Select Committee on Treasury Written Evidence

Memorandum submitted by the London Stock Exchange


  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.


  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.


  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.


  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.


  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

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