensions Supervisors' (CEIOPS) main priority will remain providing advice to the Commission on Solvency II. All three Committees have, therefore, had less time to focus on non-legislative issues, such as those enhancing supervisory cooperation. Nonetheless, despite this, CESR has started the important task of peer review and the Committee of European Banking Supervisors (CEBS) has made considerable progress in its work on home-host issues.

9.  The main difficulty for the Level 3 Committees in providing advice to the Commission has arisen from the imposition of relatively tight timetables in which to respond. This has meant that it has not always been possible for the Committees to subject their advice to full impact assessments, which has sometimes resulted in their advice being excessively detailed or prescriptive. In future, more realistic timetables need to be set, so as to facilitate better evidence-based policy making by the Lamfalussy Committees. We also believe that it is imperative that the Lamfalussy Committees work effectively together on cross-sectoral issues. Consequently, we warmly support the protocol agreed by the three Level 3 Committees as an important step forward in this respect.


10.  The UK has consistently supported developing the Single Market in financial services. Nevertheless, legislative measures introduced for this purpose must genuinely further the aims of the Single Market, break down market barriers and remove market failures. The benefits of regulation should outweigh the costs and it must be fully and consistently implemented and then enforced across the EU.

11.  We believe better regulation requires high-quality, robust, evidence-based proposals in developing policy, and the process should ensure that timeframes set for advice or consultation are sufficient and realistic at all stages of the process. In each case four steps need to be adhered to:

    —    explicit consideration of no action, or a non-legislative solution;

    —    cost benefit analysis and supporting impact assessments;

    —    competitiveness testing; and

    —    consultation with industry and other key stakeholders throughout the course of negotiating a directive.

    12.  Where ex-post evaluation demonstrates that pieces of legislation are deemed not to have delivered their intended benefits, they should be either amended or repealed, in line with the Commission's undertaking in its White Paper on Financial Services Policy, again in consultation with industry. The UK authorities believe that the ex-post evaluation of all FSAP measures, as proposed in the Commission's White Paper will be a valuable tool in assessing whether a particular directive has achieved its intended benefits.

    13.  This hasn't always been the case: some key FSAP proposals would have benefited from a greater degree of evidence-based policymaking, notably the 3rd Money Laundering Directive. Nevertheless the Treasury welcomes the fact that the Commission, in its White Paper, has placed such a strong emphasis on the importance of following better regulation principles in developing policy over the next five years. The UK has called for the adoption of a risk-based approach in all sectors, including financial services, in the interests of Europe's global competitiveness.


    14.  MiFID is central to building an effective Single Market in financial services in the EU. It seeks to facilitate cross-border business and competition whilst protecting investors. These objectives are ones that the UK strongly supports, and therefore we welcome the directive. We believe that, if implemented properly across the EU, it represents a significant opportunity for UK-based firms.

    15.  The impact of the implementation of MiFID in the UK needs to be put into perspective. There are two main points to bear in mind:

    —    MiFID does not significantly alter the boundaries of financial services regulation in the UK; and

    —    the UK already has regulatory rules in most of the areas covered by the directive.

    16.  All the core investment services and activities that Member States are required to regulate under the directive are already subject to regulation in the UK. MiFID entails a modest increase in the scope of instruments covered by financial services regulation. The main change is that a wider range of physically-settled commodity derivative contracts are brought inside the scope of regulation.

    17.  There are probably two main areas where the directive introduces obligations which do not currently exist in the UK:

    —    the appropriateness test (article 19(5) of the directive) for services other than investment advice and portfolio management; and

    —    the pre-trade transparency requirements for systematic internalisers (article 27 of the directive).

    18.  In other areas, the main impact of MiFID is not to introduce wholly new obligations but to modify those that already exist. A key example of this is the directive's provisions on best execution. These significantly update the existing UK regime, in particular to require firms to develop and maintain a policy for delivering the best possible result for the client. The provisions in the directive are, however, broadly similar to ideas for modernising the UK regime on which the FSA consulted on prior to MiFID.

    19.  In its consultation document on the implementation of MiFID in the UK, the Treasury published a partial regulatory impact assessment. This is intended to complement the wider work that the FSA has been doing on the costs and benefits of the implementation of MiFID reflecting the fact that the most significant changes will involve alterations to FSA rules.


    20.  We welcome the draft MiFID implementing legislation that the Commission published on 6 February. The drafts are grounded in advice from CESR and reflect substantial discussion with Member States in the European Securities Committee (ESC)—informal drafts were discussed at eight meetings of the ESC in 2005 after each of which member states were offered the opportunity to submit written comments. The Commission also put informal drafts out to public consultation (and put all the drafts discussed in ESC on its public website). The Commission has also engaged in an open dialogue with industry through bilateral meetings and frequent appearances at industry conferences. The drafts therefore have been produced as a result of an open, transparent and consultative process.

    21.  There were only two significant elements of the drafts published on 6 February that were neither part of the CESR advice nor were discussed in the ESC process. These were:

    —    Article 4 of the draft implementing directive. This indicates that Member States are constrained in their ability to impose obligations which go beyond those in the implementing directive; and

    —    Article 18 of the implementing directive. This allows investment firms to deposit client funds in money market funds as well as bank accounts.

    22.  Commissioner McCreevy made clear in two speeches towards the end of last year that he wanted MiFID to be as far as possible a maximium harmonisation directive in order to ensure a consistent regulatory regime across the single market. Article 4 seeks to turn that aspiration into a legal provision. The Treasury supports the Commissioner's aspiration.

    23.  The inclusion of the provision on money market funds resulted from discussion between the Commission and industry. The Treasury believes that there is a strong case for including this provision. However, it raises complicated issues about the protection of client funds in the event of the insolvency of the investment firm that the existing text fails to effectively deal with. We therefore proposed to the Commission that the provisions on money market funds should be left out of the text. This would have enabled CESR to be given a mandate to look at the issue with a view to their being a subsequent amendment to the implementing measures. The Commission has not taken up our suggestion. We have therefore concentrated on trying to improve the technical details of the proposals.

    24.  MiFID will produce a far greater degree of harmonisation in regulatory requirements for investment firms than currently exists in Europe. This is because it is much more detailed than its predecessor, the Investment Services Directive, and there is much less freedom for Member States to add obligations to those set out in the directive. Regulators will also work through CESR to agree guidelines for how parts of the directive will be enforced.

    25.  There are perhaps three elements of the implementing measures where the application of the provisions across Europe are most uncertain. The provisions on systematic internalisers are new for all Member States, whilst those on best execution will bring significant change to existing regimes in this area. If they are not implemented consistently this could undermine the directive's efforts to facilitate competition for the execution of orders which is central to cutting costs for investors and the issuers of securities. The third area is financial promotions. The directive does not contain a comprehensive regime for the regulation of marketing by investment firms; detailed provisions are mainly left to national discretion. However, it will be important that national marketing regimes do not undermine the country of origin approach to the regulation of the conduct of business by investment firms under the directive.

    26.  We have made clear our approach to going beyond the minimum requirements in EU financial services legislation. This will only occur where it is necessary to meet risks to regulatory objectives and where the benefits of taking action exceed the costs.

    27.  The timetable for the implementation of MiFID is tight. The Treasury and FSA have indicated that they will seek to ensure that industry is given the full nine months of certainty between the finalisation of the implementing laws and regulations and the date on which the directive comes into effect. Given the pressures to achieve implementation the Treasury welcomes the establishment by industry of the MiFID-Connect project. We have committed to working with industry to help ensure that industry is in the best possible position to implement the directive in a timely and effective manner. The Treasury and FSA published a joint document dealing with the implementation of MiFID on Thursday, 4 May 2006. Copies were placed in the House libraries and it is available, together with a summary of the responses to the Treasury's consultation document on the implementation of MiFID at


    28.  The Commission is right to focus on the efficiency and safety of cross-border clearing and settlement as a significant issue for a Single Market in financial services in the EU. Well functioning market infrastructure is necessary to facilitate competition between execution venues and to encourage investors to invest on a pan-European basis.

    29.  In considering whether or not EU action is needed in this area, the Commission has sought to work on the basis of consultation and evidence. It has:

    —    issued two consultative communications in 2002 and 2004 respectively;

    —    received two reports from the Giovannini group of experts looking at barriers to cross-border clearing and settlement in Europe;

    —    published a report by London Economics looking at the relationships between trading, clearing and settlement infrastructure across Europe;

    —    established the CESAME high-level group to listen to and work with market participants to remove barriers to cross-border clearing and settlement;

    —    set up expert groups to gather evidence and make recommendations in respect of legal and fiscal compliance barriers;

    —    co-ordinated work between DG-Markt and DG-Comp; and

    —    made clear that its preference in respect of removing barriers to efficient cross-border clearing and settlement is for action by the private sector rather than through legislation.

    30.  We made clear our view of clearing and settlement in responding to the Commission's 2004 communication (a full copy of the response is available on the section of the Commission's website dealing with clearing and settlement). The response made two key points:

    —    any decision about a directive needed to be grounded in market failure analysis and a regulatory impact assessment; and

    —    the potential for competition policy to contribute to policy objectives in this area should not be underestimated.

    31.  We therefore welcome the fact that since the autumn of 2004, the Commission has been working on a regulatory impact assessment, elements of which have been opened up for discussion through CESAME. It is crucial that this assessment is central to any decision the Commission makes about whether or not to propose a directive, and that the work of the Commission services is exposed to external assessment. On this latter point, we welcome the remarks that Commissioner McCreevy made in his 16 December 2005 speech.

      32.  On 7 March, Commissioners McCreevy and Kroes issued a joint press release on clearing and settlement. This issued a challenge to the industry to take action to help improve efficiency in cross-border clearing and settlement rather than leave it to the Commission to take action. The Commission appears to be looking to industry, principally infrastructure providers, to take action in respect of:

    —    ensuring non-discriminatory access, including for other infrastructure providers;

    —    price transparency, making prices available for pubic inspection;

    —    unbundling, so that users have a choice of whether to buy a full service package or individual services; and

    —    risk mitigation, to ensure that central infrastructure is as safe as is reasonably possible.

    33.  We support the emphasis being placed on action by the private sector to resolve problems. If it can be done it is clearly preferable to public sector action, particularly additional legislation. Therefore, we would urge the private sector, particularly the main infrastructure providers, to reflect on what they could do to meet the concerns expressed by the Commission. It is not possible to resolve all issues in the three month timetable set by the Commissioners for determining whether or not action is needed at the EU level. But firm commitments could be made to achieve progress on a realistic timetable.


    34.  On 25 November 2005 the Treasury and FSA jointly submitted the UK's response to the European Commission's Green Paper on Mortgage Credit. The UK's response, copies of which were deposited in the House libraries, is available at

    35.  The Treasury worked closely with a wide range of UK stakeholders to inform the development of our joint response. In our response we stressed the need for a convincing economic impact assessment by the Commission of any legislative proposals, and that alternatives to regulation should be fully explored. In our view Commission priorities should be focused on areas where enhanced market access can be achieved using persuasive and voluntary measures, to foster greater collaboration and cooperation.

    May 2006

    8   Commission document SEC(2004) 1459 The application of the Lamfalussy process to EU securities markets legislation: A preliminary assessment by the Commission services, 15 November 2004. Back

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