Memorandum by the City of London Corporation
1. The City of London Corporation welcomes
the opportunity to comment on the European Commission's annual
Legislative and Work Programme for 2007. The City has for some
time been seeking to highlight the importance of thorough and
detailed scrutiny of EU financial services legislation by Parliament,
in addition to trying to ensure that directives which emanate
from the EU are both principles-based and proportionate. The City
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.
2. The City is broadly satisfied with the
content of the Work Programme in that it demonstrates the Commission's
intention to press ahead with the Better Regulation agenda. The
strategic review of the Commission's Better Regulation activities
is welcome as is the fact that the agenda is beginning to move
from rhetoric to practice with the identification of simplification
initiatives and the withdrawal of pending legislation. The feeling
is that the Better Regulation argument at a policy level has been
won, but there is more still to be done and delivery is now needed.
The UK has led the charge in Brussels and the Commission has responded.
There are positive signs from the Commission and upcoming Presidencies
but some Member States are less keen.
3. The City of London Corporation has recently
commissioned a research report from the European Policy Forum
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. There are some concerns, however, that
despite the best intentions the process of evaluation, codification
and simplification might actually result in the creation of further
new detailed rules. Some in the City are saying that the UK should
be wary about promoting the idea of ex-post evaluation of Regulatory
Impact Assessments (RIAs) and should be cautious about going too
far along this route if the spirit of Better Regulation is not
properly embedded first. 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 an 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. It has also been stressed
that proper market failure analysis should be carried out by the
European Commission ahead of any RIA and decision on legislative
action. Market failure analysis was introduced by the Financial
Services Authority two years ago.
4. A broader linked issue not formally part
of the EC Work Programme is the planned Commission evaluation
of the FSAP. An external consultant will work on this during 2007
with publication planned for 2008. While the City welcomes such
initiatives in principle, there are concerns as noted above as
to whether this can be achieved, mainly because the original set
of measures were not supported by any substantial market analysis.
Consequently this means that it is hard to benchmark the final
result. It is intended that the City of London's annual research
report, "The Importance of Wholesale Financial Services to
the EU Economy", will include a benchmarking analysis of
the impact of the FSAP measures but that will be more forward
focused.
5. In terms of Commission political initiatives
for 2007, the two main priorities for the City are in the areas
of asset management and insurance, both of which have been the
subject of extensive recent consultation.
6. On asset management, the City broadly
welcomes the European Commission's White Paper on Enhancing the
Single Market Framework for Investment Funds, published in November
2006, and its attempts to encourage the opening up of the cross-border
funds market. The proposals closely follow the position of the
Investment Management Association and the Commission is to be
congratulated on listening to industry. The White Paper does not
call for a re-write of UCITS (Directive on Undertakings for Collective
Investments in Transferable Securities) but instead proposes targeted
and incremental changes. UCITS is a global brand and the industry
does not want this to be jeopardised. The UCITS discussions are
closely aligned with the demographic challenge and the retirement
debate across the EU. Difficult decisions still need to be made
on fund mergers, pooling and the management company passport.
7. With regard to insurance, the Commission
has indicated its intention to review the capital requirements
for the insurance industry. The "Solvency II" package
of measures has been the subject of major technical preparatory
work by the Commission and Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS) for over a year.
8. The City of London is also very interested
in the issue of climate change and emissions trading, and will
follow closely the work of the European Commission in extending
the EU Emissions Trading Scheme for 2008-12. As part of its research
programme, the City of London published a report in September
2006 from research undertaken by Consilience Energy Advisory Group
which looks at the business opportunities offered by emissions
trading, ascertains how the market has developed and identifies
the next generation. of trading opportunities for the City of
London. It also investigates how emissions trading could be utilised
by local authorities and proposes ideas for introducing energy
efficiency measures in new buildings and local transport networks.
9. In the medium-term, another issue of
potential concern for the City will be the reviews the Commission
undertakes of the Markets in Financial Instruments Directive (MiFID)
following implementation in 2007. By 2008, the Commission will
be deciding on a number of important issues, notably whether or
not to extend the directive's provisions on transparency covering
the equity markets to the bond, derivatives and commodities markets.
These are likely to be critical areas for London's wholesale markets
and are being consulted on by the EC at the moment.
10. The City of London is very positive
about the potential of the new emerging economies of China and
India in particular, and it is hoped that that practitioners in
those markets will draw on established expertise of UK financial
services to assist them in their enterprises. The City of London
has long recognised the critical importance of China and India,
both to the global economy at large, and more specifically to
the international financial services industry. It is widely recognised
that China and India will present significant possibilities for
business and the City must do everything it can to capitalise
on these opportunities. Equally, both India and China have much
to gain through a closer relationship with the City community,
not least as a source of capital and expertise for their businesses
as they seek to expand beyond the domestic scene and enter the
global market place. The City is actively campaigning on this
front.
11. While the Commission as initiator of
legislation at EU level is the main source of new legislative
initiatives, there are other emerging proposals of which the Committee
may wish to be aware. These are mainly originating from the European
Central Bank (ECB) and include activities in the area of securities
settlement and hedge funds (with the German Presidency of the
EU also likely to focus on this latter issue in 2007).
12. The issue of clearing and settlement
of securities has been a major issue for the EU institutions for
some time. The Commission announced in the summer that it was
opting for a self-regulatory solution to the problem of significantly
higher costs for the cross-border trading of securities, widely
acknowledged to be linked to problems in the clearing and settlement
side. Shortly afterwards, however, the ECB announced that it was
looking at creating a single settlement system for the Eurozone.
This is a particularly important issue for the City and the City
Corporation has brought practitioners together in a "taskforce"
to ensure an ongoing input to the dialogue with the ECB. This
will remain a major issue during the course of 2007, with the
key areas of concern being scope, cost and governance.
13. Hedge funds and private equity are increasingly
featuring on the agenda of European politicians. While Commissioner
McCreevy has repeatedly signalled his intention not to regulate
hedge funds, there is an increasing body of opinion in the EU
in favour of further investigation at the very least. The ECB
has signalled it will look again at the potential systemic risk
issues raised by hedge funds, and recently proposed the creation
of a centralised register of hedge fund activity. This might conceivably
be addressed at G8 level, where Germany has already signalled
it wishes to address issues around hedge fund transparency during
its Presidencies of both the EU and G8 in 2007. Any initiatives
in this area will clearly be of considerable interest to the City
of London.
January 2007
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