European Scrutiny Committee Contents

7   Financial services



+ ADDs 1-2

COM(10) 716

Commission Communication: Reinforcing sanctioning regimes in the financial services sector

Legal base
Document originated8 December 2010
Deposited in Parliament16 December 2010
DepartmentHM Treasury
Basis of considerationEM of 31 January 2011
Previous Committee ReportNone
To be discussed in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionNot cleared, further information awaited


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.


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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