Supplementary memorandum submitted by
Investment and Life Assurance Group (ILAG)
1. INTRODUCTION
1.1 The Investment and Life Assurance Group
(ILAG) welcomes the opportunity to submit written evidence to
the Treasury Select Committee on the recent EC draft implementing
proposals on the Markets in Financial Instruments Directive (MiFID).
1.2 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 currently within
that industry, 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 ILAG.
1.3 Having studied the EC proposals, ILAG's comments
are limited to the draft implementing Directive as having most
application to the interests of our members. As such we have no
comments to offer on the draft implementing Regulation.
2. EXECUTIVE
SUMMARY
2.1 In its length and complexity, the Markets
in Financial Instruments Directive (EC 2004/39) is one of the
most formidable pieces of legislation that has faced the financial
services sector in recent years. Between the period of original
conception through to final adoption, the directive was expanded,
seemingly without consultation, to include additional investment
activities and products. In turn, this has required two sets of
draft implementing measuresone in the form of a Regulation
and the other a further Directivewhich are the subject
of the current Select Committee inquiry.
2.2 In limiting our remarks to the implementing
directive, ILAG has concerns over the broad manner in which in
the UK, the Financial Services Authority (FSA) intend to implement
MiFID. This will encompass a number of providers eg. insurance
firms, collective investment undertakings, whom, strictly speaking,
fall outside the remit of the original directive. We further believe
that a number of key features and aspects affecting the marketing
of investment products require further clarification given the
timetable leading up to full implementation in a little more than
eighteen months.
2.3 We endorse the need for a full EU cost-benefit
analysis to be carried out mindful of the significant potential
costs to the industry to which various references are made in
the recent HM Treasury partial regulatory impact assessment.
2.4 There is also a real concern that this will
be another measure implemented and enforced unevenly across Europe
and that given the rigour and relative maturity of our regulatory
system could place the UK at a competitive disadvantage. In particular,
one "unintended consequence" would appear to be that
certain marketing activities for certain products attuned to UK
consumers will be seriously constrained if they have to meet the
requirements of MiFID.
2.5 In conclusion, we recognise the importance
of investor protection and of treating customers fairly as already
enshrined in FSA conduct of business rules and guidance. However,
the industry, and particularly smaller firms, faces considerable
financial and operational pressures in converting to new systems
and processes to meet these additional requirements by 1 November
2007.
3. CONSIDERATION
3.1 ILAG'S original submission in December 2005
to the Select Committee as part of its inquiry into European financial
services regulation included comments on MiFID. We now wish to
expand upon them in the context of the questions and issues posed
in the Select Committee's recent press notice inviting focused
submissions on MiFID.
3.2 Whether the proposals adequately reflected
prior input into the legislative process and the extent to which
there were any significant "surprises" in the proposals,
or whether any new requirements were included without sufficient
prior consultation?
3.2.1 As a trade organisation we are not aware
of any public consultation, either in the EU or UK, leading up
to the adoption of the Commission's MiFID framework directive
(EC/2004/39) in April 2004. The original intention was to regulate
firms providing services linked to the buying and selling of financial
instruments such as shares, bonds and derivatives. Between original
conception to final adoption the directive was augmented to include
the provision of investment advice as an investment service itself
requiring authorisation and extending to other financial instruments
such as units in collective investment undertakingseven
though the undertakings themselves were excluded. We are not aware
that any input was requested of the industry at this juncture
by either EC or UK authorities. As a consequence, we believe that
the FSA will interpret the directive on a broad scale to include
the investment activities and business operations of a wide number
of financial service providers including those related to insurance
companieseven though again these companies themselves were
exempted from the terms of the directive.
3.2.2 In ILAG's previous submission to the Select
Committee, in December, as part of its inquiry into European financial
services regulation, we acknowledged that the FSA may not have
wanted to run two different regulatory regimes, one for firms
covered by MiFID, and one for those that are not. However, we
must repeat it is difficult to believe that the only way of resolving
it is for the FSA to apply the whole of MiFID to firms that are
outside its scope.
3.2.3 Inevitably, this has given rise to industry
concern over the lack of clarity and precision on the types of
business affected and questioning over why it is necessary to
overhaul conduct of business rules (COB) on such a widespread
scaleto be the subject of no less than four FSA consultation
papers later this year. Only recently has the FSA started to inform
the industry of the intent and extent of MiFID, including a review
of the COB rules, but certain areas still require further clarification
to remove continuing uncertainty (see 3.5 below).
3.3 The extent to which the proposals now
provide sufficient information for a full cost benefit analysis
to be undertaken at this stage and the desirability of undertaking
such analysis
3.3.1 A full cost-benefit analysis is necessary
on both a EU and UK basis in the spirit of the recommendations
in the Commission's White Paper on Financial Services Policy (2005-10),
published in December 2005.
3.3.2 We are firmly of the opinion that, whatever
the benefits for UK consumers might ultimately prove to be (and
we have yet to identify where these might arise), they will be
by far outweighed by the increased costs which firms will incur
in changing systems, procedures and promotional literature alone.
As is always the case, such costs will inevitably have a direct
impact on consumers, either by increasing the charges firms have
to pass on to them, or by reducing investment returns.
3.3.3 Admittedly, the HM Treasury has carried
out and published a partial regulatory impact assessment that
makes specific references to up-front and on-going industry costs
in implementing MiFID in a number of places. Less specified and
quantified are the offsetting benefits to the industry leaving
the distinct impression that the latter will be significantly
outweighed by the former.
3.4 The identification of any elements of
the proposals which are most likely to be interpreted differently
across Europe and the problems that this may generate
3.4.1 Given past and continuing problems over
uniform transposition and implementation of EC financial service
directives it is almost inevitable that MiFID, given its length
and complexity, will be subject to differential application in
member states. In particular, specific aspects such as customer
advice, financial promotions, complaints handling and systems
and controls are likely to be the subject of piecemeal and patchwork
rules lacking the comprehensive approach that has been adopted
in the UK. The deadlines for transposition and implementation
also pose separate challenges to a number of countries which lack
the legislative and regulatory infrastructure of the UK raising,
once again, fears of an unlevel playing field and unfair competition.
3.5 The identification of any elements of
the proposals which conflict with existing UK regulation and an
indication of the costs and benefits of changing these elements
to reflect the rules under MiFID
3.5.1 One potential area that concerns a significant
number of UK firms is the possibility that investment products
sold using a direct marketing approach will be constrained by
MiFID on both operational and cost grounds. Direct marketing or
direct offer promotions have proved a popular and effective method
in UK financial services for a number of years. Typically straightforward,
non-complex, products are marketed directly to retail customersfor
instance by way of mail shot, telephone, internet, or via information
and application packs displayed in high street outlets. Such promotions
must conform with relevant FSA rules, including those which implement
the requirements of the Distance Marketing Directive (EC/2002/65).
3.5.2 The FSA may consider such transactions to be
outside the limits of "execution-only" transactions
as provided for by the implementing directive and therefore subject
to "appropriateness tests" to be carried out by firms
on individual investors again prescribed by the directive. The
strong possibility exists that, as a (presumably) unintended effect
of MiFID, direct offer promotions as currently undertaken by UK
firms would no longer be permitted or, if still permitted, cease
to be economically viable (because of the requirement for firms
to seek sufficient information from potential customers to perform
an appropriateness test and a resultant increase in consumer perception
that purchasing the financial product is "too complicated"
to pursue).
3.5.3 Such a situation would undermine government
strategy of developing simple products that are designed to be
low cost and accessible, in particular to those who are financially
excluded and cannot afford to seek advice on financial matters,
and for whom the typical product is most commonly distributed
by the direct offer channel.
3.6 The identification of areas in which the
UK could benefit from rules additional to those included in the
Commission's draft proposals and areas in which such "super-equivalence"
should be avoided
3.6.1 We have no particular comments to make
on this aspect except to say that in principle we would be opposed
to any additional measures amounting to "super equivalence"
unless there were significant and undisputable benefits for both
UK consumers and businesses alike.
3.7 Whether the UK financial services sector
is prepared for the domestic implementation of MiFID and the extent
to which the proposed MiFID implementation timetable is realistic
for UK firms
3.7.1 There must be a very big question mark
against whether the present timetable is attainable for firms
either in the UK or EU. Given that much of the detail has still
to be resolveddue in part to the length and complexity
of the measures requiring further consultation, rules and guidelines
etcit is placing firms under a formidable challenge to
have all processes and systems up and working by 1 November 2007little
more than 18 months away. Even though the EU timetable has previously
been extended it is unlikely that many firms will be in a state
of absolute readiness by then, particularly smaller firms for
whom the transition in terms of costs and operations will be proportionally
greater.
April 2006
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