Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by Investment and Life Assurance Group (ILAG)


  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.


2.1  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 measures—one in the form of a Regulation and the other a further Directive—which 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.


3.1  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 undertakings—even 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 companies—even 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 scale—to 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 customers—for 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 resolved—due in part to the length and complexity of the measures requiring further consultation, rules and guidelines etc—it is placing firms under a formidable challenge to have all processes and systems up and working by 1 November 2007—little 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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