Select Committee on Treasury Written Evidence

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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