Memorandum by the City of London Corporation
INTRODUCTION
1. The City of London Corporation welcomes
the opportunity to comment on the European Commission's Review
of the Single Market. The City of London Corporation aims to promote
and reinforce the competitiveness of the Square Mile and in particular
UK-based international financial services by tackling issues created
by both domestic and EU economic, legislative, fiscal and regulatory
developments which may impact upon the open, efficient and competitive
environment for doing business in the City. As the significance
of European legislation in this area has grown in recent years,
there has been far greater coordination of thinking about the
future direction of the single market for financial services,
combined with an acceptance of the need to pool resources. The
City Corporation has for some time been involved in facilitating
contact between the City and the EU institutions, primarily the
European Parliament and European Commission.
2. Many City firms, institutions and trade
bodies have been playing an active part in helping to achieve
a single European market for financial services from their sectoral
standpoints and, to this end, the City Corporation's particular
focus has been on wholesale financial services. 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 the wider better regulation agenda and 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.
3. The City Corporation is not in a position
to respond fully to all the questions posed in the Committee's
Call for Evidence but the following paragraphs reflect the City
Corporation's views on those elements of the review of the Single
Market which are of particular interest to its activities.
NECESSITY OF
FURTHER LEGISLATIVE
MEASURES
4. The European Commission has shown willing
to press ahead with the "better regulation" agenda.
The agenda has received widespread support from practitioners
in the City and beyond who have been calling for some time for
both less and better legislation, and a genuine policy shift towards
achieving more considered and intelligent regulation. At the EU
and the domestic level, there is currently a major push towards
these goals. There is also a growing realisation that the most
effective legislation is produced in close consultation with key
practitioners and stakeholders.
5. In the financial services sector there
have been 42 legislative measures introduced under the Financial
Services Action Plan. This has been an extremely extensive and
costly exercise. For example, the one off costs for implementing
the Markets in Financial Instruments Directive (MiFID) have been
calculated to be between £870 million and £1 billion
with ongoing costs of an extra £100 million a year[7].
While research published by the City of London Corporation has
suggested initial benefits deriving from the FSAP programme[8]
it is clear that at a time when the financial services industry
is facing a period of enormous and costly institutional change
as a result of the impact of the FSAP, it needs a substantial
period to consolidate these changes effectively. The City would
therefore support calls for a regulatory pause to allow firms
to adjust to the new regulations[9].
6. Moreover, before any new legislative
measures are considered, it is first necessary to undertake proper
market failure analysis, this is essential in order to decide
whether there is a prima facie case for regulatory intervention
or whether non-legislative approaches are possible. Where further
legislative moves are suggested these should first be justified
through transparent and effective cost benefit analysis, and then
involve a rigorous regulatory impact assessment in consultation
with practitioners which demonstrates that the chosen regulatory
route is the least burdensome to business within the spirit of
the legislation. In certain circumstance it may be more appropriate
to make targeted amendments to existing legislation rather than
the introduction of brand new legislation. The Commission should
seek to ensure that once transitional changes have been absorbed,
regulatory/supervisory and other burdens are permanently reduced.
THE COMMISSION'S
ENFORCEMENT POWERS
7. City practitioners feel there should
be a major emphasis on the need for effective and consistent implementation
of Financial Services directives across the EU as a whole. Member
State compliance with the provisions of Community law in all Member
States is essential to ensure that citizens and businesses across
the Union benefit fully from the advantages of Community law.
To realise the potential benefits of economic integration from
EU financial services legislation while avoiding costly burdens
on business, it is vital that there should be effective, proportionate
and consistent implementation of legislation across the EU. Now
that the legislative framework of the Financial Services Action
Plan (FSAP) has largely been set, the City would like to see resources
within the Commission shifted from legislative work to implementation
and enforcement in order to tackle these issues and to pursue
a system of reviewing the practical impact of legislation already
in operation. It is suggested that a new combined unit should
be established to monitor this within the Commission and reporting
to the Internal Market and Competition Commissioners.
8. It is understood that the Commission
is considering ways to reduce non-compliance and is intending
to publish a Communication on this issue. The City of London Corporation
sees merit in introducing evidentiary hearings in Brussels, after
several years experience of implementation across the EU, to establish
whether the final policy meets the original objectives of the
policy makers. More generally, the City Corporation favours the
use of competition policy as a means to remove barriers to cross
border trade and, in turn, create an integrated financial market.
COOPERATION BETWEEN
NATIONAL REGULATORY
AUTHORITIES
9. In order to improve implementation and
enforcement of EU financial services legislation, more cross-border
supervisory cooperation is required. The Lamfalussy processes
and structures provide a flexible framework for the evolution
of regulatory and supervisory structures. The City's position
is that this framework should be built upon by enhanced cooperation
between national authorities and convergence of their approaches.
The City would argue that pressures to create a single EU authority
are premature.
NATIONAL CHAMPIONS
10. There is a danger that the concepts
of "national champions" and "economic nationalism"
could distort competition and, therefore, prevent the full potential
of the single market being realised. The City is a strong advocate
of free competition and the City of London is a perfect model
of the success that can flow from allowing competition.
FINANCIAL SERVICES
Implementation of the Financial Services Action
Plan and in particular MiFID
11. 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.
12. In terms of the benefits of FSAP, the
City of London published research this spring on the "Importance
of Wholesale Financial Services to the EU Economy"[10]
which attempts an initial analysis. It is important to underline
that it is still too early to provide a definitive answer on the
benefits of FSAP given legislation either remains to be implemented,
or has only recently been introduced. Nonetheless, the authors
address firstly the European Commission's current work on the
evaluation of the FSAP, highlighting a number of issues to be
taken into account to ensure a sound analysis of the impact of
the legislative programme. The importance of using mathematical
analysis to separate the various drivers of the EU wholesale finance
market is underlined and an attempt is made by the authors to
provide an early assessment of the impact of the FSAP. Initial
findings, based on existing data, suggest there may have been
a one-off net increase in EU financial services output of around
2%. The Report underlines, however, that more time has to elapse
before truly robust calculations can be made. Separately, the
authors that the costs of the FSAP could amount to between 0.2%-0.3%
of GDP to the UK economy, over a 10-year period.
13. The City of London will be including
an assessment of the impact of FSAP on City and European financial
services markets on an annual basis in its research programme
as a contribution to the continuing debates around follow-up to
the FSAP programme.
The Commission's Code of Conduct on Clearing and
Settlement
14. 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. In early spring, the City of London
also published follow-up research on clearing and settlement in
the EU[11].
Building on the two previous publications, this paper evaluated
the European Commission's initial work on possible legislative
measures but found difficulties in comparing clearing and settlement
activities or costs across the member states, since data is either
unavailable or not available in a standard form or format.
15. 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 has been working closely
with the ECB as it develops its proposals, with the City Corporation
initially facilitating the creation of the National User Group
in the UK. 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.
June 2007
See also Financial Services Authority (FSA) The Overall
Impact of MiFID, November 2006
7 FSA Press Release 24 November 2006 at www.fsa.gov.uk/pages/library/communications/pr/2006/123.shtml Back
8
"The Importance of Wholesale Financial Services to the EU
Economy", centre for economics and business research ltd
(cebr), published by the City of London Corporation, May 2007.
Discussed further at para 12 below Back
9
Notwithstanding those initiatives that have already been the
subject of preliminary discussion and preparation in the Commission,
eg UCITS and Solvency II. Back
10
"The Importance of Wholesale Financial Services to the EU
Economy", May 2007, op cit. Back
11
"The European Equities Post-Trading Industry: Assessing
the Impact of Market and Regulatory Changes", NERA Economic
Consulting, published by the City of London Corporation, February
2007 Back
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