Memorandum submitted by Investment and
Life Assurance Group (ILAG)
ILAG is a professional representative body in the
UK concerned with the future of the investment, life assurance
and pensions industry. It is led by practitioners, and aims to
identify and develop industry best practice. The Group currently
has a growing membership of around 50 practitioner companies and
associate members. In addition, a number of individual members
are affiliated to the Group.
ILAG welcomes this opportunity to submit written
evidence to the House of Commons Treasury Select Committee in
the course of its inquiry into financial service regulation in
Europe.
1. PREAMBLE AND
EXECUTIVE SUMMARY
1.1 There has been a plethora of directives
under the first Financial Services Action Plan (FSAP) that have
either been implemented, are being implemented or are awaiting
implementation. Given their significance, complexity and wide-ranging
nature there is need for a period of reflection—without
recourse to additional measures—in which to properly evaluate
their impact both on the financial services industry and consumers
in the EU.
1.2 We welcome therefore the decision announced
by the European Commission (EC) in November 2005 to undertake
a full post-FSAP evaluation taking into account economic, legal
and practical aspects together with the process of implementation.
The results of this evaluation should then help shape the future
course and pace of financial services legislation as outlined
in the EC Green Paper on the Financial Services Policy (2005-10)
(May 2005) and subsequent EC White Paper (Dec 2005).
1.3 In responding to the broad terms of
the inquiry:
— we believe that the Lamfalussy arrangements
makes for improved legislation facilitating both the detail of
proposals and the manner of implementation to be properly considered;
— we strongly support the adoption
of "better regulation" principles involving evidence-based
policy-making as a basis for sound rules and being subject to
full and open consultation with the industry; and
— we acknowledge the role of the European
Parliament, largely through the Economic and Monetary Affairs
Committee, which in the main discharges its functions in a fair
and constructive manner.
1.4 However elsewhere ILAG is concerned
at the "patchy" way that EC Directives have been implemented
in many member states. The lack of regulatory convergence and
consistent transposition in the EU begs the question over the
time period within which the FSAP has been applied. This feature
must be fully analysed within the post-FSAP evaluation.
1.5 The evaluation exercise must also take
into account corresponding standards and developments in the global
market and regulatory convergence should be subject to an exhaustive
pre-implementation global competitiveness test.
1.6 The main impact of legislation on ILAG
member firms has been that of added costs and complexity—in
initial systems changes, staff training requirements and recurring
compliance and operational expenses. In particular, the FSA's
intention to apply the whole of MiFID to firms that the Directive
was not designed to cover seems to be the apotheosis of gold plating.
2. IMPLEMENTATION
OF INTERNAL
MARKET LEGISLATION
2.1 ILAG is concerned at the "patchy"
way that EC Directives have been implemented in many member states.
Two striking examples are the Insurance Mediation (IMD) and Distance
Marketing Directives (DMD) both of which are aimed at common standards
in the marketing and distribution of insurance products and services
in the EU.
2.2 The IMD Directive (2002/92/EC) set a
transposition deadline of 15 January 2005 yet as at 15 November
2005 a total of seven member states were recorded by the EC as
having failed to enact this legislation in their own statute books,
including France, Germany and the Netherlands all mainstream competitors
of the UK*.
* See also IMD Guide—"Selling Insurance
Across Europe"—August 2005 published by CMS, an alliance
of major law firms.
2.3 The DMD Directive (2002/65/EC) set an
earlier transposition date of 9 October 2004—over a year
ago—but again as at 15 November—another seven (but
not necessarily the same seven as above) member states had similarly
failed to enact and implement. Given the spread and growth of
e-commerce and the ability to buy/sell financial services over
the internet, as recognised by this directive, it is vital that
steps be taken to enforce its proper implementation everywhere.
2.4 With an effective EU transposition rate
of just over 60% on these two measures we regard this as a most
unsatisfactory state of affairs. The perception also prevails
that the governments in those member states will take a similar,
non-proactive approach to enforcement inevitably gives rise to
allegations of unfair competition and an uneven playing field.
ILAG is aware that the EC is now trying to apply more rigour to
the process of transposition and implementation but believes that
actions should be intensified including the imposition of suitable
legal and financial sanctions against offending member states.
2.5 Whilst the UK did implement both of
these measures on time nevertheless there has been another occasion
of the UK acting in haste in order to meet implementation deadlines.
One example of this was the Simplified Prospectus Directive (2003/71EC)
on disclosure of information to consumers buying certain investment
products implemented in the UK on 1 May 2005.
2.6 In this case not only did the FSA "gold-plate"
the directive by requiring the domestic industry to continue providing
"return-on-yield" figures for UK-based consumers (but
not non UK-based customers), in addition to the "total expense
ratio" prescribed by the directive, but also at the eleventh
hour the FSA was forced to withdraw some of the proposed and associated
Conduct of Business rules (COB) —effectively leaving the
industry to interpret the finer details. On this occasion the
FSA could have helped the industry by allowing more time especially
as the EC transposition deadline was 1 July 2005, two months later.
3. CONSEQUENCES
OF INTERNAL
MARKET LEGISLATION
3.1 The lack of regulatory convergence and
consistent transposition in the EU begs the question over the
time period within which the FSAP (42 measures in all!) has been
applied. In an enlarged Community it has been clearly impossible
for all member states to maintain the same pace of implementation
and that a period of inaction or reflection at EC level is required.
ILAG therefore supports the recent announcement by the EC to carry
out the first part of an evaluation of the FSAP.
3.2 Part of the difficulty over the achieving
integration of the internal market is the operation of the state
benefits system in member states that for instance have a major
influence on the personal protection and pensions markets. In
such situations and particularly in those states where benefits
are more generous than elsewhere the best intentions of legislation
and of promoting cross border business can be stymied. We trust
this feature will be analysed within the evaluation.
3.3 We also believe that the evaluation
exercise must take into account corresponding standards and developments
in the global market. As an instance, the IMD—even though
it is not being fully implemented in all member states—may
already be damaging the insurance sector's global competitiveness.
Risk capital moves round the world very quickly and there are
already indications that the IMD has encouraged capital to flow
out of the London insurance market to Bermuda. Thus, regulation
may have made non-EU insurance markets more attractive for highly
mobile capital, which appears to be exactly what the Commission
was not intending. In short, a market that is heavily regulated
for internal reasons, but without a proper understanding of the
global position, may well result in the competitiveness of the
domestic industry being undermined.
3.4 Regulatory convergence should therefore
be subject to an exhaustive pre-implementation global competitiveness
test and that thereafter there can be no convergence until the
Commission is satisfied that all member states are actively and
effectively enforcing current regulations.
4. IMPACT OF
INTERNAL MARKET
LEGISLATION
4.1 The main impact of legislation on ILAG
member firms has been that of added costs and complexity—in
initial systems changes, staff training requirements and recurring
compliance and operational expenses. As a result, the UK insurance
sector, in particular, has been forced into a process of rationalisation
involving the closure of firms and investment funds (reducing
consumer choice) and outsourcing of services to third countries
(reducing jobs and employment opportunities).
4.2 Although not strictly the subject of
this inquiry we would mention the ruling of the European Court
of Justice in March 2005 (Netherlands Supreme Court v Arthur Andersen
& Co) extending the application of VAT to insurance-related
services. The imposition of VAT in this manner in the UK is estimated
to cost the life and pensions industry at least £100 million
annually and can only give added impetus to the process of outsourcing
to third countries, such as India, with consequent job losses
in the domestic industry. ILAG has requested the Government to
re-consider current proposals to introduce such legislation in
this country ahead of other member states.
4.3 The costs of meeting EC legislation
has had the most profound impact at the level of smaller and medium-sized
enterprises that have neither the financial resources nor the
size or capability of work-force to conform with the new requirements.
Increasingly, such firms are having to "buy-in" skilled
services from outside, such as actuarial and compliance advice,
to meet their obligations. The added cost of acquiring these services
in turn impairs the ability of those firms to remain competitive
in attracting savers and investors.
4.4 ILAG therefore welcomes the fact that
the post-FSAP evaluation to be conducted by the EC will include
a thorough economic analysis that should cover the specific impact
on small businesses.
5. MARKETS IN
FINANCIAL INSTRUMENTS
DIRECTIVE (MIFID)
5.1 The MiFID Directive provides rules affecting
the conduct of investment business with consumers. It is thus
designed to cover a whole range of investment products and firms
with the exception of life assurance companies, friendly societies,
non-UCITS CIS companies professional firms, and most Independent
Financial Advisers, ie those who do not hold client money. Although
the details of implementation have still to be finalised, both
within the EC and UK, the FSA is nevertheless intending that it
should be extended to cover all the above firms as well as investment
houses.
5.2 We acknowledge that the FSA may not
have wanted to run two different regulatory regimes, one for firms
affected by MiFID, and one for those who are not. However, it
is difficult to believe that the only way of resolving it was
to apply the whole of MiFID to firms that the Directive did not
intend to be covered at all; it seems to be the apotheosis of
gold plating. Some judicious reworking of the COB Rules could
well have been a more proportionate response.
5.3 The result will be huge costs to firms
as COB Sourcebooks have to be completely rewritten, and changes
to systems such as disclosure and promotions implemented. It must
be doubtful whether all this cost is really justified by the benefits
that will accrue and will again give rise to concerns about the
UK competitive position in Europe.
6. CONCLUSION
6.1 We trust that these comments and findings
will be helpful to the Select Committee in its inquiry and remain
ready to respond to any points or questions that may emerge from
consideration of it during proceedings.
7 December 2005
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