House of Commons
|Session 2006 - 07|
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Public Bill Committee Debates
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006
The Committee consisted of the following Members:
Glenn McKee, Committee Clerk
attended the Committee
The following also attended, pursuant to Standing Order No. 118(2):
Second Delegated Legislation Committee
Monday 22 January 2007
[John Bercow in the Chair]
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006 (S.I. 2006, No. 3384).
The Chairman: With this it will be convenient to consider the following: the draft Financial Servicesand Markets Act 2000 (Exemption) (Amendment) Order 2006.
The draft Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2006.
The draft Uncertificated Securities (Amendment) Regulations 2006.
Ed Balls: It is a great pleasure to serve under your chairmanship for the first time, Mr. Bercow. We are debating four sets of provisions, which constitute an important part, although not the entirety, of the UKs implementation of the EUs markets in financial instruments directive, which I shall henceforth describe as MiFID.
As hon. Members may know, MiFID is a cornerstone of the EUs financial services action plan. It regulates the buying and selling of shares, bond derivatives and other financial instruments. Through a mixture of competition between intermediaries and markets, as well as core investor protection rules, MiFID seeks to increase the depth and liquidity of European financial markets.
MiFID replaces the existing investment services directive. The ISD was genuinely considered not to provide an effective basis for investment in services and for other activities in the EU in the 21st century. The ISD subjected firms doing cross-border business to multiple regulatory regimes and allowed member states to retain anti-competitive arrangements for share trading. The Government therefore supported the Commissions desire to replace the ISD.
MiFID, which has now been agreed, and which is to be implemented over the course of this year, simplifies the regulatory regime for cross-border business. It opens up share trading in all member states to competition, and we are already seeing benefits from that change, with new proposals and schemes being brought into the marketplace.
There has been controversy and debate in the City and across Europe. In large part, that has focusedon getting investor protection right and on the
The Commission has sought to create a flexible and proportionate investor protection regime. In several areas, the directives investor protection rules are less extensive than those that they will replace in the UK. They afford different levels of protection to different categories of investor, as is currently the case in the UK, and as one would expect from a regime that seeks to be risk based and proportionate. The highest level of protection is reserved for retail investors. The directive also allows member states to retain additional protections where those can be justified against strict criteria.
The negotiations were tough, and implementation is now important. On balance, we believe that we have secured a positive outcome from a UK perspective. The directive will achieve an improved passporting regime compared with the old regime, which allowed discrimination. The supportive comments that we have had from many parts of the City attest to that.
Through the directive, we have also moved in the direction of more effective competition between execution venues. The Project Turquoise initiative is one example of the market responding to that opening up. We have also achieved a liberalisation of the means of trade and transaction reporting. Again, a market initiative called Project Boat is evidence of the market responding to the new opportunities that MiFID is creating.
Finally, we have moved in the direction of a more principle-based approach to implementation through the Lamfalussy process for making policy in this area. The fact that the detailed rules that the Financial Services Authority will produce in due course to implement the directive in the UK will be 300 pages shorter than the rules that they replace is a sign that such principle-based implementation has allowed us to move in a deregulatory direction.
The provisions before us give effect to the directive in the UK. As hon. Members will know, responsibility for their implementation is split between the Treasury and the FSA. Given the structure of financial services regulation in the UK, the FSA will undertake the greater part of the implementation through changesto its handbook. However, given the split in responsibilities, we have worked closely with the FSA on implementation to ensure that the whole hangs together coherently. In addition to the formalpublic consultation, we and the FSA have, since 2005, had meetings with the main trade associations approximately every six weeks, as well as a host of other meetings with trade associations and firms.
The measures can be split into two: the regulated activities and exemption amendment orders deal with the scope of the directives implementation, and the main implementing regulations and the uncertificated securities amendment regulations deal with other aspects of implementation. We have had extensive discussions on the scope of UK regulation and the best approach to revisions through the regulated activities
The amendments do three main things: indicate more clearly where exclusions from UK regulations can be overridden by MiFID; introduce a new activityoperating a multilateral trading facility, or MTF; and expand the scope of financial instruments that are caught by regulation.
As hon. Members will know, there are concerns that the directives implementation might bring foreign exchange forwards under the scope of the regulated activities order. We have been in contact with the Foreign Exchange Joint Standing Committee on this issue, and we believe that MiFID does not alter the current test for determining whether such instruments are covered by the order.
The main implementing regulations cover a wide variety of issues in just over 30 pages of legislation. Despite their length, however, they do not fundamentally remake the UKs regulatory regime under the Financial Services and Markets Act 2000; they essentially amplify existing requirements. Some areas still need to be sorted out, in contact withthe Commission and the industry, in the detailed implementation that will follow from the regulations, but we have made substantial progress in a number of areas in a way that has involved consultation with the City. As a result, the directive is broadly welcomed across the UK financial services industry.
We have tried to implement the directive in a practical and proportionate manner that is liberalising and flexible and that will expand the single market for financial services in Europe more effectively. Creating a truly integrated market for financial services depends on more than legislation, but getting legislation and its implementation right is necessary to break down national barriers and promote competition and a better deal for companies and consumers. We believe that we have achieved that outcome with the regulations, but the devil will be in the detail of implementation. We will need to monitor and debate many issues in the coming months, but at this stage I wholeheartedly commend the provisions to the House.
I welcome the opportunity to debate the statutory instruments prior to the FSA rules being revised at a board meeting later this week. It is rather unfortunate timing that we are debating these statutory instruments here today when the FSA is to ratify, on Friday, changes to its rules that depend on these measures being approved today. That rather limits the Committees ability to consider and shape the way in which the FSA implements MiFID.
In principle, we welcome the measures that will open up Europes financial services markets to UK-based businesses, so long as the benefits of doing so
I want to talk about five broad issues on the statutory instruments: the cost of implementation, progress on transposition and implementation, scope, passporting, and exchanges and share trading. As the Minister said, this is not the first attempt that has been made to improve the openness of financial markets, and the directive supersedes the investment services directive, which sought to make such improvements at an earlier stage. It is important to have on record the contribution of a large number of businesses and trade associations to ensuring that we have a proper replacement for the investment services directive. We should not overlook the contribution of my hon. Friend the Member for Chipping Barnet (Mrs. Villiers), who, as a Member of the European Parliament, did sterling work in ensuring that the directive represented and reflected as far as possible the needs of UK-based businesses.
Let me refer to the cost-benefit analysis, which is covered by the regulatory impact assessment of these statutory instruments. There is deep scepticism about the analysis that has taken place and it is a great pity that no proper cost-benefit analysis was carried out before we began the process of revising European directives. In evidence to the Select Committee on the Treasury given in May last year, Callum McCarthy, the chairman of the FSA, said:
It is deeply unsatisfactory that UK financial services firms face major changes, with the associated costs, for an initiative which has been subject to no comprehensive EU cost-benefit analysis to assess the specific contribution it might make to unlocking the prize of a more integrated European capital market.
He also said:
It is the case that the costs... are likely to fall particularly on the UK as the major wholesale market.
He went on to express some scepticism:
Whether the benefits for Europe as a whole outweigh those costs, it is impossible to say because no proper exercise has been done.
Industry, regulators and the European Union andthe Commission have embarked upon the process without undertaking a proper cost-benefit analysis to demonstrate whether the return from the investment will outweigh the cost.
In the regulatory impact assessment, it was suggested that the benefits of MiFID might be £200 million a year, with second-order benefits of about £240 million. As the RIA states, there is a considerable range of uncertainty. Indeed there is, because when the FSA published its own review of the cost-benefit analysis of the measures in November last year, its estimate was rather hedged by caveats and qualifications. It said that
broadly, under particular assumptions, MiFID couldplausibly be estimated to generate quantifiable benefits of upto £200 million per year in direct benefits,
but it went on to say:
However, the distribution of these benefits may be unevenly spread among firms.
In this debate about benefits, there is a sense of how difficult it is to quantify them and to see whether they will be captured. With regard to the £240 million a year in second round effects cited by the RIA, the FSA said:
These benefits, which are contingent on the direct benefits arising and thus subject to some additional uncertainty, would accrue to the economy more generally rather than to individual firms.
Of course, it is individual firms that will bear the cost. The FSA document had this to say about cost:
Alongside these quantifiable ongoing benefits of MiFID, this paper identifies reported quantifiable one-off cost estimates of some £877 million to £1.17 billion for firms, and estimated additional ongoing costs of £88 million to £117 million per year.
However, the RIA indicates that the up-front costsof compliance would be between £490 million and£355 million. I would be grateful if the Minister explained or reconciled the difference between the FSAs figure of up to £1.7 billion and the Governments figure of up to £490 million. There is a significant gap between those figures, and given the difficulty that exists in quantifying the benefits of the regulations, it is important that the Minister puts on record his view of what the costs are and says whether he believes the FSAs estimates to be realistic.
On the transposition and implementation of MiFID, for businesses subject to MiFID, 31 January is one of two key dates this year. That is the date by which MiFID should be transposed into law and into the rule books of regulators throughout the EU. The second important date for business is the implementation date, 31 October. The transposition and implementation dates are fixed throughout Europe, which is appropriate given that the directive applies Europe-wide. Transposition is, however, the responsibility of member states and of each regulator in each state.
Will the Minister advise the Committee as to how many member states will meet the 31 January deadline? My latest information is that only two states, ourselves and Bulgaria, will meet it, which leaves another23 states to do so. Based on his discussions with Commissioner McCreevy, when does the Minister expect all member states to have transposed MiFID into domestic law and regulation? Has he discussed with Commissioner McCreevy the sanctions that might apply to ensure that MiFID is transposed into domestic law?
There is a concern that transposition and implementation might be delayed. Committee members may think that that is unjustified scaremongering, but in a submission by the Association of Independent Financial Advisors to the Treasury Committee on its review of financial regulation, the association said of the MiFID delay:
Our fears are compounded by the recent experience with the implementation of the Insurance Mediation Directive (IMD) where 14 months after the official implementation date several member states have still not implemented the Directive.
In the financial services sector there is deep-seated concern about the delays, and also concern that, as the Commission has agreed a nine-month gap between transposition and implementation, the implementation
Does the Minister recognise the importance of transposition, given the potential for differences in regulatory regimes where MiFID has not been transposed? If there were a delay in transposition and in implementation, would not it threaten the competitiveness of UK marketsan issue on which the Minister and I agree a great dealif UK businesses complied with MiFID on business undertaken in the UK, but on business undertaken elsewhere in the EU, where MiFID had not been fully implemented, they had to comply with a different regulatory regime?
How will the Treasury and the Financial Services Authority work together over the next two months with the Committee of European Securities Regulators to ensure that firms are not penalised and that market stability is not undermined as a result of any logistical and administrative delays? How will the Minister ensure that CESR focuses on promoting supervisory convergence and that it does not reopen questions about legislative interpretation? It must focus only on issues in which an understanding between regulators will help to enable firms to regulate the directive on time.
For firms in member states, those issues are important to ensuring that implementation and transposition take place throughout the EU at the same time. There is genuine concern. I am sure that the Minister realises that the financial services sector expects him to work with the FSA, CESR and the Commission to ensure that no undue delays take place.
The Minister knows that there has been considerable debate about the scope of MiFID and about the activities to which it applies. We should not get away with the idea that MiFID will apply only to those businesses selling products that fall under the definitions in the directive. There is concern in the insurance sector, for example, about the way in which the directive will apply to it, and in particular about the directives boundaries.
One role that insurance companies undertake isthat of investment manager. A number of investment managers that are members of the ABI are concerned about how market-facing issues will be implemented in relation to them. In particular, they have concerns about the scope of the best execution and transaction reporting obligations. In the context of best execution, they are concerned that insurance companies as investment managers will not be treated as clients in dealer markets; they will not get the protection that clients would get, but will be treated on a par with dealers. As a consequence, they believe, they will not be subject to any conflict of interest provisions; nor will there be a requirement on dealers to implement rules that would protect client assets in the event of insolvency. Perhaps the Minister will outline whether he believes that to be a valid concern and whether it reflects a proportionate implementation of MiFID in the sector.
I want to mention retail insurance. Insurance products are prima facie outside the scope of MiFID, but the FSA has adopted a case-by-case approach to
There are other relevant areas, which I shall not detain the Committee by examining at length, but there is concern that some aspects of the rules are yet to be clarified. Some of those were dealt with in consultation paper 06/19. The FSA has noted that it has not been possible, within the time scales, to consider the application of MiFID rules to all types of non-MiFID firms and business. The FSA will look at the issue in the second quarter of 2007, but I am sure that the Minister will recognise that that creates a degree of uncertainty in the sector, particularly where there are some activities that the operators of collective investment schemes might feel fall under the investment services definition of MiFID but the FSA intends to grant an exemption to some of those activities. A prompt resolution of those matters would be to the advantage of operators in the sector.
I want to touch on passporting, which the Minister outlined as an important development in the regulation. It strengthens the rights of businesses that are authorised in one member state to operate in another. There are several provisions in the statutory instruments before us today that tackle that, and I want to begin by discussing the draft Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2006, which are abbreviated as MiFI in the regulations.
New section 312A of the 2000 Act, set out in paragraph 15 of schedule 2 to the regulations, sets out the passporting rights of businesses. As I understand it, MiFID should make it easier for firms to work cross-border. It sets out arrangements to enable a company established in one country to establish a branch in another, without having to be authorised in the second country. I understand that the procedure is that the company informs its regulator that it wants to set up a branch in another member state, and the regulator then informs the regulator of the branch in question. That seems to be a relatively straightforward process. There is one notification to be made. However, may I clarify how that might work in a more complex situation? I can see clearly how it might work for a UK-operated business that was setting up a branch in, say, Belgium. However, what would happen if the branch in Belgium then decided to set up an operation in the Netherlands? Would the London-based company make the notification to the FSA about the new operation being set up, or would the Dutch branch notify the Dutch regulator? It is important, given the growing complexity of the operation and organisation
The issue of passporting relates to implementation. If under the regulations a UK operator set up a branch in the Netherlands, for example, but the Netherlands did not transpose or implement MiFID by the agreed deadlines, would the branch in the Netherlands have to follow the pre-MiFID rules of that territory, or would it be able to comply with the new MiFID rules that will have been implemented in the UK? Again, there is the possibility of a business having to comply with two sets of rules.
Given that people can apply for a passport, the removal of the right to a passport is inevitable. In new chapter 3A of the MiFI statutory instrument, new section 312B enables regulators to remove passport rights. It enables the FSA to remove from a market operator the right to set up a branch in the UK when the operator has breached a rule required by MiFID, or by any other Community legislation in its home state. The measure will also enable the FSA to make a judgment about the adequacy of enforcement by the operators regulator. It is an extensive power. Can we assume that after the implementation date, if for whatever reason MiFID has not been implemented in another member state, the FSA will still be able to exercise the power in respect of the unimplemented element of MiFID?
Regulators have a responsibility under new section 312B(10) to notify the Commission of their intention to take action. What mechanism is there forresolving disagreements between regulators in such circumstances? A Belgian regulator might think that it has done a fine job regulating an operator, but the FSA might take a contrary view. What is the mechanism for reconciling a conflict of opinion between home and host regulators?
I turn to my next concern about passporting. The regulatory burden of the home regulatorthe person who regulates the location of the operatorand of the host regulatorthe person who regulates the location of the branchis important. CESR has produced a full consultation document, which says:
To help address the challenge in supervising branches, under the general division of responsibilities between home and host regulators, of where the boundary between 'organisational' and 'conduct of business' requirements lies, a number of possible options or solutions have been identified.
It then lists at least six different options, including:
Regulators agree as precisely as possible where in practice the line is drawn between their respective responsibilities.
Firm provides a defined set of common information on organisational matters (that includes the branch) to both home and host regulator
Home regulator requests co-operation in supervisory activity, through delegating or outsourcing tasks of supervision (but not responsibility) on various organisational matters to the host regulator.
A menu of options is available to determine howthe boundary between the branch and its operator will be regulated. That is an important and complexarea, because if the right balance is not struck, responsibilities could be duplicated among different regulators and a gap could open. One might have
CESR proposes that the respective home and host regulators be able to agree among themselves...on how best to carry out this aspect of branch supervision and to agree the specific solutions.
It will be up to individual regulators to decide, because it is an example of the application of the doctrine of subsidiarity.
Does the Minister accept that, under the directive, regulators could slow down or inhibit cross-border trade by not agreeing boundaries? Would he be prepared to use his political capital in Europe to ensure that border disputes are not used as a block to opening up markets? How would he propose to demonstrate that to the sector?
I should now like to move on to the rules on stock exchanges, multilateral trading facilities and share trading, which have also benefited under MiFID, as the Minister outlined. I should be grateful if the Minister could clarify the provisions on the approval of change of control for stock exchanges, and he may want to do so during my remarks. He and I co-operated very well to ensure that the Investment Exchanges and Clearing Houses Bill became law before the Christmas recess. We did that so that excessive regulations and requirements could not be imposed on recognised investment exchanges and so that the UK retained its reputation as a market that is open to investment from overseas.
The MiFI regulations give the FSA powers to veto a potential change of control at an exchange. Is that a new provision? Proposed new section 301B gives any regulator the power of veto if someone intends to acquire 20 per cent. or more of an exchanges share capital. On that basis, NASDAQ would have to have notified the FSA of its intention before acquiring shares in the London stock exchange, and the FSA could have vetoed its acquisition if it felt that NASDAQ was unsuitable. How will that regulation work in practice? Is it coming on top of existing UK law, or does it replace existing regulations? It is not clear from FSMA where it fits in.
Transaction reporting is another issue that arises in connection with the changes under MiFID. Under existing rules, passported branches are required to report share trades to their home states. A branch of a UK operator in the Netherlands, for example, would report any share transactions to the UK. Under the changes proposed in MiFID, branches will report transactions to their host state, so a branch based in the Netherlands will report to the authorities there. What will happen if MiFID is not properly implemented by November? Will a branch based in a member state that has not implemented MiFID have to apply to both regimes? Again, a significant cost would be attached to that.
One of MiFIDs key provisions, which is being transposed into law today, relates to establishing multilateral trading facilities. It will allow a group of market counterparties to establish a facility to trade shares on a pan-European basis. The Minister referred to Project Turquoise, in which a consortium of
As the Minister will have seen, concern was expressed at the weekend about the fragmentation of share trading between exchanges and MTFs making it more difficult to detect market abuse. Another concern is that such fragmentation might lead to a decline in the quality of transparency, particularly as regards establishing the market price. How will MTFs be regulated if they are all operating on a pan-European basis? What would happen where an MTF was headquartered in, say, Luxembourg? Who would regulate trades undertaken by UK-based businesses trading with a business in Frankfurt? How would the post-transaction reporting deal with that?
I have covered in some detail the five key areas on which I wanted to focus, although I hope that I have not done so in too much detail for the patience and tolerance of the Committee. However, they are important issues, and this is the last opportunity that the Committee will have to debate them, unless someone prays against those statutory instruments that are covered by negative resolutions. It was therefore important to go through these significant points in some detail.
Before I conclude, I shall just make some smaller, but no less important, points. The first concerns consumer protection. It is a requirement of MiFID that investment firms and credit institutions should be members of compensation and consumer protection schemes. In the UK, we have two very well established schemes for consumer protection: the Financial Ombudsman Service and the financial services compensation scheme. Would a customer who is buying products from the UK branch of an Italian market operator be entitled to use the UK arrangements under FOS and the financial services compensation scheme, or would they be subject to the requirements and arrangements in place in Italy? Where UK-based customers are subject to the complaints and compensation regimes of another member state, is the Minister content that those regimes give protection and security equivalent to that found under schemes operating in the UK?
The topic of article 4 notifications does not sound very glamorous, but it is at the root of the concern people have about the gold-plating of the implementation of MiFID, where UK rules go beyond what is required by EU directives. The FSA has a general presumption against retaining or creating detailed rules unless it is obligated to do so by EU legislation, or where it has discretion to do so and there are sound cost-benefit reasons in support of the exercise under article 4.
My understanding of the process is that the FSA will publish its intentions for making article 4 notifications and it would be good if that were done at the earliest possible opportunity in order to give the industry the opportunity to comment. However, as I understand it,
In conclusion, we are debating a significant set of proposals that will have a far-reaching impact on the strength of London as a global financial centre and on how well placed it is to compete with New York and other centres outside the EU. However, as the Financial Times noted in an editorial last year, sentiment in the City is becoming more hostile towards the EU. A poll commissioned by the Centre for the Study of Financial Innovation revealed that respondents in the EU put too much regulation at the top of the list of concerns. In the US, despite the issues surrounding the Sarbanes-Oxley Act, and the concerns relating to it, regulation was only the sixth biggest concern, and it was only the ninth greatest concern in the rest of the world.
There is a concern that the volume of financial services regulation coming from the Commissionmay have an impact on the financial services sector. Certainly, the arguments about the benefits of the initiative have yet to be made conclusively, but there is greater evidence that the costs are significant. With that in mind, I conclude my remarks.
Dr. Vincent Cable (Twickenham) (LD): I have little to add to the general comments of the Minister or the detailed comments of the hon. Member for Fareham. There have been times during the past few years when there has been a great deal of foreboding in the City about the MiFID rules, but it is clear that a great deal of work has been put in by the Government. The hon. Member for Chipping Barnet has been mentioned, and my hon. Friend the Member for Eastleigh (Chris Huhne) was also heavily involved in the discussions. My understanding is that the proposals have been substantially modified in such a way that the City institutions are now broadly happy with them.
I want to raise a much broader question than the Conservative spokesman raisedthe extent to which the new rules comply with the basic philosophy of the single market. After all, that is what all this essentially is about. We hope to get three things from the single market, the first of which is the removal of barriers overseas, particularly in relation to discrimination. Clearly that aim will be achieved, but as he said, we should monitor progress rather than take it for granted. It would be useful to have regular reports on how far that has been achieved.
Secondly, we hope to get mutual recognition of regulation, so that FSA rules will apply in London, subject to the complexities of passporting. I believe
To set aside those three objectives, we have to balance them against the set-up costs. The Conservative spokesman asked the right question about the enormous disparities between the estimates made by the Government and the FSA as to set-up costs. It would be useful to have some clarification of what the range is and what is plausible.
The Conservative spokesman has already asked how the new set of rules will interact with the legislation on the exchanges takeover that the Minister brought to the House a few weeks ago. My question is simple. When the new legislation is enacted and the MiFID rules have been introduced in the UK through the regulations, if Deutsche Börse were to take over one of the British exchanges, would it be in exactly the same position as an American exchange trying to effect a takeover? Will such cases be exactly equivalent or are different principles involved? Is there now a completely level playing field?
Overall, as the Minister said, the devil is in the detail rather than in disagreements of principle, and I broadly support what is proposed as a liberalising measure.
Ed Balls: I shall come later to the question askedby the hon. Member for Twickenham. I ask for his patience in the meantime as I address the questions posed by the hon. Member for Fareham. It is encouraging that there is a degree of consensus about the ability of the measures and the directive, if implemented rightly, to open up the single market and financial services in a more flexible way. The hon. Member for Fareham agreed that we can make progress in that regard, but he asked important questions that need to be addressed.
On the timetable, we have been moving as speedily as we can within the timetables set out for us to ensure that we will be able to transpose, and we will try to do so by the end of January. The regulations come after a lengthy consultation period, and I published them for the House in December, before Christmas, to allow time for scrutiny. We have worked closely with the FSA to ensure that our changes and regulations go hand in hand with its changes. However, I understand the hon. Gentlemans point about wanting more time, and in a moment I shall address the pace of implementation in other countries. I reiterate that the process has involved a lot of consultation and that we tried to ensure both that the regulations were published in draft and that we kept within the timetables. That will be a competitive advantage for the UK.
I should have mentioned, as the hon. Gentleman did, the work of the hon. Member for Chipping Barnet as a rapporteur. We in the House often underestimate the important role that rapporteurs play in trying to get the best outcome in such negotiations. I know that the hon. Lady has had an important impact on and input into the directive during the years of discussion on it. I am sure that she will have helped to inform the hon. Gentlemans detailed comments.
The hon. Gentleman asks, rightly, that we are as sure as we can be about whether the costs exceed the benefits when the regulations and the directive are implemented. Through the consultative process we have sought to achieve that. As part of that process we have relied on the FSAs published estimates for its costings, the potential benefit year on year, direct and indirect, and the initial set-up costs; it is clear on the basis of those numbers that in the long term the reforms will substantially benefit the UK, but that given the cost of implementing something so large and important, the set-up costs in the early period are substantial. As to the estimates that we have included in the RIA, the FSA produces a number of different estimates, depending on whether a top-down or bottom-up approach is adopted, but we have used estimates based on its work, and there is no separate Treasury set of estimates separate from those of the FSA.
On 18 December, the day on which we published the regulations, a letter appeared in the Financial Times from Mr. Ian Mullen, the chief executive of the British Bankers Association, setting out a belief that the Markets in Financial Instruments Directive will help open markets to greater competition, and that that will be good for customers, banks and the whole of the UKs financial sector. He said that MiFID is only one of a number of market-opening initiatives that need to be seen alongside other moves, such as action on cross-border mergers and clearing and settlement. I think that Mr. Mullens views reflect a wider view in the City that the benefits will be substantial if we get the implementation right, and that alongside some of the other measures that we are pushing forward, including measures on clearing and settlement, there is potential across the piece for some of the directives to result in great gain for the UK.
We need at all times to keep a close eye on how implementation is being carried out, however, so that sand is not thrown into the wheels of this liberalising directive. Some of the detailed points made by the hon. Member for Fareham relate to exactly the kind of things that we need to be conscious of in the coming period. He asked about the pace of implementation, and I have some good news for him. I am told that it is possible that Romania, as well as Bulgaria, may be joining the UK in meeting the deadline for transposition at the end of January. I am told that between February-March and June-July, Norway, Sweden, France, Belgium, Germany, Portugal, Malta, Greece and Luxembourg are expecting to meet the January deadline, but that so far there has been no firm indication from Italy, Spain or the Netherlands. That is a reason for concern on the part of the member states and other countries that will be late. The reality is that for firms that do business in the UK or that are regulated from the UK, the implementation of MiFID on time will be of substantial benefit. It is our view, following our consultations, that it will be a competitive advantage to the UK to be ahead of the game, compared with some other countries.
The hon. Member for Fareham asked me what conversations I had had with Mr. McCreevy. I think that the best thing I can do is quote public comments
The spotlight is now on the Member States who must transpose MiFIDand its implementing measuresinto their national law. I am very concerned that some Member States have stated publicly that they will not be able to transpose MiFID on time.
Let me be perfectly clear about this. The Commission will launch immediate infringement procedures against any Member State which fails to transpose on time. There will be no exceptions.
He made the same point to me. We have an interest in the implementation of the measure on time by other countries. As long as we get things right, there will be a competitive advantage if others are slow, but we shall not allow continual delay. The Commissioner has said the same, and he has a legal power to back that up with action. We shall make sure that we stay in close consultation with him and other member states. In discussion with the industry I am willing to use whatever levers I can to make sure that we implement on time and that there is no competitive disadvantage to UK firms.
Mr. Hoban: I am grateful to the Minister for his response to my questions, but does he seriously believe that Commissioner McCreevy will launch infringement action on 1 February against the 22 member statesthat will not have transposed MiFID into law by31 January?
Ed Balls: The important question is whether,given their parliamentary timetables, processes and procedures, member states are ready to have the directive up and running by the autumn, which is the timetable that has been set out. We have moved to be ready by the end of January in order to have the maximum time for detailed discussion of the rule books and to get systems in place to start on time.
Mr. McCreevy has said in public and on the record that he will have no qualms about taking action and that there will be no exceptions. I have no reason to doubt his word; if he believes that parliamentary and consultative processes in other countries mean that they will not be ready on time to implement the directive, he has made very clear in public his intention to act.
Mr. Hoban: One of the concerns that I expressed about timing was the gap between implementation and transposition. If implementation does not take place in time for the autumn deadline will there be a risk that UK businesses operating in states that have yet to implement MiFID will have to operate on pre-MiFID rules, whereas their home businesses in the UK will operate on MiFID rules? There may be additional costs in such circumstances. I am not sure that the Minister has responded to that point.
Ed Balls: The directive is complex, and so was the list of questions that the shadow Minister put to me. Iwas attempting to organise my thoughts through a chronological process, and trying to answer his questions in the order in which he put them to me. That question came later, so rather than going out of sync, I will stick to his script and respond to it as I go along.
The hon. Gentlemans next point was about scope and discussions with the ABI on the application of MiFID-style conduct-of-business rules to non-scope businesses. The FSA has been consulting in two stages. The first was between October last year and February this year, on retail matters, including insurance. It will then consult between April and July on wholesale matters, which will also include the insurers to which the hon. Gentleman referred.
Retail consultation applies MiFID rules to non-scope businesses only where that is justified by cost-benefit analysis. We will look very carefully at the replies to the consultation, which the hon. Gentleman quotes, including those from the ABI. On the wholesale side, we will be looking to apply more principles regulations to regimes that are already lighter than the retail regime, and we will consider the issues that he raised regarding the consultation. There will be opportunities for us to discuss them in the House and outside in due course. I am grateful to him for raising those issues. Consultations are taking place at the moment and we will take them seriously.
The hon. Gentleman asked me a series of questions about passporting, and I hope that I can reassure him. He used the example of a branch that knocked onto a third-party branch. Under the rules, only a headquarters can establish a branch, and not a branch of a branch. A branch further down the line would still refer back to the headquarters. In his example, we would still require notification from the UK rather than from the regulatory regime where the branch being opened is located.
Branches can do business without needing a passport where clients based outside the country of the branch ask to do business with the branch or where the provision of that service is deemed to have taken place in the member state where the branch is located. Broadly, in that case the branch would be subject to UK rules and FSA supervision for conduct-of-business purposes.
The hon. Gentleman raised another point about CESR and the six options. Implementation, like the branches issue, is complex, and the FSA, CESR and the Commission are continuing to discuss the matter. CESR is trying to find a practical way in which to ensure the necessary co-operation and proper protection for consumers and markets. We are tryingto find out which of the options will work most effectively. That decision has not yet been made, which is why the options are still open to consultation.
Will the Minister return to his earlier point about the headquarters and branches? We both know that the international operations of a number of international banks in, say, Frankfurt or Paris, have their headquarters in London. They are run from London, where decisions are taken. That is how their international operations are structured. Is he saying that even if a London branch makes decisions about operations elsewhere in Europe, it will have to go back to its home-state regulator in order to make a notification to a branch, despite the fact that its internal organisation is based around the branch, not the headquarters?
Ed Balls: I am happy to look into that issue in greater detail. As I understand it, the hon. Gentleman described the position accurately. In the end, the headquarters is the lead regulator for such purposes and where a business would go for notification. However, I am happy to look into the matter further. If anything that I have said today is incorrect or I can offer further clarification, I shall be happy to write to him with the details. The next set of issues that he raised concerned stock exchanges.
Mr. Hoban: Before the Minister continues, may I say that he has not dealt with another of my points, although I made it next in chronological order, concerning the removal of passporting and the mechanism for resolving disputes between regulators, such as where the FSA thought that a home-state regulator had not performed its duties properly? Resolution of such conflicts is important if we are to have harmony in European integration.
Ed Balls: I reserve the right to deviate from the chronological order in a proportionate and risk-based way, but generally I aim not to do so.
The hon. Gentleman raised two points. On differences of view, there are mechanisms in MiFID for supervisors to raise concerns and try to resolve them. However, if the difference of view cannot be resolved, the home regulator has power to take unilateral action, which could then be tested. In the end, in the event of a difference in view, I am advised that the home regulator makes the initial judgment.
Mr. Hoban: Will the Minister offer some clarification? I interpreted proposed section 312B to the 2000 Act to mean that the FSA, as the host not the regulator, could remove from a market operator the right to set up a branch in the UK. The host regulator, not home regulator, can take that action or at least the initial view. I see some nodding from behind his shoulder.
The Chairman: Order. No such nodding can be discerned in this Committee, because the people to whom I think that the hon. Gentleman is referring do not exist for the purposes of these proceedings, or are not in the room, at any rate.
Ed Balls: Their non-existence is of great importance to me in an area of such technicality. I shall exercise my right to ex-chronologically check out the facts before giving an answer in a moment.
On the hon. Gentlemans other point, if a UK firm passported into a country that had not yet implemented the changes, it would be for the UK firm to follow the MiFID rules for the UK as home regulator; there would be no requirement on the company to implement MiFID rules and the pre-MiFID rules of the other member state just because that member state had been unable to meet the timetable. There will be no question of dual regulation under two different systems. If we have implemented MiFID in this country, MiFID will apply and the company will be required to follow MiFID rules.
On the issue of supervisors and attempts to resolve disputes, the position is as I described it. When dealing with the branch issue that the hon. Gentleman raised,
Stock exchanges were mentioned by the hon. Gentleman, and also the hon. Member for Twickenham. Is the MiFID requirement new? The answer is yes. Is it a requirement that we considered last summer in deciding whether to opt for new primary legislation in the UK? Yes. Was it put to us by some players in the marketplace that MiFID might provide the FSA with powers to block regulatory changes and therefore give us the protection that we sought? Yes. However, we examined that issue and concluded that the MiFID rules did not provide us with the powers that we required. Basically, under MiFID a change of control can be blocked only in limited circumstances in which the new owner is both a threat to the sound and prudent management of the exchange and not fit for purpose as manager of the exchange.
The hon. Member for Fareham knows from our detailed discussions that through legislation we sought to range considerably wider than the rather narrow fit-for-purpose regime. Indeed, the FSA has always had the power to take away the status of regulated investment exchange if it judges that an exchange is being badly managed and that its management are not fit for purpose. Our legislation gives it a wider power to block what it considers to be disproportionate rule changes that will damage London as a financial centre. We considered the MiFID rule change and judged it insufficient for our purposes. Independent of MiFID we did what we needed to do through the original Bill.
Mr. Hoban: I am grateful to the Minister for that response. I concur that the MiFID changes would not have achieved the same outcome as has the Investment and Exchanges Clearing Houses Act 2006. However, I am concerned by the Ministers response that there are new powers, but that the FSA has existing powers when there is a change of control. I am concerned that the regulator will be able to block somebody acquiring, for example, a 20 per cent. stake in an exchange. Is that a new power? If it is, it changes the way in which markets work. Will he clarify that point?
Ed Balls: As I understand it, the power is new within a European context. It is the clarification and extension of a power that the FSA has under UK legislation. Although MiFID extends the power, it is not sufficient to give us the comfort that we seek, which is why we pursued new primary legislation in last Decembers Bill.
Mr. Hoban: So let us just say that it is possible for the FSA to veto the acquisition of a 20 per cent. stake in a stock exchange under the new powers in MiFID and that a potential acquirer needs to seek the FSAs permission before acquiring a stake. That is quite a significant change, given some of the recent activities
Ed Balls: It is true that the existing power to de-recognise exchanges does not have a trigger related to share holdings. It is also true that MiFID introduces a trigger and therefore allows the FSA to be notified in advance. In that sense, it is an extension of existing powers, because it introduces a trigger at the European level, rather that just a broader power at the UK level, as was the case before.
Although the hon. Gentleman is right that the proposals are an extension, that extension is still in a rather narrow range. The FSAs ability to use the trigger depends on its making a serious judgment about the lack of fit and proper capacity to manage an exchange. In the autumn, we were talking about a much wider ability to decide whether the rules that would be introduced as a result of a change of ownership would be proportionate and support London as a global competitive financial centre. Here, however, we are talking about a much narrower concern leading the FSA to use the trigger.
Mr. Hoban: Indeed. The Minister and I concur on that. The present power is not as effective as the power under the Investment Exchanges and Clearing Houses Act. However, the point that I am trying to make relates to the way in which the proposals affect the acquisition of stakes in stock exchanges, the way in which NASDAQ has built its stake in the LSE and the interest in Euronext. Under MiFI, the power in proposed new section 301C gives the authority up to three months to decide whether a change of control can take place. We want to ensure that we have efficient markets, in which investors can respond to trends, but that power seems to slow the effective operation of the market in shares for investment exchanges. My concern is that it goes somewhat further and interferes much more closely with the way in which people can build stakes in investment exchanges.
Ed Balls: I understand the hon. Gentlemans point. Although we are talking about a much narrower power, the way in which the FSA conducted itself in the discussion of our Bill in the autumn should give hon. Members some comfort that it will use the publication of detailed rules and guidance to make it absolutely clear that the power will be used only in the narrowest range of circumstances, in which a judgment must be made about fitness and properness, and that it will not be used to put sand in the wheels of takeovers in the broader context. We will need to look closely at the way in which other countries go about using the power to ensure that obstacles are not introduced through the back door.
The issue is particularly topical because there could be some big changes of ownership in the UK. Furthermore, our Bill focused on a wider range of issues relating to protecting the proportionality of the regulatory regime, which is particular to exchanges because of their listing and rule-making role.
If one looks more widely at the financial services sector and, for example, considers changes in ownership of investment firms, one finds that that sort of notification process has been in place for some time.
With your indulgence, Mr. Bercow, I turn to the final set of issues raised by the hon. Member for Fareham, which concerned MTFs. He asked where firms would report their share transactions in an MTF world. The answer is that firms based in the UK, including branches, would report their trades to the FSA which, where the trades relate to instruments traded mainly elsewhere in Europe, would pass on the report to the relevant regulator.
The hon. Gentleman also asked about the danger of trading fragmentation. Although MiFID aims to open markets, he was concerned that it may not do so sufficiently or establish a single source of information. He felt that the information requirements could lead to fragmentation and, therefore, create obstacles to open markets and competition. I say to him that MiFID includes requirements to ensure data can be easily combined, and both the FSA and CESR are developing guidance measures to promote that outcome. There are also various commercial providers that are active in delivering market solutions. We discussed Project Turquoise earlier, and Project Boat is a system that will allow brokers to make public data about share trading: a process that has been made possible by MiFID. Such internationalisation of information following the internationalisation of trading systems will promote competition and greater cross-border activity. I hope that I have given the hon. Gentleman some comfort on that matter.
The hon. Gentleman also asked about consumer protection and wanted to know to whom the consumer would turn if dealing with a UK branch of an Italian firm. In the case of the financial services compensation scheme, they would turn to Italy, unless the branch had decided, as is now their right and ability, to opt into the UK scheme. In the case of FOS, my instinct is to believe that the matter would fall under the Italian arrangements, but because I do not have a definitive answer on that point, I shall consider it in detail and write to him and other Committee members to clarify it. I do not wish to mislead the Committee.
Mr. Hoban: I am grateful to the Minister for that clarification and I look forward with interest to his letter. We must be careful to ensure that consumersare well aware of the changes that may be made tothe compensation scheme arrangements and the ombudsman service under the home and host mechanism. It may be the case that the Italian compensation scheme is more generous than the UK one, and its financial ombudsman service more assiduous, although I find that difficult to imagine in either case. We must ensure that consumers are aware of the difference in arrangements for complaints and
Ed Balls: I understand the hon. Gentlemans point and I know that the FSA does too, because it takes those issues very seriously. As part of my clarification of the position, if appropriate, I shall write to the chairman of the FSA to raise the hon. Gentlemans point in order to ensure that the FSA is clear that we need answers on that issue and that we are all on board with the reply.
The hon. Gentlemans final point was about gold-plating. I have taken an interest in the implementation of MiFID in a UK context, and as far as possible we have avoided gold-plating the directive. There are some examples where, following consultation, the FSA will want to go beyond the precise letter of the law in MiFID. For example, MiFID exemptions are not, in their entirety, going to be transposed in the case of commodity firms in order to maintain the status quo in the UK. As for treating third-country firms in the same way as EEA firms, that could also be an example of gold-plating, although we think that it is a correct interpretation of the directive. In general, we believe that we have not gold-plated the directive but the FSA has made it clear that there will be some notifications under article 4 and it will be consulting further with the industry before it makes the notifications.
The hon. Gentleman was correct to say that the Commission does not have to approve article 4 rules as such. Its job is to launch infringement proceedings if countries fail to meet the test set out in article 4. The same is true in respect of other aspects of implementation of the directive. It is certainly not our intention to gold-plate unnecessarily, but when it is the right thing to do in order to protect the integrity and operation of UK financial markets we are happy todo so.
Mr. Hoban: One of my comments was about the time scale. Is there a requirement for the Commission to bring infringement actions within a defined period of time? My concern is about an article 4 notification made by the Treasury. There is some uncertainty about whether that notification is valid because the Commission has not launched an infringement action against the FSA or the Treasury. It is important to have some certainty when a notification has been issued.
Ed Balls: I believe that the UK is currently the only country that has so far given any indication of an intention to notify. Our obligation is to notify by the end of January, which gives the Commission plenty of time to infract if it chooses to do so before implementation. Under the statute, there is no time limit for the Commission, so it could choose to infract at a later stage. If we meet the timetable, we have every expectation that, if the Commission has any concerns, it will make decisions in plenty of time for the implementation of the directive by the end of this year. If there is any uncertainty about that or any concern in the industry that it is not specified clearly in the directive, I will ensure that it is clarified with the Commission, which will not be difficult to do.
I have tried my best to answer the detailed questions asked by the hon. Gentleman. There is always a danger that I may have missed the odd one, although he would probably have intervened at least four times to point it out. The fact that he is no longer doing so may mean that I have managed to be comprehensive in my remarks, and risk-based, too, which means giving the best answers to the questions that would be most risky not to answer fully.
I echo the hon. Gentlemans congratulations to the hon. Member for Chipping Barnet on her contribution. If we get this measure right, in negotiation and in implementation, we will advance the interests of the UK, the City of London and our financial services industry. We clearly gain from opening markets and from liberalisation. As the hon. Gentleman will know, and as I have said many times before, no Member of the European Parliament or Minister at the table at the centre of the argument can stand up for the interests of the City unless they are willing to say no when necessary, to pursue the national interest and to see the benefit of engagement in European decision making. It is in the best interests of the UKs financial services market to advance the single market, and we will do all we can to ensure that that is how things turn out, but we can do that only if we are at the centre of the debate, at the table, and making sure that our voices are heard. I commend the measures to the Committee.
Question put and agreed to.
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006 (S.I. 2006, No. 3384).
DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (EXEMPTION) (AMENDMENT) ORDER 2006
That the Committee has considered the draft Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2006.[Ed Balls.]
DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (MARKETS IN FINANCIAL INSTRUMENTS) REGULATIONS 2006
That the Committee has considered the draft Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2006.[Ed Balls.]
DRAFT UNCERTIFICATED SECURITIES (AMENDMENT) REGULATIONS 2006
That the Committee has considered the draft Uncertificated Securities (Amendment) Regulations 2006.[Ed Balls.]
Committee rose at eight minutes to Six oclock.
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