Select Committee on Treasury Written Evidence

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.


  1.1  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.


  2.1  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.


  3.1  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.


  4.1  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.


  5.1  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.


  6.1  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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