CHAPTER 4: Summary of conclusions
Chapter 1: Introduction
86. We agree with our witnesses that a review
of MiFID I was necessary, not least because of the technological
advances that have taken place since it came into force. Nevertheless,
we are deeply concerned at the speed with which MiFID II has been
brought forward. With a package of the size, complexity and importance
of MiFID II, it is more important to get the legislation right
than to get it passed quickly. The consequences of poorly drafted
legislation could be damaging for the EU financial sector, and
for the economy as a whole. We urge the UK Government, the Commission,
Council and European Parliament to take all steps necessary to
ensure that the legislation is fit for purpose before it comes
into force. Given the important co-decision powers that the European
Parliament now possesses, we particularly urge the Government
to ensure that they liaise with and pay due attention to the European
Parliament in its consideration of the MiFID II proposals. (para
9)
Chapter 2: MiFID: An overview
87. The view has been expressed to us that the
Commission's proposals are a "good starting point" for
negotiations. Yet, as we explore in detail in Chapter 3, significant
improvements in the text are required before it is implemented,
and we welcome the steps taken thus far in the European Parliament
and in the Council to address these issues. Broadly speaking,
the Commission needs to ensure that MiFID II is consistent with
other legislative packages, in particular EMIR. It is also important
to ensure that as much clarity as possible is set out in the detail
of the Level 1 framework text. (para 15)
88. We further note that there is a tension between
a rules-based and a principles-based approach in terms of how
to structure the regulatory system in order to anticipate market
developments, in seeking to balance flexibility with accountability
in the exercise of delegated powers, and in providing sufficient
legal certainty to satisfy market participants. In our view, MiFID
II does not resolve that tension. Furthermore, there needs to
be a recognition that MiFID II, however well it is drafted, will
not be the final word in financial market regulation. The single
market in financial services is constantly evolving, and it is
impossible to predict with any certainty how it will do so in
the future. We therefore conclude that further packages of legislative
reforms are inevitable. (para 16)
Chapter 3: Assessing MiFID II in detail
ORGANISED TRADING FACILITIES (OTFS) AND THE OVER-THE-COUNTER
(OTC) MARKET
89. We acknowledge the Commission's rationale
in proposing the introduction of a new category of Organised Trading
Facility (OTF) in order to bring trading on to more organised
electronic venues. We also acknowledge the evidence that has been
put to us that the over-the-counter (OTC) market has developed
in ways that were not initially foreseen. However, we are concerned
about the difficulties that would result from a ban on 'own capital',
as well as the amount of detail about the operation of OTFs that
has been left to be dealt with at Level 2. There is a wider concern
that the expansion of organised electronic venues that would result
from the new OTF category would lead to an overly complex regulatory
framework which does not distinguish clearly between organised
venues and OTC. We are concerned that the likely implications
of such a reform have not been fully assessed. It is essential
to ensure that market participants, regulators and legislators
can all with confidence anticipate the impact of the introduction
of an OTF category before a change of such magnitude is introduced.
(para 26)
PRE- AND POST-TRADE TRANSPARENCY
90. We understand the thinking behind the Commission's
proposals for transparency, in terms of equivalence of market
models and investors' access to relevant information and terms
of trade. The proposals relating to post-trade transparency are
likely to be beneficial for investors and regulators. However,
the pre-trade transparency proposals are flawed. It is important
to acknowledge the markedly different characteristics of each
sector of the market, in particular in terms of their liquidity.
A one-size-fits-all approach to pre-trade transparency must therefore
be avoided, and the Commission needs to be mindful of the potential
of a negative impact on the sovereign bond markets and the corporate
bond markets in the current economic climate. In particular, it
is not clear that the price formation process will be enhanced
by more onerous pre-trade transparency requirements in those markets.
As negotiations continue, we urge the Government to ensure that
a more flexible approach is adopted, to ensure that the right
balance is struck between reaping the benefits of increased transparency
and ensuring that the market is able to operate in an effective
and efficient manner. Moreover, since the requirements to report
transactions to regulators are extended by the recast regulation,
the national authorities (such as the FSA and its successors)
will be better placed to monitor and supervise market integrity,
thereby enhancing market confidence and lowering the cost of capital.
(para 35)
91. We acknowledge the evidence we have heard
that the fragmentation of the market achieved under MiFID I has
also led to a fragmentation in data collection, and therefore
to a deterioration in data quality. We support the case for the
creation of a timely consolidated information tape and urge the
Commission to take urgent steps to bring this about. (para 36)
SYSTEMATIC INTERNALISERS (SIS)
92. Whilst we recognise the Commission's desire
to provide greater transparency and equivalence between market
models in the operation of Systematic Internalisers, we conclude
that the regulatory regime set out in MiFID I has been unsuccessful,
as demonstrated by the unwillingness of market participants to
adopt the SI model. It would be undesirable for the reach of such
a flawed regime to be extended further, as MiFID II proposes.
(para 42)
ALGORITHMIC AND HIGH-FREQUENCY TRADING (HFT)
93. High-frequency trading remains a deeply controversial
activity, and there is a wide spectrum of views and evidence as
to its utility. Further research is needed in order to determine
with any certainty the impact of high-frequency trading on financial
markets and on the economy as a whole. To this end we look forward
to the publication of the final report of the Government's Foresight
project on the Future of Computer Trading in Financial Markets.
In the context of such uncertainty, whilst there appears to be
a strong case for such devices as circuit breakers, we are concerned
that some elements of the Commission's proposals may prove counterproductive.
We are concerned that the scope of the Commission's proposals
is too broad, and that the distinction between algorithmic trading
and high-frequency trading needs to be more carefully drawn. In
particular, the proposal to require algorithmic trading strategies
to be in operation throughout the trading day is likely to have
a detrimental effect on financial markets. We urge that careful
attention be given to the proposals and their likely implications
in this complex and controversial field. (para 52)
THIRD COUNTRY ACCESS
94. Whilst we recognise the legitimate desire
to introduce greater harmonisation across the EU in relation to
third country access, the Commission's proposals are deeply flawed.
There is a risk that, if introduced, such provisions could lock
third country firms out of the EU markets, which, taking into
account the risk of regulatory retaliation, would have an extremely
damaging effect on European financial markets, and in particular
the City of London. Given that global financial markets are independent
of geography, we believe this to be wholly impractical. We are
pleased that amendments have been proposed in the European Parliament
to correct the weaknesses of the Commission's proposal. Given
the vital strategic importance of the UK financial sector, not
only for the domestic economy but also for the EU as a whole,
and also given its international character, we urge the Government
to work to ensure that any provision on third country access will
not have a detrimental effect on the UK financial market or on
the EU financial sector as a whole. We support the Government's
view that lengthy transitional periods for existing firms would
be essential. (para 60)
REGULATION OF COMMODITIES MARKETS
95. There is a divergence of views on the proposals
for regulation of commodities markets. In our view, whilst the
Commission's proposals could be a useful deterrent to market manipulation,
there is also potential for a serious negative impact on liquidity,
investor choice and price formation. Furthermore, the Commission's
proposals will not eliminate the price volatility of markets such
as those dealing in food commodities. Such volatility is dependent
upon a range of factors, and is in particular driven by supply
and demand. Beneficial as increased regulation may be, it can
only provide a partial solution. (para 67)
INVESTOR PROTECTION AND CORPORATE GOVERNANCE
96. Whilst the Commission is right to seek to
strengthen investor protection by building on the important steps
taken under MiFID I, we conclude that its proposals as currently
drafted are flawed. Restricting the ban on inducements to independent
advisers will be unworkable, since advisers will simply take steps
to avoid being classified as independent. A more consistent approach
to consumer advice is needed to ensure that consumers are adequately
protected. One model for this is the approach adopted by the FSA
in its Retail Distribution Review, which deals with the status
and remuneration of advisers generally, and prohibits all payments
in the form of commission.[125]
In our view, this would be preferable. (para 72)
97. We acknowledge the need to ensure adherence
to good standards of corporate governance, but the Commission's
proposed approach is overly prescriptive. We do not believe that
the MiFID II package is the appropriate mechanism by which to
seek to achieve the Commission's goals. If these provisions are
retained, then it is essential that greater flexibility is provided
so as to take account of the diverse size, capacity and business
models of the range of market participants. (para 76)
THE ROLE OF ESMA AND THE POWER TO INTERVENE
98. We conclude that ESMA has a vital role to
play in coordinating regulation of financial markets across the
EU. However, whilst its rule-making powers are broadly accepted,
there is less consensus about the degree to which ESMA should
engage in direct regulation of the financial markets, as suggested
in the Commission's proposals for ESMA to take on product intervention
powers. There are also significant resource issues for such a
small organisation, and there is a strong likelihood that ESMA
will need to rely on leading national regulators, including the
FSA and its successors, to fulfil its tasks. We reiterate our
view that day-to-day supervision of financial institutions should
remain at a national level, and that an EU regulator should only
have the power to intervene in exceptional circumstances. (para 85)
125 Or "inducements" in the terminology used
in MiFID II. Back
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