Memorandum by the British Bankers' Association
1. The British Bankers' Association is the
leading UK banking and financial services trade association and
acts on behalf of its members on domestic and international issues.
Our 219 members are from 60 different countries and collectively
provide the full range of banking and financial services. They
operate some 130 million personal accounts, contribute £35
billion to the economy, and together make up the world's largest
international banking centre.
SUMMARY
2. The BBA believes that the Single Market is
good for banks and generally for financial services and indeed
good for European citizens. We believe that it is important to
take a positive and proactive attitude to the development of the
Single Market.
3. Since 1999 the majority of legislation
has been on the wholesale side of financial services. The legislation
to integrate wholesale markets (the Financial Services Action
Plan or FSAP) needs time to bed down in national legislation before
the effect can be fully assessed. We believe that the Markets
in Financial Instruments Directive (MiFID) will particularly benefit
the large wholesale and investment banks.
4. We also believe that the Code of Conduct
on Clearing and Settlement is an appropriate way to improve the
trading, clearing and settlement market infrastructures in a flexible,
but thorough manner. It also fulfils the criteria for the Better
Regulation agenda, which we strongly support.
5. On the retail side, the European Commission
has recently launched a Green Paper on retail financial services,
which we believe will form an important part of the overall Single
Market Review this autumn.
6. The European Commission's Interim Report
to the 2007 Spring European Council[1]
confirms our view that the consumer will play an increasingly
significant role in the Single Market.
7. With this in mind, the BBA believes that
proposals to integrate the Single Market in retail financial services
must benefit consumers, satisfy better regulation criteria as
well as give rise to more efficient markets.
8. There are still a number of barriers
for providers of financial services to establish themselves in
other markets, such as different market behaviour and legal frameworks.
Geographical proximity can play an important role, in addition
to financial considerations, for companies to invest in the new
Member States' markets.
9. We believe that future competitive retail
banking markets require not only access by consumers to the provision
of services but also for consumers to be able to choose the best
deal. Therefore, a number of persisting inhibitors need to be
considered in order to increase competition for the benefit of
the consumers.
10. Firstly, the transparency of information
provision must be improved. For consumers to be confident in their
product choices they need comprehensive and easily understood
information on financial products both through advertising and
marketing material and aggregator, and other websites. Steps must
be taken in Member States to improve financial capability if consumers
are to reap the benefits.
11. Secondly, we believe that banks across
Europe should cooperate to minimise the inherent complexities
in the necessary anti-money laundering and counter-terrorist financing
legislation.
12. Thirdly, we believe that voluntary switching
codes of conduct between banks at national level would enable
customers wishing to move bank to do so more efficiently.
13. Fourthly, work needs to be done on improving
data sharing between EU jurisdictions for those consumers moving
from one country to another, while respecting data protection
and fraud considerations.
14. Fifthly, consumers have to feel confident
that redress mechanisms are compatible between jurisdictions if
problems arise with particular financial services products.
15. In financial services we have a Single
Market on the wholesale side. EU decision-markers are working
with national authorities to bring the Single Market benefits
to citizens on the retail side as well. We need to ensure that
any action is proportionate and not detrimental to national markets.
Nevertheless, we support this process because we want UK financial
services companies to benefit from better access to the EU market
and because we believe it will allow the City of London to remain
a world leader in financial services.
A. THE CURRENT
STATE OF
THE SINGLE
MARKET
I. What has been the impact of the recent
enlargements of the European Union on the single market?
16. The enlargements of the EU in 2004 and
2007 have had a major impact on employment through migration from
east to west. This has allowed product development in retail financial
services targeted at new population groups in the UK. We expect
this "mobile consumer" to become a more important part
of the financial services market.
17. There are clearly increased opportunities
for UK companies in the new accession countries as these are growing
markets.
18. On the legislative side, another impact
has been the introduction of 12 new national markets at differing
stages of development and levels of financial services rules which
has led to increasing support for maximum harmonisation in Brussels.
Also in some areas, like consumer credit, new Member States can
sometimes support more EU-level legislation where they do not
already have sophisticated domestic rules.
II. Are there significant barriers to firms
seeking to offer their goods or services, or to consumers accessing
these goods or services, in other Member States of the European
Union? If so, what are the most important of those barriers? What
measures are needed to overcome those barriers?
19. We believe there are a number of barriers
for firms seeking to offer their goods or services in other Member
States. This includes both providing services direct to consumers
in other Member States (cross-border services) and acquiring local
operators or establishing a subsidiary (scale entry).
20. As an example, our recent work on the
impact of the Consumer Credit Directive showed that our member
banks perceived a multitude of barriers in offering consumer credit
services in other EU Member States. These include:
— Problems of assessing credit-worthiness
due to inability to access credit data.
— Differences in taxation, legal basis,
employment laws and access to payment systems.
— Difficulties in debt collection.
21. Some "old" EU markets were
considered unattractive by our members because the estimated returns
on equity would be lower or equal to that already enjoyed in the
UK. Many of our members do of course operate on a global basis
and their investment decisions will reflect this.
22. For retail financial services we believe
the EU is still very much a collection of 27 separate markets
and banks cannot ignore this commercial reality. Integration is
held back due to different maturity of the various markets and
the differences in languages and cultures, as well as the structure
of consumer demand. These differences cannot be resolved through
legislation, but they need to be progressively understood and
accepted on all sides. Therefore, there are greater chances of
success in achieving a foothold in a market by either acquiring
a local competitor or by establishing a subsidiary with separate
management, systems, products and marketing.
23. It is important that banks which wish
to enter other EU Member States are able to do so freely and those
consumers who wish to purchase financial products and services
on a cross-border basis are able to do so with confidence. It
is important that the needs of the growing number of citizens
who move around the EU are met in an efficient, flexible and transparent
manner.
24. There is a role for the European Commission
and National Regulatory Authorities to monitor market competitiveness,
maintain a level playing field and facilitate cross-border mergers
and acquisitions. Increasing commercial integration over time
of financial services is more likely to encourage the development
of an internal market than regulation forced from above.
III. Do you consider further legislative measures
by the Commission to be necessary for the completion of the single
market? If so, what measures would you consider appropriate?
25. We do not think that legislative measures
are the best solution to complete the single market. Often non-legislative
measures such as codes of conduct or self-regulation are more
effective and flexible. There are non-legislative measures that
should be considered in the retail financial services area to
bring benefits to EU citizens including:
— Research into what financial services
the mobile consumers (such as migrant workers) need.
— Development of market comparison
websites to benefit more EU consumers.
— National account switching codes
with third party oversight.
— Work around effective recognition
between Member States on dispute resolution mechanisms.
IV. Are the current provisions for monitoring
market functioning and performance effective?
26. It is difficult to judge the effectiveness
of current provisions at this point in time. It is necessary to
wait follow-up actions from DG Competition's Sector Inquiry into
Retail Banking before it is possible to evaluate the effectiveness
of market monitoring by the European Commission and National Regulatory
Authorities.
27. The Commission plays an important role
in ensuring the transposition of EU legislation, essential for
the Single Market to deliver benefits to citizens and companies.
We welcome DG Markt's Internal Market Scoreboard which examines
how quickly and how well the Member States transpose Single Market
Directives into national law, as well as highlighting the on-going
infringement cases against Member States. However, the Commission
should act more forcefully to ensure Member States comply with
internal market rules. We also welcome the Committee of European
Banking Supervisors (CEBS) initiative to help the Commission oversee
the transposition of the Capital Requirements Directive (CRD).
There should be greater scope for Lamfalussy Level 3 Committees
to aid Member States transpose financial services legislation.
28. The Better Regulation principles adopted
by the EU in the recent past should contribute to better monitoring
of market functioning because they embody the need for effective
research and impact assessment. The creation of the Impact Assessment
Board in 2006 should further underpin this process.
V. Is there a need for greater cooperation
between National Regulatory Authorities?
29. In our experience, there appear to be
differences in the performance of national competition authorities.
We believe that there is a greater need for cooperation and spread
of best practice in the competition field which should encourage
greater consistency across the EU.
30. We support cooperation between supervisory
authorities rather than the development of a single EU supervisory
authority. Recent legislation such as the CRD and MiFID has improved
co-operation between financial services supervisory authorities.
Whilst there is still much more to be done to ensure uniform implementation
by supervisors of legislation, we believe the CRD is an example
where supervisors have voluntarily agreed to reach consensus in
the present implementation phase.
VI. Are the current remedies available to
the Commission to enforce single market legislation adequate;
and are they used effectively?
31. The Commission is responsible for ensuring
that Community law is correctly applied. Consequently, where a
Member State fails to comply with single market legislation, the
Commission can take action through the infringement procedure
against that Member State. This procedure can ultimately lead
to referral of the Member State to the European Court of Justice
which can impose hefty fines on countries. In practice, the process
can take years before Member States are actually liable to pay
fines.
32. We believe that the remedy of infringement
proceedings is not effective enough to force Member States to
implement EU-level legislation on time. A good example of this
is MiFID where uneven implementation by EU Member States has led
to considerable insecurity in the financial services industry.
Of the major financial markets only the UK had implemented the
legislation by the deadline of 31 January 2007. By the end of
April only the UK, Romania, and Ireland had notified the European
Commission of transposition measures. This led to a situation
where a sophisticated financial market like the City of London
found itself constrained in participating fully in the Single
Market. The then UK Economic Secretary Ed Balls MP wrote a letter
to EU Internal Market Commissioner Charlie McCreevy asking him
to pursue those Member States who had not yet implemented the
legislation. The Commission duly notified on 24 April 2007 that
it had launched infringement proceedings. We believe that the
European Commission should be more vigilant in enforcing EU-level
legislation to allow financial services providers to reap the
benefits of the Single Market.
33. The Commission has performed well in
curtailing cartels and deterring abuses of dominant positions
(forbidden under Articles 81 and 82 of the EC Treaty). The Commission
enjoys wide powers of investigation, such as being able to inspect
business and non-business premises, and to send written requests
for information, among others. The Commission can also impose
fines on companies violating the Treaty Articles. More work could
be done to prevent uneven application of competition law by national
authorities, as was evident with the ABN Amro takeover bid for
Antonveneta in 2005 in Italy.
VII. What is your view of the Country of Origin
Principle, whereby a company registered to provide services in
one Member State is automatically qualified to provide those services
in any other Member State on the basis of home country regulation?
Does this Principle constitute the best basis for single market
measures?
34. The use of the Country of Origin principle
in financial services raises a number of issues due to differences
in the Member States' consumer protection legislation. Many consumers
are unlikely to be aware of the different levels of consumer protection
or redress systems. Where consumers are aware, those in a jurisdiction
with high consumer protection would probably not buy a financial
services product from a country with a lower level of consumer
protection legislation.
VIII. Do the concepts of the "national
champion" and "economic nationalism" pose a threat
to the single market?
35. We believe that the effective enforcement
of competition law and rigorous monitoring of markets by both
the Commission (DG COMP) and national authorities will contribute
to decreasing the amount of economic nationalism in the EU.
36. The removal of "undistorted competition"
from the draft EU Reform Treaty, negotiated in the June 2007 European
Council, raises further concerns in this area.
IX. What is the significance of the single
currency to the operation of the single market?
37. Institutions engaged in the wholesale
markets are of course used to multi-currency trading. For them
the FSAP was more important than the single currency in facilitating
the development of a single market.
38. However, the single currency has increased
value transparency by removing the fluctuations between the currencies
it replaced. Also, it is true that multinational corporations,
which before needed a dozen or more sets of accounts in different
currencies, with all the reconciliation and valuation that this
poses, can now simply use the euro.
39. The City has proven increasingly attractive
to Eurozone based financial services business. At the end of 2006,
79% of European based hedge funds assets ($360 billion) were managed
in London. The UK was the source of 27.5% of European investment
banking revenue in 2006 and more euros are traded in the UK than
the entire Eurozone. Also, around half of European investment
banking activity was conducted in London in 2006.
40. One area that the single currency is
having a major impact on is on payments. The Single Euro Payments
Area (SEPA) initiative will create a single integrated euro payments
environment.
B. SECTOR SPECIFIC
QUESTIONS
Financial Services
I. What has been the impact of the implementation
of the Financial Services Action Plan as a whole; and in particular
the Markets in Financial Instruments Directive?
41. The Financial Services Action Plan (FSAP)
has had a substantial impact on the European financial services
market as a whole. However, on the whole many of the standards
imposed by key pieces of new legislation such as the Prospectus
Directive, the Transparency Directive and the Market Abuse Directive
were already in place in the United Kingdom. Consequently, the
FSAP has had a lesser impact on the United Kingdom than on many
other member states.
42. In many respects the biggest impact
of the FSAP has been the fact that it has ensured that a much
more extensive body of European capital markets legislation is
now in place. This means that European law relating to capital
markets is now, generally speaking, more important than other
national law relating to capital markets. This shifts the balance
away from national legislatures towards the European legislative
process.
43. A second, simultaneous and connected,
development was the creation of the Lamfalussy Process which has:
— formalised and encouraged much greater
cooperation between European regulators, and
— resulted in a more connected national
approach to the implementation and interpretation of the EU legislation
passed under the FSAP.
44. This shifts the balance away from the
national autonomy of financial services regulators so that they
are increasingly more constrained by their collective approach
to issues.
45. In the case of the Markets in Financial
Instruments Directive (MiFID), this Directive has not yet been
implemented. It is due to be implemented by 1 November 2007 and
it is anticipated that those aspects that can be implemented without
the need for information coming from other European jurisdictions
will be implemented by that date. It seems likely, however, that
in many other European countries MiFID will not be properly implemented
by 1 November 2007.
46. The implementation of MiFID raises significant
issues for banks across Europe. There are few banks which are
not buying or selling securities in some way or other and consequently
all banks, whatever their precise business model, are likely to
be affected by MiFID in some way or another.
47. An important difference between banks
and other securities firms is the fact that banks already have
a passport to do business across the EU under the Banking Coordination
Directive (BCD)—so consequently there are a range of provisions
in MiFID (mainly organisational requirements) which do not apply
to banks because they are already subject to them, or equivalent
provisions, under BCD.
48. The precise impact of MiFID depends,
in particular, on whether or not a bank is principally carrying
out wholesale investment banking, private banking or retail banking—but
before discussing this it may be worth making some general comments
about the likely landscape for banks once MiFID is implemented.
Competitive impact of MiFID on banks doing business
in Europe
49. It is difficult to crystal ball gaze
and it is certainly not possible to pick with any certainty specific
banks which will be winners or losers as a result of MiFID. It
is, however, possible to make some general predictions. These
are as follows:
— MiFID will initially impose significant
implementation costs on the European financial services industry.
Large banks (and large exchanges) will be better placed to bear
these costs than smaller financial institutions, particularly
non-banks.
— Banks, generally, particularly larger
banks tend to be better prepared for MiFID. Many of them have
followed the negotiations closely and have well developed project
teams.
— As a result, on balance, banks, particularly
large banks, will be much better placed to take advantage of MiFID
than many other market players.
— Overall, therefore, despite the costs
of implementation, some banks are likely to reap a significant
competitive advantage from MiFID. At least one research report
from an analyst in JP Morgan Chase suggests that US banks operating
in Europe may be better placed to benefit than European banks.
This is yet to be proved—but it is certainly the case that
some US banks and investment banks have invested heavily in their
MiFID projects.
— Other banks will still be able to
benefit from MiFID but will have to think hard about how they
can best differentiate their service offerings to clients from
the services of others.
Wholesale Investment Banks and Universal Banks
50. These banks focused on the importance
of MiFID very early as it was perceived to centrally affect their
business. It is not possible to cover every aspect of their business
in this evidence but key ways in which MiFID affects their business
are as follows:
— Trading securities, particularly
equities. Key provisions include pre and post trade transparency
provisions, best execution obligations and the provisions creating
the concept of a systematic internaliser of equities.
— Improving the passport. A range of
MiFID provisions are intended to strengthen the role of the home
state supervisor and lessen the influence of host state rules.
New passport rights are created eg for commodities and multi-lateral
trading facilities (MTFs).
— More common conduct of business requirements
across the EU as a whole.
— A greater differentiation between
the rules applying to business with retail customers and the rules
applying to business with professionals and the most regular players
in the markets (known under MiFID as "eligible counterparties").
In essence lighter obligations apply when dealing with professionals,
and even more light when dealing with eligible counterparties.
51. The most controversial and potentially
expensive requirements to implement for wholesale investment banks
are they requirements relating to market structure for equities
business, particularly, if a bank is regarded as a "systematic
internaliser".
52. However, a bank can choose whether or
not to be a systematic internaliser and can choose to structure
its business so that it does not carry out such a role. At this
stage, it is not clear precisely what individual banks will choose
to do and there is also some uncertainty about how different European
supervisors will approach the question with regard to banks which
they supervise. In essence, banks are only likely to be systematic
internalisers if they have a multilateral platform which is dealing
with its customers in equities by quoting in a "standard
market size" for those equities to which the obligation applies.
This "standard market size" is likely to be, broadly
speaking, a size consistent with retail equities trading rather
than the much larger sizes traded by wholesale investors. Consequently
it is likely that institutions which only wish to do equities
business with wholesale investors will seek to structure the business
to ensure that they are not systematic internalisers.
53. It is difficult to predict but it may
well be the case that it is less costly for many firms to adapt
their structures in this way rather than to take on the obligations
of a systematic internaliser and that, in consequence, there will
be far fewer banks taking on this obligation than might have been
anticipated.
54. As yet, it is early days to assess the
value of the new passporting rights. However, overall there are
likely to be some advantages to banks who do a considerable amount
of commodities business or who operate an MTF. These advantages
are more likely to develop over the medium to longer term than
in the first few years after MiFID implementation because it is
likely to take some time for regulatory practice with regard to
these new passports to settle down.
55. A more common approach to conduct of
business rules could carry significant benefits. The UK's FSA
will cut its own Conduct of Business Sourcebook by around 50%,
and although there will be initial implementation costs it is
likely that over time this will bring advantages. Wholesale banks
will benefit more than retail banks if there is genuine convergence
in conduct of business rules across Europe because most cross-border
business is wholesale. However, there will still be scope for
some divergence between rules in different States and, moreover,
there are still risks of divergent interpretations. In view of
this the changes to the conduct of business rules, while mostly
helpful, are likely to take some time to bed down and there remain
risks of continuing differences. Benefits are likely to be medium
to long term.
Retail Banks
56. The most significant impact on retail
banks in the UK will be in the area of conduct of business rules.
MiFID does not apply to all of a bank's retail banking business—only
to business in relation to financial instruments. Consequently,
its principal application is to retail securities business which
in the UK is mainly the sale of equities, often on an execution
only basis—and to the sale of tax-wrapped products containing
securities such as pensions, ISAs and the like. Strictly speaking,
MiFID does not apply to Undertakings for Collective Investment
in Transferable Securities (UCITS) which continue to be covered
by the UCITS Directives—although there can be some unexpected
indirect affects on firms, particularly those which sell UCITS
and other fund management products out of the same platform.
57. In the context of retail broking business
an important issue will be the impact of MiFID on the existing
retail service provider model whereby brokers access shares on
behalf of retail clients. There had been concerns that MiFID requirements
relating to market structure might destroy this model of doing
business—but it is now felt that it is likely to survive—albeit
with some modifications.
58. There had also been concerns resulting
from MiFID limiting the ability of a firm to carry out execution
only business in a range of financial instruments. However, it
is increasingly thought that it will generally continue to be
possible to carry out business which is currently considered to
be "execution only" because the correct analysis of
this business under MiFID is that it is business subject to the
requirement to carry out initial "appropriateness" checks.
Most "execution only" brokers now consider that their
initial account opening procedures—whether on-line or not—already
contain the right sort of checks to ensure the retail client is
only carrying out the sort of business which it would be appropriate
for him to do. If they do not, however, they will have to modify
their account opening procedures accordingly.
59. An important constraint for retail business
will be the limitations on carrying out derivatives business.
In general most continental European member states are very reluctant
to permit retail clients to have access to derivative products
and MiFID does not draw a sophisticated distinction between derivatives
products which are generally regarded as relatively safe and low
risk such as eg warrants and those which might be high risk. Consequently
it is likely that it will be more difficult for retail clients
to buy and sell derivatives in future except on an advised basis.
60. MiFID also contains a new distinction
between "suitability" and "appropriateness".
Some products and services can only be provided on the basis that
they are "suitable" and, consequently, that the client
has been fully advised with regard to each transaction. Others
can be sold in a lighter touch way provided the firm has carried
out an assessment of the appropriateness of the client dealing
in the products when beginning the account opening process. The
suitability concept is well understood in the UK and in practice
MiFID is unlikely to make major changes to the approach of either
the FSA or the Financial Ombudsman Service ("FOS") when
assessing how a firm has behaved. There is much more uncertainty
about how the appropriateness concept will work as this is a novel
concept in the UK.
Private Banking
61. In some ways this may be the area of
banking that will struggle most with MiFID. The reason for this
is that most of the clients with whom private bankers deal are
likely to fall into the MiFID retail category and will have the
full range of retail protections applied to them. Traditionally
private bankers have dealt with high net worth individuals and,
in the UK at any rate, most of these individuals have neither
needed, or wanted, these full retail protections. Currently the
UK rules mostly permit private banks to treat their high net worth
clients as intermediate customers and consequently the full retail
regulatory requirements do not apply to them.
62. As a result, there will be private banks
which currently have business models which are not geared up to
follow the processes and documentation requirements required by
the regulators for mass retail banking. A positive is the fact
that the FSA is using MiFID implementation as a means of removing
from its rulebook many detailed retail documentation requirements
that the UK currently requires but MiFID does not. However, where
MiFID requires certain documents or warnings to be given to retail
customers' private banks that may not currently be required to
give such documents or warnings will find that they will now have
to put in place processes to do this for their clients even if
they consider that the client is sufficiently sophisticated not
to need them. This will mean that private banks are likely to
have to think very carefully about their current business models
and the best way in which to adjust in order to comply with MiFID
while not drowning their client base in new warnings and documents.
Overall
63. Overall the precise impact on a bank
will depend very much on its mix of products and services and
the nature of its client base. It is likely to have the biggest
impact on wholesale banks and on private banking.
64. The banks who are likely to be best
placed to benefit from MiFID are likely to be found within the
group of the largest wholesale investment and universal banks
for two reasons—first, because although they will have substantial
costs they will also be best placed to reap the benefits of greater
cross-border competition and trading and second, because they
are amongst the entities who have most closely followed the development
of MiFID and are best prepared to implement quickest.
II. Do you support the Commission's Code of
Conduct on Clearing and Settlement?
65. We agree that this is an appropriate
process in meeting the Commission's Better Regulation Agenda,
and in addressing some key issues in relation to the position
of trading, clearing and settlement market infrastructures ("MIs"),
in a flexible, but thorough manner. The BBA supports the process
in which it has been actively participating with the Commission
Monitoring Group and with other users through its membership of
the European Banking Federation's (EBF) User Task Force. This
is commenting significantly on the performance of MIs in meeting
the different chapters of the Code. This process has been going
reasonably well. The first chapter of the Code on Price Transparency
is nearly closed. This has led to a much greater visibility and
display of price and product tariffs by the MIs, although some
work needs to be completed on a fuller display of discounts and
rebates, as well as enhancing billing reconciliability and comparability.
66. The BBA, the EBF and others are currently
in discussion with the MIs on the next chapter on Access and Inter-Operability.
We have seen a first draft of the MIs' proposals—a set of
principles—designed to govern the offering and acceptance
of access to, and inter-operability between, MIs. Although this
is a good first effort, in what is a complex and intricate area,
it probably falls short of users' expectations in some respects
at this stage, and requires revision. This chapter is due to be
finalised towards the end of this month, and the final chapter
on Accounting Separation and Unbundling is due to be completed
by the end of the year. The Commission will then be submitting
a report to Ecofin in the early months of 2008 on the Code's impact
and enforceability. We sincerely hope that this will give the
"thumbs up" to the process. The Commission will then
be turning its attention to the possible extension of the Code
to other asset classes (it currently covers only equity securities),
as well as contemplating whether the Code should be extended to
other providers of post-trading services, such as custody banks.
The BBA, and the EBF, are opposed to this, given the significant
differences between MIs, which are monopoly service providers,
and banks, which are subject to the rigours of severe market competition
in this segment of the value chain.
3 July 2007
1 "A Single Market for Citizens" COM(2007)60 Back
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