Select Committee on Treasury Written Evidence

Memorandum submitted by the London Investment Banking Association

1.  The London Investment Banking Association (LIBA) is the principal trade association in the UK for firms active in the investment banking and securities industry. The diversity and quality of London's wholesale markets is unique in the world. LIBA represents the interests of its Members in all aspects of their business, and promotes their views to the authorities in the UK, the European Union, and elsewhere.


  2.  The Treasury Committee's Inquiry is well-timed, as it coincides with the recent publication of (1) The European Commission's White Paper on Financial Services Policy 2005-10 and (2) FSA's Better Regulation Action Plan. The White Paper highlights four particularly important principles,[9] which provide standards against which the past and future actions of the European authorities can be judged. It is essential that the European Commission now puts them into practice, and that it finds the resources to do so, both internally and by drawing on external experts.

  3.  FSA's Better Regulation Action Plan has in addition a welcome emphasis on:

    —  avoiding "gold-plating" of EU measures; and

    —  market practitioners' participation in regulation through "industry solutions".

  It is particularly important to encourage the adoption of "industry solutions" in the EU, where they have not yet been contemplated.

  4.  Many FSAP measures:

    —  suffered from deadlines which were unrealistic, given the complexity of the measures;

    —  sought to harmonise where there was insufficient consensus across the EU; and

    —  could only be implemented in an unduly interventionist/prescriptive way.

  The Lamfalussy process had a positive impact, but its potential was limited by the above factors. The post-FSAP period, supported by the commitment to better regulation in the White Paper, is an opportunity to remedy these shortcomings.


  5.  The model set out in the Lamfalussy report commands our strong support as the best way to develop and coordinate financial services regulation in the EU. Shortcomings in its implementation have arisen as a result of:

    —  its introduction in the middle of the FSAP process;

    —  unrealistic deadlines, which meant there was not enough time to apply properly the procedures it recommended;

    —  some legislators and regulators having to learn how to implement new consultative procedures and assumptions; and

    —  the failure to implement the recommendations on agreed overarching principles of regulation.

  Completion of the FSAP and its associated measures should provide a less frantic atmosphere. It is important that it is used to implement the Lamfalussy procedures properly, and to introduce the improvements set out in the White Paper. Enough time needs to elapse before definitive conclusions are drawn about the success of the Lamfalussy process.

  6.  In particular, the Committee of European Securities Regulators (CESR) needs to adhere more closely to the role established for it in the Lamfalussy Report of providing technical advice to legislators. As an influential member of CESR, FSA should encourage CESR to:

    —  perform more thorough technical analysis;

    —  apply better regulation principles; and

    —  avoid providing political answers to technical questions.

  7.  At times the interests of the international wholesale markets in London are given insufficient attention in EU policy-making because the UK and other authorities with experience of regulating them are in a minority in CESR, Council working parties, the European Securities Committee, and similar bodies. The Lamfalussy Report emphasised that in consultation, particular weight should be given to those with knowledge and expertise of the subject in question. Therefore, given that CESR's role is to provide technical advice, mechanisms should be adopted which:

    —  ensure that on points that affect wholesale markets, those CESR members which have substantial experience of regulating those markets have the preponderant influence; and

    —  bring to bear the weight of knowledge and expertise which FSA has as the regulator of the EU's dominant wholesale market (see "International Financial Markets in the UK", published by IFSL in November 2005, accessible on

  8.  As the UK member of the Committee of European Banking Supervisors (CEBS), which is the "Level 3" committee with responsibility for advising the European Commission on the prudential regulation of investment firms as well as banks, FSA should also encourage CEBS to give due attention to specific respects in which prudential regulation, which may be designed with banks in mind, has a different impact on investment firms.

  9.  HM Treasury is in the lead in determining overall UK policy in relation to EU initiatives in the financial services area, and has managed this role successfully, for example in negotiating the Capital Requirements Directive (CRD). HM Treasury staff are high-quality, but any reduction of the already limited numbers devoted to the EU would create significant risk for the UK position, not least as the European Commission may press for initiatives which are not formally acknowledged in the White Paper, such as harmonisation of the prudential supervision of liquidity.


  10.  The European Commission's White Paper represents a welcome new commitment to better regulation principles and practice. The essential elements are:

    —  a commitment to market failure analysis;

    —  a commitment to economic and market impact analysis;

    —  a commitment to have regard to the impact of regulation on the global competitiveness of EU markets;

    —  a commitment to pre-consultation with experts on commercial and technical aspects;

    —  no presumption in favour of legislation as the solution to any problems that are identified;

    —  a commitment to use non-legislative tools, such as competition policy, and effective enforcement of existing legislation, to remove barriers to single market;

    —  a commitment to regulatory impact analysis and cost-benefit analysis for any legislation that is proposed;

    —  an endorsement of supervisory convergence as a means of coordinating cross-EU implementation; and

    —  a commitment to review and amend or repeal legislation that does not work.

  11.  These proposals are excellent, and it is most important that the European Commission implements them consistently, quickly, and effectively. Experience, for example of similar work by FSA, suggests that the Commission will need time and considerable effort to meet such standards. It will need considerable professional and market expertise and resources, where necessary drawing on CESR or national experts. Even with them, there will continue to be tension between the technical conclusions that the better regulation approach points to and the inherently politicised process of negotiating between 25 different Member States.

  12.  FSA's Better Regulation Action Plan has in addition a welcome emphasis on:

    —  avoiding "gold-plating" of EU measures; and

    —  market practitioners' participation in regulation through "industry solutions".

  It is particularly important to encourage the adoption of "industry solutions" in the EU, where they have not yet been contemplated.


  13.  The formal status of the Parliament in developing "Level 2" implementing measures needs to be clearly established by agreeing effective "callback" procedures. Without such procedures, the Level 2 mechanism will not be able to serve its purpose of quick adaptation of EU legislation to changing market conditions. In the absence of the EU constitution, discussions are under way on alternative mechanisms to do this, and it is important that they succeed.


  14.  Many of these points are illustrated in the recent examples which the Committee is taking as case studies:

Case study: Markets in Financial Instruments Directive (MiFID)

  15.  The development of MiFID was inconsistent in many respects with the better regulation approach. Although there was pre-consultation, its results were partly overturned, in the absence of any market failure or regulatory impact analysis, by political intervention on technical issues.

  16.  Negotiations in the Council of Finance Ministers with unrealistic deadlines established uneasy compromises between radically different regulatory approaches (principled v prescriptive), and without sufficient awareness of the characteristics of the wholesale markets.

  17.  A key aspect of negotiating MiFID "Level 1" and "Level 2" measures has therefore been to remedy where possible those politically-inspired measures which would most disrupt markets. This is a process which HM Treasury has generally managed well.

  18.  An important and open aspect of MiFID is that it provides for the Commission to review whether its transparency obligations for equity markets should also apply to fixed-income (and other) markets. It appears that the European Commission accepts the need for thorough market impact analysis before it considers whether to propose any extension of MiFID's requirements for publishing trading interests and reporting transactions in equities to other market sectors. We understand that the Commission intends to place significant reliance on independent academic studies in this area which a number of associations, including LIBA, have commissioned.

Case study: European Commission's consideration of a possible Clearing and Settlement Directive

  19.  Aspects of the European Commission's continuing approach to possible legislation on Clearing and Settlement which are worthy of note include:

    —  an approach which is more in line with the principles of better regulation, including a thorough and open analysis of whether there is market failure;

    —  early recognition of the role of competition law in this area;

    —  a readiness to recognise the role of the market itself in providing solutions to problems;

    —  a serious effort to avoid an automatic, instinctive recourse to legislation; and

    —  a commitment to a regulatory impact analysis.

  20.  Aspects of the European Parliament's approach to legislation on Clearing and Settlement worthy of note are:

    —  Two own-initiative reports—the Andria report of January 2003 (OJ C 38 E, 12.2.2004) and the Kauppi report of June 2005 (A6-0180/2005)—in different Parliamentary sessions. The Kauppi report clearly benefited from a better understanding of the market, which had itself evolved. It supported non-legislative initiatives by the Commission which had borne fruit since the Andria report, such as the establishment of the CESAME committee to review the barriers to efficient cross-border settlement.

    —  The European Parliament has made clear its displeasure about work carried out by the ESCB and CESR to implement international (CPSS-IOSCO) standards in Europe without the authority of appropriate pan-EU legislation. Although regulators are entitled to proceed at "Lamfalussy level 3" without a Level 1 text, the episode has been valuable in injecting an additional element of oversight into an EU initiative which was perhaps over-ambitious, and had become politicised and hard to manage properly. The ESCB and CESR had consulted, though not always to the highest standards. But they showed little sign of amending their proposals in the light of the consultation responses, nor did they always explain thoroughly why they had chosen to continue with proposals which had been criticised. In the meantime, a number of years have effectively been lost in which European regulators could have applied an agreed international approach.

  21.  Nonetheless, thanks to the Commission's approach, the debate on DG Markt's forthcoming impact assessment—itself an innovation—has the potential to be well informed and mature. Should the upshot be a new Directive, it has a much better chance of being proportionate, targeted legislation which need not spend long in the legislative process.

  22.  The price of the less satisfactory aspects of this policy initiative is that while the original Commission Communication was published in 2002, legislation is unlikely to be implemented before 2008 at the earliest.

8 December 2005

2.  International, outward-looking financial services policy.

3.  Implementation and enforcement, including synergy with competition authorities and other policy areas, rather than new legislation.

4.  Practical approach to supervisory convergence.

9   1. Better regulation, including evidence-based policy-making, impact analysis, and cost-benefit analysis. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 8 June 2006