Memorandum by the City of London Corporation
SUBMITTED BY THE OFFICE OF THE CITY REMEMBRANCER
INTRODUCTION
1. The City of London Corporation welcomes the
opportunity to comment on the European Commission's Annual Policy
Strategy for 2008. The City has for some time been seeking to
highlight the importance of thorough and detailed scrutiny of
EU legislation by Parliament, in addition to trying to ensure
that directives which emanate from the EU are both principles-based
and proportionate.
2. The City Corporation's particular focus has
been on financial services and in this context the City fully
supports the Government's desire to bring about a fully functioning
single market in wholesale financial services, recognising that
such harmonisation would be beneficial to economic growth in the
UK and EU. More generally the City has a growing interest in environmental
issues, particularly climate change and emissions trading, and
also in the wider better regulation agenda. The following paragraphs
reflect the City Corporation's views on those elements of the
Annual Policy Strategy which are of particular interest to its
activities.
ENERGY AND
CLIMATE CHANGE
PACKAGE
3. The City Corporation is actively monitoring
EU developments in the area of climate change reduction policies.
Last autumn, the City of London published research on the EU Emissions
Trading Scheme,[25]
particularly on how the markets had developed in London. This
research has been used in the London and Brussels context to influence
the policy debate as the EU ETS is reviewed and extended beyond
2012. In addition, the City of London has recently launched a
research project—"London Accord"—with the
aim of identifying the best climate change reduction technologies
for investment, with expected consequent implications for policy-makers.
It is also intended to inform initiatives to promote adaptation
to environmental challenges alongside sustainable production and
consumption. The project has, so far, generated considerable interest
and City firms have pledged research services conservatively valued
in excess of £4 million.
FOLLOWING UP
THE CONCLUSIONS
OF THE
SINGLE MARKET
REVIEW
Implementation/post-implementation reviews
4. The key concern for the City of London in
the immediate future is the continued transposition and implementation
of the Financial Services Action Plan (FSAP). Towards the end
of 2007 a major element of the FSAP—the Markets in Financial
Instruments Directive (MiFID)—will be implemented across
Member States. The City wishes to see consistent implementation
of EU legislation across the Union to ensure that the benefits
of wholesale financial markets liberalisation are fully realised
for the industry and ultimately the consumer.
5. Other pieces of existing FSAP legislation
will also be reviewed in the next two years, as indeed will be
MiFID, with a potential extension of some of its provisions to
the bond and commodities markets. There is always the fear that
evaluation might open up avenues for the EU institutions to revise
legislation and demand further, more detailed rules which could
lead, in effect, to the creation of a FSAP II. The experience
with the review of the Investment Services Directive which led
to the Markets in Financial Instruments Directive (MiFID) is a
prime example in this regard. Whilst there appears to be no explicit
commitment to "FSAP II" on the agenda, at least for
the time being, further legislative intervention at EU level in
the area of financial services regulation remains a possibility
at a time when the City would argue greater emphasis should be
placed on ensuring consistent implementation of existing legislation
across Member States.
6. The City of London Corporation commissioned
research from the European Policy Forum, published last year,[26]
which looks at the ex-post evaluation and audit of European legislation
and puts forward a number of suggestions for initiatives such
as evidentiary hearings to evaluate the success of individual
pieces of legislation. Some in the City have however expressed
caution over promoting the idea of ex-post evaluation of Regulatory
Impact Assessments (RIAs) and should be wary about going too far
along this route if the spirit of "Better Regulation"
is not properly embedded first.
Expected EU legislative developments: wholesale
to retail
7. With regard to expected legislative proposals
from the European Commission, the proposal on reviewing the solvency
requirements of insurance companies, the so-called "Solvency
II" package is of considerable interest. Work is also expected
to begin in the middle of the year on the review of parts of the
EU legislation covering retail investment funds, the so-called
UCITS legislation. The debate on the need or otherwise for regulation
of alternative investments—namely hedge funds and private
equity—is also expected to figure in this area, although
legislative measures are not currently expected.
8. As the leading international financial centre
in the EU, the City of London must also take careful account of
the impact of EU legislative requirements on the international
business environment. One particular area where this is relevant
is the Directive on Statutory Audit, which concerns cooperation
with non-EU jurisdictions on auditor oversight. Whilst the City
broadly supports the objectives of the Directive, it is imperative
that the subject is handled cautiously as implementation has the
potential to invalidate current audit arrangements of listed companies.
The Directive must be implemented in such a way as to promote
high standards of corporate governance whilst ensuring the EU
market retains its attractiveness to third country issuers.
9. Increasingly, the financial services agenda
in Brussels is turning to retail and consumer aspects, with a
prevalent feeling that retail financial services markets across
the EU remain fragmented. The European Commission is expected
to bring forward a Communication (White Paper) on proposals for
action in this area in the late spring. At the same time, outstanding
legislative initiatives in this area include the proposed directive
on consumer credit and the payment services directive. Retail
financial services are not an area the City of London has prioritised
in the past, with its focus on the wholesale side. The City Corporation
will, however, monitor developments closely to ensure that there
is no spill-over of retail regulatory approach into the wholesale
sector.
Pan-European supervision of financial services
10. An important work strand linked to the single
market in financial services is the current review of the Lamfalussy
Process. The Lamfalussy Process is the comitology approach to
legislating EU financial services, incorporating a separation
of principles-based legislation drafted and adopted by the EU
institutions and technical implementing rules drafted by national
regulators and supervisors, with final adoption by the EU institutions.
The Lamfalussy Process, which was introduced into the securities
area in 2002 and later extended to the banking, insurance and
pensions areas, is being evaluated during 2007. While considerable
focus will be on how the process has worked during the current
round of legislative activity at EU level, there will be some
reflection on how the regulation and supervision of financial
services could evolve in the medium-term. The City strongly supports
the Lamfalussy process, noting that in combination with the Commission's
2005 White Paper on Financial Services, it has delivered better
legislation that is more responsive to the needs of the markets.
The current supervisory framework is fundamentally sound, and
the City looks forward to the Inter-Institutional Monitoring Group's
recommendations for improving the effectiveness of the existing
framework.
11. The City believes that the current structure
works well and that any moves towards centralisation in an EU
supervisory institution (or a single regulator) would be premature,
before resolving a host of complex legal and political issues
reflecting Europe's cultural diversity, on which there is at present
little consensus on the way forward; for example, it is argued
that a single regulator would require the harmonization of all
of the substantive law affecting financial services across the
Union, as well as a single fiscal authority, and a EU-wide deposit
guarantee scheme. While debate over creating a single regulator
at EU level continues, there is still considerable interest in
exploring how regulation can be adapted to the changing landscape
of EU wholesale financial services. The City of London is engaged
in this debate and is seeking to influence views in Brussels in
the run-up to the publication of important reports in the autumn.
12. The City has welcomed the European Commission's
self-regulatory approach to the issue of Clearing and Settlement,
where it has opted for a voluntary Code of Conduct drawn up by
industry aimed at creating a more efficient clearing and settlement
infrastructure across the EU. On a related issue, the European
Central Bank (ECB) has recently proposed to provide securities
settlement services in central bank money for euro-denominated
securities, (TARGET 2 Securities or T2S). The City is working
closely with the ECB as it develops its proposals. It is vital
that the users of this system are fully involved in its governance.
For the project to succeed any proposal must offer a manifestly
better alternative to other possible solutions. The main aim should
be the creation of efficient, deep, liquid capital markets backed
up by a strong settlement system.
STRENGTHENING CONSUMER
TRUST AND
PROTECTION
13. The City has noted the Commission's proposal
to review the consumer acquis whilst the work on the "common
frame of reference" for contract law is proceeding. Whilst
no issue is taken over this approach, the City remains firmly
of the view that the work on contract law should be directed towards
establishing a handbook of defined words and expressions to help
legislators in achieving greater consistency in EU lawmaking.
The City does not support the development of a pan European "optional
instrument" governing contractual obligations or any form
of European Civil Code.
14. The City believes that any Regulation replacing
the current international convention on contractual obligations
("Rome I") should not be over prescriptive and in particular
should maintain the current entitlement for the parties to choose
the law by which contractual obligations are to be governed.
COMMON CONSOLIDATED
CORPORATE TAX
BASE (CCCTB)
15. The CCCTB is one of Commissioner Kovacs'
main priorities during his period as Tax Commissioner. The European
Commission has been working in this area for the last couple of
years and formal proposals to introduce a CCCTB are expected in
2008. The proposals are to be justified as a means of simplifying
the tax arrangements of European companies with operations across
EU Member States. There is, however, a concern that such proposals,
if enacted, would be a first step towards a single corporate tax
rate across the EU. The City of London would have grave concerns
about such an outcome. Given the strong opposition from a group
of Member States, however, including the UK, it is highly unlikely
these measures would be adopted unanimously. It is to be expected
that the Commission will proceed on the basis of enhanced cooperation,
with a group of Member States deciding to agree to the policy
proposal. With taxation commonly cited as an important factor
for City practitioners, the UK will need to need to position itself
carefully during negotiations so as to ensure there are no detrimental
effects to UK competitiveness.
ECONOMIC AND
MONETARY UNION
16. Whilst the Government's position remains
that the UK should continue to opt-out of the single currency,
the euro is nevertheless of considerable importance to the City
in terms of trade with some 70 per cent of all Eurobonds traded
in London. Given the range of practitioners represented in the
Square Mile and the diversity of opinion as to the merits of the
single currency or otherwise, it is very difficult for the City
of London Corporation to make a judgement one way or the other
and comment on the single currency. The Committee may however
be interested in comments relating to a "non-currency-dimension"
of EMU reflected in research recently published by the City of
London.[27]
Some of those interviewed by the authors for the research expressed
concern that the UK is not routinely involved in some decisions
on financial structural matters that now take place as a matter
of course within the Eurozone at both Finance Minister and Central
Bank Governor level. One of the issues arising from the UK's non-participation
in the Eurozone referred to in the research is the fact that although
developments within the Eurozone are of direct concern to the
financial services industry in London, the industry is not represented
in discussions about them. This has given rise to the perception
that decisions may be made within the Eurozone at Finance Minister
or Central Bank Governor level without reference to the UK, and
could have an adverse impact upon the whole sector.
17. The most obvious example of this aspect
of the UK's position outside the Eurozone is the debate currently
taking place over T2S, the desire by the ECB to build a settlement
operation for the Eurozone as a whole. The research concludes
that there seems to be no overt desire on the part of players
such as the ECB deliberately to exclude the London community from
their deliberations. Indeed, in the case of T2S the ECB has already
had exploratory discussions in London. The fact remains, however,
that combining the UK's non-participation in the Eurozone with
the apparent desire of the Bank of England to confine its role
quite narrowly to monetary policy is producing a clear and forceful
perception in the City that its interests are in serious danger
of being under-represented in discussions within the Eurozone.[28]
EUROPE AS
A WORLD
PARTNER
18. The City of London is following current
developments in this area closely. As a pre-eminent international
financial services centres, the City has an interest in maintaining
the global competitiveness of EU wholesale financial services.
The City is supportive of the European Commission's attempts over
recent years to integrate better the external dimension into its
policy making processes.
19. There is currently considerable focus on
the EU-US transatlantic market-place, with discussions covering
the potential extension of mutual recognition in certain areas,
including securities, between the two jurisdictions. The German
Presidency of the EU under Chancellor Merkel took the lead in
this area by proposing that a deadline be set for the creation
of a transatlantic marketplace, and the Presidency has been working
to build support for this initiative over the last few months.
This builds on existing work undertaken by the European Commission
and its regulatory agency counterparts in the US on building a
regular informal dialogue in the area of financial services, which
has produced notable successes. The key in these discussions will
be the decisions made as to the nature and level of mutual recognition
and/or convergence of rules in the financial services area, as
well as the political commitment given on both sides of the Atlantic.
Another important aspect will be to ensure that bilateral initiatives
do not fragment the multilateral approach in the WTO, and as such
it will be important to ensure coordination with other jurisdictions
at the relevant stage.
20. Relations with other third countries remain
high on the EU agenda, and this is work the City of London supports.
The creation of City Offices in China and India represents the
increased importance of the UK's links with these countries, and
the City is pleased to see priority given to the conclusion of
revised partnership agreements with these countries.
BETTER REGULATION[29]
21. The City of London has long promoted the
principles of better regulation at EU level. This has notably
been achieved through the City Research Programme, which to date
has published three major publications on the topic.[30]
Each of these reports has served to influence the debate in Brussels
and it is encouraging to note the progress being made. Of particular
note is the creation of an Impact Assessment Board within the
European Commission. This Board, composed of senior Directors
from the leading directorates in the economic, social and environmental
fields, reports directly to Commission President Barroso on the
quality of impact assessments drafted by Commission services to
accompany legislative proposals. The creation of this Board should
provide stakeholders with an additional means of drawing legislators'
attention to poorly designed impact assessments before legislation
is formally proposed.
22. Work continues on the programme to reduce
the administrative costs of implemented legislation and the simplification
programme. Regarding the latter, work has not proceeded as rapidly
as might have been wished, partly due to the choice of measures
to be simplified, but also due to the fact that decisions on repeal
or amendment or subject to the normal EU decision-making processes
(ie in many cases co-decision).
23. A potentially important recent development
has been the adoption by the Commission of guidelines for the
ex-post analysis of impact assessments. Essentially, this provides
for a systematic review of the initial basis for EU legislation
once the final measures have been implemented in the Member States,
effectively closing the circle. It is intended that this work
feeds back into the policy-making process to ensure that "lessons
learned" are incorporated at the earliest stage. The City
of London supports these developments and indeed recently invited
one of the Commission's lead officials on the project to speak
at a meeting with City practitioners in London.
Mr Bruce Hunt
Senior Parliamentary Affairs Officer
April 2007
25 "Emissions Trading and the City of London",
Consilience Energy Advisory Group Ltd, published by the City of
London Corporation, September 2006. Back
26
"Evaluating Better Regulation: Building the System",
European Policy Forum, published by the City of London Corporation,
September 2006. Back
27
"The Competitive Impact of London's Financial Market Infrastructure",
Bourse Consult, published by the City of London Corporation, April
2007. Back
28
ibid. Back
29
Comments included at paras 5 and 6 are also relevant in this
context. Back
30
"Reducing the Regulatory Burden: The Arrival of Meaningful
Regulatory Impact Analysis", European Policy Forum, published
by the City of London Corporation, July 2004; "Rebalancing
UK and European Regulation", European Policy Forum, published
by the City of London Corporation, April 2005; "Evaluating
Better Regulation: Building the System", op cit. Back
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