Select Committee on European Union Forty-Fifth Report

CHAPTER 4: Implementation and enforcement

76. A key mechanism for implementation is the Lamfalussy process. The structure for this process is sketched in Box 1 but it is worth going back to the original task of the "Committee of Wise Men" chaired by Baron Alexandre Lamfalussy to see what that Committee was asked to do. The Committee was required:

  • to assess the current conditions for implementing the regulation of the securities markets in the European Union;
  • to assess how mechanisms for regulating the securities markets in the European Union can best respond to the developments underway on the securities markets; and
  • in order to eliminate barriers and obstacles, to propose adapting current practices in order to ensure greater convergence and co-operation in day-to-day implementation and to take into account new developments on the markets[46].


77. The "Wise Men" identified the following key problems:

The Lamfalussy Solution

78. The response in the form of the Lamfalussy process, which was subsequently ratified and adopted, identified four levels.

Framework Principles and Implementing Measures

79. Level 1, the framework principles, consist of legislative acts, Directives or Regulations adopted by the co-decision process (Council of Ministers and European Parliament). Level 2 would comprise technical implementing measures adopted by the Commission on the basis of powers delegated by Level 1 legislation.

80. The "Wise Men" recommended that Level 2 implementing measures should be used in order to ensure that technical provisions could be kept up-to-date with market and supervisory developments. Such amendments would be enacted according to a rule-making procedure using a "comitology" Committee. The newly established Committee, the European Securities Committee (ESC) would act in both advisory and regulatory capacities in the field of securities markets. A representative of the European Commission would chair the ESC which would be composed of Member State nominees representing the EU Economic and Finance ministries. In its advisory capacity, the ESC would advise the Commission on security issues relating to the adoption of proposed Directives or Regulations under the co-decision process. In its regulatory capacity, the ESC would vote on implementing measures proposed by the Commission (Level 2), though the ESC does not have a veto as such. In the absence of agreement, the matter would be referred back to the Council for decision (i.e. Level 1).

Committee of European Securities Regulators (CESR)

81. The Commission would also be assisted by a second Committee, the Committee of European Securities Regulators (CESR). CESR would comprise senior representatives of national regulatory agencies designated by Member States. CESR would act as an independent advisory group in the preparation of technical implementing measures (Level 2).

82. Level 3 was designed to ensure consistent, timely, common and uniform implementation of Level 1 and 2 acts in Member States through enhanced co-operation and networking among EU securities regulators. Level 3 would be the responsibility of the Commission assisted by both the ESC and the CESR.

83. Finally, at Level 4, the Commission and the Member States would strengthen the enforcement of Community law.

Progress to Date

84. At Level 2, CESR has begun to develop implementing legislation for the Market Abuse and Prospectus Directives. The process is still in its infancy and, according to the London Stock Exchange, raised concern about the volume of implementing measures and the speed at which it was required to be processed[47]. Although most witnesses welcome the advent of the process, and believed that if properly applied, it would help speed the implementation of regulation, there was already a fear that the original objectives embodied in the four level structure were beginning to be lost. In particular, witnesses feared pressure on Level 2[48] exacerbated by extremely short timescales[49].

85. Other witnesses welcomed the fact that the Lamfalussy process firmly embedded consultation with practitioners and transparency into the policy-making process[50] but called for more clarity with regard to the specific competencies of Level 2 and Level 3[51].

86. One witness suggested that the Lamfalussy process and the creation of CESR should enable the EU to address differences in interpretation and transposition before they became embodied in national legislation or regulation. This would ensure that Directives were applied consistently across the EU[52].

87. UNICE, the Union of European Employers' Organisations expressed concern that,

"all of the easy compromises have been made. We now have difficult ones to deal with……we feel that in some instances there has been too much regulation at Level 1, in other instances, there has been too little" [Q. 341].

88. Mr Paul Arlman, Secretary General of the Federation of European Securities Exchanges also had problems with the loading of responsibility at Level 2 - he called the process one of "entassement"- simply piling different national regulatory rules on top of each other. Nevertheless, he felt there was no going back - the Lamfalussy process had to be made to work [Q 354].

89. The Committee were privileged to have a private conversation with the Secretary-General of the Committee of European Securities Regulators (CESR), Mr Fabrice de Marigny. Mr de Marigny was accompanied by Mr Nigel Phipps who had been seconded to CESR's staff from the FSA. In spite of the difficulties that witnesses had pointed to, there was a sense that CESR was the beginning of an entirely new way of implementing EU legislation across the Union. The process of transparency and consultation with the practitioners in the marketplace had been formalised. This meant that in addition to the Council, Parliament and Commission legislating, the markets themselves were now part of the process of implementation. The Committee concluded that this could only be to the good and that it was understandable given the complexity and magnitude of the task imposed by the FSAP, that progress should appear to many witnesses to be hesitant.

90. The Committee remains uncertain whether or not sufficient resources will be available to ensure smooth and effective implementation of legislation through the different levels of the Lamfalussy process. We have already recorded the Commission's concern on this point (paragraphs 46-48). We were struck by the modest size of the permanent cadre of CESR. We are also concerned that the process of implementation has yet to be costed. Deadlines set by the European Council are important to maintain the impetus towards integrated markets in financial services but there is still a lot to do. There is tension between those who want to keep regulation flexible at Level 2 and 3, primarily politicians, and CESR who want the same rules in each Member State. Inevitably, this will affect the way in which legislation is implemented and will pose problems in many Member States.

A European Regulator - EUROSEC?

91. One witness in particular doubted that the Lamfalussy process would succeed, although in oral evidence, Dr Ruben Lee did appear to mitigate this view. Nevertheless, he argued that eventually the system would prove impracticable and that there would be a need for some EU-wide, common regulator - EUROSEC[53]. This is a question which the Committee put to many of the witnesses[54]. None was inclined to support this proposition. The Committee had expected some support for this concept to have come from the French witnesses given the approach to regulation that has been associated with French administrative practice. However, all French witnesses we put the question to said that it was far too early even to think of such a proposition. We agree with witnesses: there is no case for a European Regulator for as far forward as we can realistically see.

Report of the Inter-institutional Monitoring Group (IIMG)

92. The Inter-institutional Monitoring Group (IIMG) for Securities Markets published its first interim public report on the Lamfalussy process in May 2003[55]. The IIMG consists of six experts nominated by the Commission, the Council and European Parliament and is expected to report bi-annually on the implementation of Lamfalussy. The May report stated that initial indications were that legislation was progressing faster than would otherwise be the case, that there had been positive joint working between all participants but that it was very early days and a more authoritative assessment would have to wait until more evidence was available[56]. The Committee agrees that it is still too early to be able to judge the eventual success of the Lamfalussy process.

The role of the Commission in monitoring implementation and enforcement

93. The Committee was encouraged by the enthusiasm shown by Director-General Schaub, for directing the Commission's resources into ensuring that implementation and enforcement become the focus of the Commission's activities (Q. 315). Dr Schaub stressed that the financial markets were special because inherent in them was the risk of systemic failure. Member States, the Commission and regulators had to be prepared to intervene should such a risk appear on the horizon. At the same time, European consumers and investors had to have confidence in the system.

94. In its recent communication "Internal Market Strategies Priorities 2003-2006" (IP/03/645) the Commission proposed a number of measures intended to increase the speed and consistency of transposition of internal market law including an "internal market compatibility test[57]" to assess whether specific regulations in specific Member States were compatible with internal market law; a recommendation on "best practices" to speed-up and improve the quality of transposition of internal market law; and a study on the different options for improving enforcement of internal market law[58]. We welcome these proposals designed to increase the speed and consistency of transposing EU Directives into national law.

Measuring the effectiveness of implementation and enforcement: the Commission's views

95. In his oral evidence to the Committee, Director General Schaub said:

"first we must make sure the rules are effectively and correctively transposed and that they are applied" [Q. 321].

96. Mr David Wright, Director of Financial Services in the Internal Market Directorate General spoke about the means:

97. Mr Wright went on to say that the private sector had been largely absent from helping the Commission to identify where Community Law was not being implemented and enforced properly, possibly through a fear of the commercial consequences of doing so:

"I think that ways have to be found and the private sector has to be more bold and imaginative in bringing such cases to us". [Q. 315].

98. We agree with this view: the private sector has to be persuaded to identify cases of poor implementation or enforcement and to bring this information to the attention of the Commission.

Measuring the effectiveness of implementation and enforcement: proposals from the London Stock Exchange

99. In supplementary evidence, the London Stock Exchange argued:

"despite the difficulties in measuring outcomes, it is essential for the Commission and policy-makers to set objectives for all legislative proposals and to keep sight of them throughout the process, at Levels 2, 3 and 4 of Lamfalussy, as well as during Level 1."

100. The London Stock Exchange suggested that one possible measure of success for the Prospectus Directive might be the number of cross-border issues of securities following implementation in 2005[59] and that the impact of the new Investment Services Directive might be assessed by surveying investment firms to see whether the Directive had affected their ability to operate from a centre elsewhere in Europe[60]".

Measuring the effect of the FSAP: Retail Markets: The Gyllenhammar Report

101. For the retail markets, a recent report for the European Financial Services Roundtable - the Gyllenhammar Report[61] - offered a more sophisticated analysis suggesting that the so-called "Sharpe ratio" measure of diversification - could be significantly increased by a Europe-wide diversification.

102. The Committee was in no position to comment on whether or not these proposals would be effective though we recognise that some form of measurement of success after 2005 would help demonstrate the benefits that are expected to flow from a fully-liberalised market in financial services.

Harmonisation versus Flexibility

103. It was clear to the Committee that while witnesses recognised the key importance of implementation and enforcement, there were inherent contradictions built into the system. Some Directives attempted maximum harmonisation even at the Level 1 Framework stage. Others sought to elaborate core principles and to allow flexibility in implementation though at Level 2, CESR appeared intent on securing maximum uniformity. There is no easy answer to this conundrum; inevitably the FSAP will be a mixture of both maximum harmonisation in some Directives and greater flexibility in others [Q. 521]. This will ensure that the process of implementation remains dynamic and will require all participants, Member States' Governments, the European Parliament, the Commission, the Regulators and the market practitioners to continue to co-operate in translating regulation across the European Union. Given the uneven record of Member States in implementing Directives, we urge the Commission to engage at an early stage in the appropriate enforcement processes.

Coherent Legislation

104. There are elements in the way in which the process is being managed that continue to give cause for concern. There is criticism of the lack of detailed cost-benefit analysis in the consultation stage of drafting Directives and there is no mechanism to measure the relative effect of Directives against the objectives of other Directives. Some witnesses argue that the overall aims of the single market may be served by one Directive and yet another Directive will, in effect, bring about a retrograde step[62]. There is also concern about how long it might take to change regulations to accommodate changes in the market[63]. One witness [Q. 344] suggested that the legislative process would take three years even if there was common agreement to make such changes, though the Lamfalussy Process is designed to allow changes to be made at Level 2 more quickly than at the level of primary legislation. The Committee believes that there needs to be some review process and a mechanism to deal with fatal flaws that might emerge when Directives are transposed. We are glad to note that the Commission has set up four groups of market practitioners to assess the internal market for financial services and to help map out the next stage of the integration process following the completion of the Financial Services Action Plan.

46   Hertig/Lee 2003 paper. Back

47   Written evidence from the London Stock Exchange - Page 2, paragraph 12. Back

48   Written evidence from LIBA - Page 15, B, paragraph 5c. Back

49   Written evidence from Pricewaterhouse Coopers - Page 209, paragraph 3. Back

50   Written evidence from FSPP - Page 196, paragraph 2.1. Back

51   Written evidence from ICAEW - Page 200, paragraphs 24 and 25. Back

52   Written evidence from Fidelity Investments - Page 194. Back

53   The analogy is drawn with the US regulator - the SEC - which is a federal agency. Back

54   Q.20, Q.52, Q. 83, Q. 108, Q, 151, Q.178, Q. 207, Q. 269, Q. 293, Q. 309, Q. 315, Q. 393-395, Q. 474, Q. 489, Q. 537. Back

55   First Interim Report-Monitoring the New Process for Securities Markets in Europe (the Lamfalussy Process). Back

56   Written evidence from HM Treasury -Page 158, paragraph 15. Back

57   Written evidence from Prudential - Page 211, paragraph 17. Back

58   Written evidence from Investment Management Association - Pages 202 and 203, paragraph 6. Back

59   Supplementary written evidence from LSE -Page 13, paragraph 18. Back

60   Supplementary written evidence from LSE - Page 13, paragraph 24. Back

61   Hynaman and Jopp, "The Benefits of a Working European Retail Market for Financial Services 2002". Back

62   Written evidence from Lachlan Burn - Page 76. Back

63   The Times, 7 November 2003, Page 39. Back

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