Supplementary memorandum submitted by
the London Investment Banking Association (LIBA)
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. This evidence supplements the evidence that
we sent to the Committee on 8 December 2005, and responds to the
Committee's 1 March 2006 for additional evidence on the European
Commission's draft "Level 2" measures under MIFID.
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. The Commission generally did a good job of
developing its proposals to reflect prior input. The official
draft is considerably improved over earlier drafts in many areas
as a result of the previous consultative process. Only on a small
number of points do outstanding issues remain.
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
an analysis
4. It will be important for HMT and FSA to implement
the Directive in a way that maximises benefits and minimises costs.
There remains considerable scope for useful cost benefit analysis,
in particular because all of the Level 1 legislation and much
of the Level 2 legislation is in the form of a Directive, which
must be transposed into national requirements, and because in
some areas the Directive provides Member State options. Since
tight implementation deadlines have already been set, however,
the formal process of cost-benefit analysis must not be allowed
to eat into the timetable. In the areas where it has no discretion
on implementation, therefore, FSA should provide an impact assessment
of implementation measures rather than a full financial estimate
of costs and benefits to the extent that the FSMA permits it to
do so.
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
5. Differences of interpretation are inevitable
and to an extent desirable, given the need to accommodate diverse
market practices and legal concepts, as regards for example the
identification of conflicts of interest and the protection of
client assets. The proposals' split between directives that need
to be transposed into national law and regulations that are directly
applicable is the right one in this respect. However, international
firms that operate across Europe need as much consistency of interpretation
and application of rules as possible, so that they can design
systems and procedures which are streamlined across the group.
Effective enforcement of the Directive by the European Commission
and convergence of interpretation and application by CESR have
an important role in promoting consistent interpretation. The
draft measures should provide a basis for sufficient harmonisation
of requirements across Europe and regulation on the basis of mutual
recognition of country of origin requirements, although it is
essential, in order to avoid duplicative and contradictory regulation,
that the provisions on the regulation of branches are interpreted
and applied consistently across Europe on a country of origin
basis.
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
6. At this stage we are aware of two areas where
there may be an issue about whether the Directive allows elements
of the UK regime to be maintained, namely the approved persons
register and the provisions on unbundling. The position needs
to be clarified as soon as possible. The implementation of MIFID
will involve considerable changes to UK regulation—with
cost implications for firms—rather than extensive conflict
with it. In many areas the drafts are broadly in line with existing
regulation or existing good practice. The major changes, and therefore
the major sources of cost, will be:
— Increased formalisation of procedures
and record-keeping, in particular in conduct of business, best
execution, order handling, conflict of interest management.
— Changes to market transparency structures
and transaction reporting formats, in particular minimum pre-trade
disclosure requirements for exchanges, changed arrangements for
post-trade reporting and deferred reporting of large trades, and
changes to the information required in transaction reports to
regulators.
— Establishment and operation of quoting
mechanisms for those firms that choose to operate as "systematic
internalisers".
Given that the implementation of MIFID will represent
substantial change rather than substantial improvement to existing
regulation in the UK, the main benefit to be derived depends on
the ability of firms to provide services on a cross-border basis
across the EU. Benefits from MIFID therefore depend heavily on
thorough implementation in other Member States, and recognition
of passporting rights, with effective enforcement if this proves
to be necessary.
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
7. Article 4 of the proposed Level 2 Directive
provides a helpful check on "gold-plating" of the provisions
which it contains, but also provides a practical mechanism for
objectively justified super-equivalent rules.
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
8. Considerable preparatory work is already under
way in firms, and as far advanced as can be expected while rules
remain unfinalised. LIBA also participates in "MIFID Connect",
a grouping of associations which is preparing industry guidelines,
in discussion with HM Treasury and FSA, on the practical implementation
of MIFID. Systems and reference data specialists are also undertaking
considerable preparatory work.
9. Thorough domestic implementation depends heavily
on the prompt finalisation of the Level 2 measures, and prompt
transposition into national requirements, so that firms can take
advantage of the full nine months allowed to them under the revised
implementation timetable. The proposed MIFID implementation timetable
is realistic for UK firms, provided that transposition is prompt
and pragmatic, and regulators have due regard to the industry
guidelines that are under development. It will be necessary to
find ways of providing firms more time to implement if the transposition
timetable slips further. For groups that operate across the EU,
and firms whose home State is outside the UK, the likely late
transposition of MIFID in many Member States is likely to pose
particular problems that will need to be handled pragmatically
and without disturbing firms' ability to continue to service client
needs.
March 2006
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