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.
MARKET IN
FINANCIAL INSTRUMENTS
DIRECTIVE (MIFID)
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.
IMPLEMENTING MEASURES
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 http://www.hm-treasury.gov.uk/Documents/Financial_Services/eu_financial_services/fin_eufs_isd.cfm
CLEARING AND
SETTLEMENT
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.
MORTGAGE CREDIT
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
http://www.hm-treasury.gov.uk/media/24A/A4/eufs_mortgageresponse131205.pdf.
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
