Memorandum submitted by the London Stock Exchange
EXECUTIVE SUMMARY
1. Thank you for the opportunity to submit
views to your inquiry on European financial services regulation.
The London Stock Exchange has taken an active role in the debate
on a single financial services market for the European Union.
As well as responding to many consultation exercises, we have
taken part in Commission expert groups and given evidence, for
example, to the EU Financial Services Committee. We have also
actively lobbied—together with many other financial interests
in the City of London—for regulation that supports the UK
emphasis on open and competitive markets.
2. Without a financial sector that is able
to support enterprise and to tackle wider social challenges such
as the pensions deficit, the EU cannot expect to deliver on the
Lisbon Strategy on jobs and growth. We believe that the policy
outlined by the Commission in its recent White Paper, "Financial
Services Policy 2005-10" should make an important contribution
to the wider economic goals of the European Union. However, the
real challenge for the Commission is to make its vision a reality
by providing sufficient resources and focus to maintain momentum
and to deliver the objectives of the Financial Services Action
Plan.
OPERATION AND
DEVELOPMENT OF
THE LAMFALUSSY
ARRANGEMENTS
3. The Commission has rightly rejected a
further ambitious legislative programme, in favour of an emphasis
on implementation and enforcement. The White Paper states that
any new legislation will be limited to areas where carefully targeted,
evidence based initiatives might bring benefits to the EU economy.
The Exchange and others in the City of London have argued consistently
against a further ambitious package of legislation, favouring
instead an emphasis on giving the recently adopted legislation
time to work. Therefore we welcome the Commission's decision to
focus on "dynamic consolidation" of financial services.
In other words, seeking to promote co-operation between regulators
and ensuring enforcement in the event of faulty implementation.
However, this will only happen if the EU and national authorities
make sufficient resources available to ensure effective implementation
and enforcement.
4. The White Paper refers to the need to
avoid so-called "gold plating". We agree with the need
to avoid unnecessary regulation. However, we believe that the
emphasis should be on "intelligent transposition", rather
than on a blanket ban on anything other than "copy out"
implementation (see para 11 below). Equally, we believe that the
debate over whether Directives or Regulations provide the best
framework for financial services legislation is less important
than the actual detail of the legislation. In other words, the
priority should be outcomes rather than process.
5. We support the continuation of the Lamfalussy
legislative procedure which in many respects has worked extremely
well and has the potential to make Community legislation on securities
markets more flexible. In particular, the quality of legislation
has been improved by the involvement of national regulators and
external stakeholders with a stronger voice for market participants.
The extensive pre-consultation has worked well, particularly in
relation to the Markets in Financial Instruments Directive and
Transparency Directive. However, there is scope for further improvement.
On timetables, for example, there must be a proper balance between
speed and quality. The Commission must propose realistic adoption
and transposition timetables and CESR should be allocated sufficient
time to provide advice to the Commission on implementing measures.
Therefore, we have welcomed the formal proposal to delay the implementation
dates for the Markets in Financial Instruments Directive.
6. The Commission is to be congratulated
for its focus on the global nature of financial services. We welcome
the intention of the Commission to deepen the EU-US financial
markets dialogue and to widen dialogue with countries such as
Japan, China, Russia and India.
ROLE OF
THE EUROPEAN
PARLIAMENT
7. The European Parliament had made a positive
contribution to the negotiations on several of the FSAP directives
from a UK perspective. This was primarily a reflection of the
strength of the voice of the City of London in the deliberations
of the Economic and Monetary Affairs Committee. The City of London's
cause was taken up on a cross-party basis by a group of pro-market
MEPs and in particular, in their roles as Rapporteurs by Theresa
Villiers, Chris Huhne and Peter Skinner. It remains to be seen
whether the UK voice will maintain its influence going forward.
It is important that the new Parliament does not become more concerned
with inter-institutional politics than the substance of legislative
development.
8. In our view this makes the case for a
stronger role for national parliaments to debate the merits of
European legislation and where necessary to intervene to promote
UK interests. We therefore commend the Select Committee for its
initiative in undertaking this particular inquiry and look forward
to further such interventions, either in relation to specific
issues or in a more strategic role looking at progress towards
Lisbon and delivery of the objectives of the Financial Services
Action Plan.
MIFID NEGOTIATION
AND IMPLEMENTATION
CASE STUDY
9. The London Stock Exchange has been involved
in the MiFID negotiation and implementation process since the
European Commission's first Communication in 2000. The directive
is the cornerstone of the Financial Services Action Plan and,
along with the Prospectus, Market Abuse and Transparency Obligations
Directives, the general themes within it represent a substantial
step towards facilitating a single market in financial services
within the EU.
10. The Exchange's objective throughout
the negotiations has been to promote London's open and competitive
market model as Europe works towards the clearly desirable goal
of removing barriers to cross border activity. The Exchange has
worked with the UK authorities to preserve the unrivalled balance
of transparency, liquidity and flexibility in the UK market.
11. The negotiations were a learning process
for the City of London as a whole but, taking on board lessons
learned from the negotiation of other FSAP directives, the UK
became more effective as a lobbying force throughout the process.
This is demonstrated by the superiority of the draft level 2 legislation
when compared to the initial directive.
12. The process of UK implementation is
only now beginning and we urge the Treasury and FSA to consider
that quality of regulation and maintenance of existing high UK
standards should underpin its stated "intelligent copy out"
approach.
INTELLIGENT COPY-OUT
V GOLD-PLATING
13. We welcome the Chancellor of the Exchequer's
commitment to "no gold-plating", and we share his desire
to avoid the introduction of unnecessary new regulation which
delivers questionable benefits. However this should not blindly
deliver a facsimile of flawed EU legislation onto UK statute books;
especially where the legislation could obviously be improved by
intelligent interpretation, additional guidance or occasionally
supplementary rules. The priority must be to retain existing high
standards where they are proven to work.
14. We certainly believe that FSA appreciates
the difference between gold-plating and intelligent copy-out.
Indeed in FSA's recent Better Regulation Action Plan, John Tiner
comments that "we will not gold-plate EU requirements. We
will only add additional requirements when these are justified
in their own right."
15. One example where additional requirements
are justified, and we would expect FSA to provide additional rules,
is in relation to managing the fragmentation of trading data.
Ensuring that all trades continue to be subject to real-time monitoring
and are then capable of being consolidated into a single trade
feed is vital if we are to preserve the efficient, orderly and
fair markets for which London is renowned. In this particular
example, a direct copy-out of MiFID would risk FSA falling short
of their statutory objectives. As such, additional rules are required
to ensure that the transition from existing UK practice to EU
rules does not inadvertently damage proper operation of our markets.
16. In conclusion, we are encouraged by
the direction of the Commission's White Paper and in particular
its emphasis on Better Regulation. We believe the Lamfalussy arrangements
have made a significant contribution to the process of developing
EU legislation. Whilst the operation of committees such as CESR
is far from perfect, it is improving all the time. On MiFID, we
have seen a positive evolution of the text following a disappointing
outcome at the 2003 ECOFIN meeting. We are grateful for the efforts
of HM Treasury and FSA in this regard. However, key to the directive's
success will be effective implementation. We are fully supportive
of the authorities' commitment to intelligent copy-out and are
confident that this will be done in a sensible way which will
avoid unnecessary "gold-plated" rules but will provide
for supplementary regulation when this is necessary.
17. We do hope you find our comments useful,
and we would of course be happy to discuss any aspect of them
with your Committee.
8 December 2005
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