7 Financial services
| (32347)
17849/10
+ ADDs 1-2
COM(10) 716
| Commission Communication: Reinforcing sanctioning regimes in the financial services sector
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| Legal base | —
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| Document originated | 8 December 2010
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| Deposited in Parliament | 16 December 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 31 January 2011
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| Previous Committee Report | None
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| To be discussed in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared, further information awaited
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Background
7.1 Since the beginning of problems in the financial services
sector in 2008 the Commission has proposed a range of temporary
and permanent responses, many of which have been or are being
adopted. Some of the most important of these proposals relate
to changing the regulatory and supervisory regimes for the sector.
In June 2010 a Commission Communication "Regulating financial
services for sustainable growth" outlined a work plan,
which included the intention to publish a consultation paper on
convergence of sanctions in the sector.[32]
The document
7.2 This Communication is the Commission's foreshadowed consultation
paper, to which Member States and other interested parties have
until the 19 February 2011 to respond. The Commission:
- refers to sanctioning regimes as the legal framework covering
sanctions provided for in national legislation for violations
of EU financial services rules, including national rules adopted
in transposition of EU Directives, by financial institutions and
other market participants and actual enforcement of sanctions;
- considers that further convergence and reinforcement
of sanctioning regimes are necessary to prevent risk of improper
functioning of financial markets;
- proposes to introduce, through new legislation,
minimum common standards on the key issues of sanctioning regimes
where shortcomings have been identified; and
- suggests that such standards would be developed
in the framework of basic principles common to all specific sectors,
which would guarantee the overall coherence of any EU action in
this field, but be adapted to the specifics of the different sectors
and EU legislative acts — the envisaged legislative approach
would be sector-specific and strictly limited to certain elements
of the sanctioning regime.
7.3 After discussing the perceived shortcomings
of existing sanctions regimes the Commission identifies seven
possible actions. First, in relation to appropriate types of administrative
sanctions for the violation of key provisions, it suggests:
- introduction of a core set
of sanctions; and
- that such sanctions should be of a nature allowing
the competent authorities to impose, in each specific case, a
sanction that is likely to be optimal in terms of effectiveness,
proportionality, and dissuasiveness.
On publication of sanctions it suggests that:
- competent authorities should
be required to disclose public sanctions imposed; and
- exceptions from this obligation should be limited
— for example, where disclosure would seriously jeopardise
the financial markets, the competent authority would be required
to publish the sanction in an anonymous way.
Next, in advocating a sufficiently high level of
administrative fines, the Commission says that, in view of the
large gains that could be obtained from violations of financial
services legislation, the level of any fines provided for by national
law should be sufficiently high to allow effective, proportionate,
and dissuasive impositions. Fourthly, in suggesting that sanctions
should be provided for both individuals and financial institutions,
it says that:
- administrative sanctions should
be applicable to all the persons responsible for an infringement;
and
- this would include the individual responsible
for a violation and/or, where that individual is part of a financial
institution, the financial institution benefiting from the violation.
In relation to taking appropriate criteria into account
when applying sanctions, the Commission says that, to ensure that
competent authorities, when determining the sanction to be imposed
for a violation, Member States should take into account, as a
minimum, certain common key criteria. Sixthly, in the context
of serious violations it says that it will assess whether, and
in which areas, the introduction of criminal sanctions and establishing
minimum rules on the definition of criminal offences and sanctions
may prove to be essential in order to ensure the effective implementation
of EU financial services legislation. Finally, turning appropriate
mechanisms for supporting effective application of sanctions,
the Commission suggests:
- action to improve the legal
framework in which competent authorities operate — particularly
to ensure that all national authorities have the necessary key
powers and investigatory tools and that they cooperate and coordinate
their action appropriately; and
- possible introduction of common provisions on
mechanisms that Member States should put in place to better detect
violations of EU law, particularly those aiming at protecting
persons, for example, employees of financial institutions, who
denounce potential violations committed by other persons (that
is whistle blowing) or at providing for reduction of sanctions
applicable to persons who confess involvement in a violation,
under certain strict and clearly defined conditions (that is leniency
programmes).
The Government's view
7.4 The Financial Secretary to the Treasury (Mr
Mark Hoban) says that:
- the Government believes that
convergent sanctions regimes will help to better ensure consumer
protection and assist in strengthening the single market; but
- before the Commission develops more detailed
proposals it must demonstrate that the existing sanctions regimes
are not convergent and that this objective can only be delivered
by the EU, rather than individual Member States.
The Minister comments further that:
- the Commission asks whether
an EU legislative initiative to promote convergence and reinforce
national sanctioning regimes in the financial services sector
is necessary;
- if responses to the Communication indicate that
such a legislative regime is necessary, then the Commission will
go on to develop new legislation;
- for this legislation to be consistent with the
principle of subsidiarity, the Commission will have to show that
a new regime is necessary to achieve the purposes set out in the
Communication, that the objectives of the proposed action cannot
be sufficiently achieved by the Member States acting on their
own and that they can therefore be better achieved by action on
the part of the EU; and
- the Government agrees that if it can be demonstrated
that there is insufficient convergence in national sanctioning
regimes in the financial services sector, then an EU-wide policy
may be necessary to minimise the risk of regulatory arbitrage
and ensure high levels of investor protection apply throughout
the EU.
7.5 On the policy implications of the Commission's
suggestions the Minister says first that:
- the Government can support
in principle the Commission's proposal that there should be further
convergence of sanctioning, because it believes that the regimes
in many other Member States are not as rigorous as in the UK;
- it would like the type of sanctions regime that
applies in the UK to be applied throughout the EU;
- it is important that all competent authorities
have effective deterrent and enforcement capabilities if the risk
of regulatory arbitrage is minimised and high levels of investor
protection are ensured throughout the EU — this will strengthen
the single market;
- the key is convergence, rather than uniformity,
of sanctions and a set of minimum standards in certain areas;
and
- in some instances, the Government would want
the regulator to be able to retain discretion, either to impose
a higher financial penalty, or possibly reduce it (in a situation
where, for example, there has been significant cooperation).
7.6 The Minister elaborates that:
- the Government considers it
important that Member States have the ability to impose financial
penalties that are sufficiently severe to deter those who might
be tempted to commit a breach and, equally, that the sanction
should be proportionate to the gravity of the infringement and
should be consistently applied;
- it may not be appropriate, however, for a minimum
level of penalty to be imposed for most types of infringements;
- this is because there may sometimes be reasons
for imposing a lower level of penalty, for example, to award cooperation
or whistle blowing, to take into account any claim that the financial
penalty would cause the person serious financial hardship or to
take into account any settlement discount (which the Government
considers is an important tool for competent authorities to have
at their disposal);
- currently in the UK the Financial Services Authority
can impose an unlimited administrative fine for all types of infringements
and the court has the power to impose an unlimited criminal fine
for insider dealing; and
- it is not clear from the Communication how the
Commission envisages a minimum level of penalty might work in
practice.
7.7 On the question of criminality the Minister
says that:
- the Government considers that
Member States are best placed to consider which breaches should
attract criminal, as opposed to administrative, sanctions;
- it should not be assumed that requiring certain
breaches to be criminalised has advantages and not disadvantages;
and
- the Government considers, therefore, that any
Commission proposal should give the Member State the choice of
deciding whether or not a particular breach should be treated
as a criminal offence.
7.8 Finally, the Minister tells us that his Department
will be sending us the Government's response to the Communication
at the same time as it goes to the Commission.
Conclusion
7.9 The Commission's suggestions in this Communication
could be significant for the UK's financial services sector. However,
before considering the document further we await the Government's
response to the Commission. Meanwhile the document remains under
scrutiny.
32 (31694) 10822/10: see HC 428-i (2010-11), chapter
71 (8 September 2010). Back
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