BRITISH BANKERS ASSOCIATION

Transcription

1 BRITISH BANKERS ASSOCIATION Pinners Hall Old Broad Street London EC2N 1EX Tel: +44 (0) Fax: +44 (0) BBA response to Post-FSAP Expert Group reports 26 July 2004 The British Bankers Association is the principal banking association in the United Kingdom and represents over 250 UK banks and non-uk banks which are doing business in the UK because of the global importance of the UK s wholesale banking business based primarily in London. Many of those banks come from other EU member states. The BBA has taken a close interest in the work of the Expert Groups, particularly those relating to Banking and Securities on which a BBA Executive Director and BBA members served in a personal capacity. The BBA has also been very actively involved in the negotiations relating to all the major FSAP legislation affecting banking and securities and in the development of the Lamfalussy process. The BBA is also an active member of the European Banking Federation and many other members of the Expert Groups acting in a personal capacity are associated either directly or indirectly with other banking associations which are members of the EBF. We welcome the opportunity to respond to the 4 Expert Group reports. This response adopts the structure requested by the Commission in the Working Document which accompanied the 4 reports. We focus particularly on the content and proposals of the Banking and Securities Expert Groups but also draw on the other two Expert Groups from time to time, particularly where there are themes common to all 4 reports. (1) The General Ambitions and Vision of the Expert Groups The Degree of Financial Services Integration in Europe We recognize and agree with the overall description of the state of development of the different financial services markets in Europe. In summary: Europe has made significant progress towards integration of wholesale banking, cash fixed income products and OTC derivative products. Equity markets are undergoing structural change which is likely to lead to further integration and the FSAP legislation may also encourage further integration. Insurance and asset management, with the exception of UCITS products are not, in general, integrated and significant work is needed to evaluate the extent to which it is appropriate to improve integration, and how best to do it. BBA01#

2 There are significant practical, cultural and legal barriers to cross-border integration of retail markets across all sectors and significant question marks over the value of attempting such an integration except on a limited and targeted basis following careful evaluation of the benefits to be gained and the costs of such integration. The Vision for Further Development of the Single Market Overarching Themes We consider that there are five overarching priorities which are set out to a greater or lesser extent in each of the 4 reports. These are: Better Implementation and Enforcement This is best exemplified in paragraph 8 of the Securities EG report. We support what is said there, and the rationale given: The FSAP has prompted a significant overhaul of Community legislation affecting securities markets. The Group therefore believes that the main emphasis should now shift from introducing and agreeing legislation to implementation and enforcement. This should be coupled with a review of how existing legislation and new FSAP measures are working, with a view to identifying gaps and deficiencies or any areas where legislation could be reduced or removed. The aim should be to allow investors, issuers, market participants, regulator and supervisors to adapt to the new rules and make them work in practice. This breathing space will be particularly important in the ten new Member States, where ensuring that the acquis is fully functioning should remain a priority. All four of the reports support better implementation and enforcement. Self-Regulation and Other Non-legislative tools The EU should encourage self-regulation where it already exists and is working well. Where possible it should be extended. Self-regulation can either take the form of codes and guidance which set standards which are not enforced by the industry itself (but may, for example, be enforced by a regulator which has set more general principles underlying the code) and codes which are also monitored and enforced by the industry (for example, the UK s Banking Code which is enforced by the Banking Code Standards Board). The EU should also look at co-regulatory options whereby even when legislation exists there may be means by which regulators and an industry can work together to produce joint initiatives which serve both public policy and industry objectives. Other important tools include using competition law or market-driven approaches whereby economic policy goods are achieved through opening up a more competitive economic environment. Within the EU not all member states banking members are equally competitive. In some jurisdictions parts of the financial sector receive either direct or indirect state aid and there are issues as to how far this hinders a truly 2

3 competitive market. The EU Commission should take a more active stance in examining the extent to which state aid is being given in different jurisdictions. Where state aid is given illegally financial sector recipients of this are not subject to the same competitive pressures to deliver a commercial return on capital as their commercial competitors. This acts as a barrier to entry into the member states which have particularly large sectors of this type. There are other areas where the competition authorities might take a more proactive role such as the availability of customer data to new entrants to a member state market. The failure to agree an effective Takeover Directive leaves significant barriers to entry remaining. As a result there are practical difficulties for banks from other member state in acquiring banking businesses in a number of EU member states e.g. Italy, France and Germany. While the Takeover Directive has only recently been adopted it should be recognized that the need for more effective Takeover legislation remains important unfinished business in the EU. 1 Global Competitiveness of EU markets and the importance of Innovation We support the reports emphasis on the importance of the global competitiveness of EU markets which is most succinctly expressed in the Executive Summary to the Securities EG: Regulation must take account of its impact on Europe s international competitiveness, both by ensuring that European firms can access international financial markets in an environment that represents a level playing field, as well as by recognizing the needs of non-eu market participants carrying out business in Europe. The aim should be that Europe is the securities market of choice for issuers and investors worldwide. 2 We also agree with the Securities EG that: Innovation is an essential part of a vibrant financial services market and regulatory measures must not impede the innovative process. 3 We are concerned that some of the regulation emanating from CESR is overly detailed and intrusive and likely to harm innovation. Examples of this can be found in the CESR Investment Protection standards which CESR are proposing should be turned into MIFID 1 For support for these points see Banking EG sections 2.3 and 3.2, Securities EG section 2.5, Asset Management EG section 2.1.9, Insurance EG section Similar views are expressed in the other reports:banking EG paras. 28 to 33, Asset Management EG paras. 7 and 51, Insurance EG section Para. 36 3

4 Level 2 legislation. Among the provisions which could impede innovation are the suitability provisions. Unnecessary elements within these requirements could negatively impact both advised services and execution only services by imposing unnecessary additional costs on providers. In turn some providers are likely to cease to provide the services reducing consumer choice. Proper advice to consumers is important but the information requirements must genuinely benefit the consumer at a reasonable cost to the supplier of the services. Making the Lamfalussy arrangements work better We support the emphasis found in the reports on improving regulatory convergence through the Lamfalussy arrangements. We set out our views in more detail below. Better EU institutional regulation The Expert Group reports do not expressly mention the EU s Better Regulation Action Plan. There are, however, a range of important references to the need for better evidence gathering during the policy formulation process, the importance of regulatory impact assessment and cost/benefit analysis and the importance of better embedding consultation at both the EU level and the member state level. These are consistent with ideas found in the EU s Better Regulation Action Plan. The BBA supports the reports emphasis on evidence-based policy making. It is important that policy is informed by the realities of how business is conducted and what consumers and market participants want. Good quality research is needed and the use of forum groups and early consultation is extremely important. The BBA strongly supports suggestions to develop the use of impact assessment and cost/benefit analysis before a legislative proposal is made. We know that the Dutch Presidency has also emphasised this element. If EU policy and legislation is to be effectively targeted, robust but proportionate, and its implications fully appreciated by all concerned, then it is essential that good quality assessments of the likely benefit and impact of a policy change are made. We believe that it is also reasonable to expect this assessment to explain the main changes that would be required in each member state. This is an important aspect of the development of the policy and should be explained by policy makers. Change should primarily result when there is a clear need for it either to provide public goods or to enhance legislative or business infrastructure in a way which assists market participants. In our view the development of Lamfalussy has shown the benefits of wide consultation preceding, and during, the development of legislation and regulatory rules. This approach should also be encouraged in those member states where it is not yet used and it should be a key aspect of all EU policy making in the financial services sector going forward. 4

5 The Vision for Further Development of the Single Market Specific Priorities Within banking and securities it is evident that there are five major areas on which to focus over the next few years which should be prioritized. These are: 1. The new Capital Directive which will take two to three years to adopt and implement and which, it is clear, will continue to develop as the new Basel Framework develops. This will affect all significant banks and securities firms in Europe and require a substantial allocation of management time and financial resources. 2. Greater supervisory convergence within different sectors and across financial sectors. Most of this work should be carried out at Lamfalussy Level 3 but it is a significant undertaking and, therefore, less legislation should be developed in the sectors most affected by it. We comment in more detail on this below. The Capital Directive will be one of the drivers of greater convergence but there will be others such as implementation of the FSAP Directives - e.g. MIFID and the Prospectus Directive. 3. Clearing, settlement and payments work. We would envisage that much could be achieved without legislation. This is an important area where genuine improvements could improve cross-border access and drive settlement costs down to the benefit of market participants and, ultimately, member state economies and citizens. 4. Anti-money laundering legislation. This received less attention from the Expert Groups but in the light of anti-terrorist and financial crime concerns and the imminence of a Third Money Laundering Directive we consider that it is a priority to develop a Directive which is both effective and as business-friendly as possible in implementing the revised FATF 40 revised recommendations throughout the EU. A more risk based approach to anti-money laundering should be a priority, taking account also of the need for broad equivalence of implementation throughout the EU, and for an element of flexibility in achieving common obligations. 5. Corporate governance and company law. It is important to ensure that the European Commission retains an appropriate balance between the need to establish a common European framework and its stated intention of respecting Member States arrangements. The Expert Group reports are generally quiet on a vision for retail financial services. The Banking Expert Group report states: It is nevertheless felt that the full potential of integration, in particular in the field of cross-border retail activities still remains far from achieved. This may also have adverse consequences in relation to price and product competition. It must be 5

6 noted however that an increase in the number of products does not automatically result in a benefit for the consumer: the distribution channels and the level of consumer influence play a crucial role in more effective competition. The BBA firmly supports the development and delivery of a single market in financial services however an integrated market is characterised by open competition, it cannot be achieved by regulation alone. We strongly support the call for the Commission and other EU institutions to use all means and measures at its disposal, including those in the context of competition policy. A competitive financial services industry will naturally lead to the benefits of integration by providing consumers with a wide variety of innovative products at keener prices. Whilst there have been a few cross border mergers and acquisitions most consolidation within the retail banking market has occurred at national level. We would concur with the Banking Expert Group that some banks have shown a tendency to develop their crossborder activities via subsidiaries rather than branches. Whilst direct cross border provision of traditional banking remains relatively small in terms of overall banking activity, some banks are keen to develop this business. Internet banking is gaining wider public acceptance either as another distribution channel alongside branch and telephone banking or as the only distribution channel generally for specific products. Businesses and consumers should be able to select from a variety of providers. It is essential that banks are not precluded from developing any or all of these distribution channels. We support the call of the Expert Group that emphasis should be put on ensuring that Member State markets are indeed open to competitive entry. A level playing field for both domestic and cross border providers of financial services and new entrants is essential. Work needs to continue in relation to accounting standards. These need to be connected to the practical reality of the businesses to which they apply. International Accounting Standards, provided they are grounded in this reality, can greatly assist the development of pan-european business by providing a common basis for reading accounts of corporates from different member states. Although IAS will be adopted by 1 January 2005 further work will be needed on the detail of the standards and a longer term aim should be convergence with US GAAP and mutual recognition of other GAAPs as well. (2) The Effectiveness of the Current EU Legislative and Supervisory Framework The BBA supports the extension of the Lamfalussy procedure to the banking, insurance and UCITS sectors and considers this to be the right framework within which to develop financial services legislation and supervision for the foreseeable future. As is inevitable with a new procedure it is capable of improvement as experience of working with it develops. As the Inter-Institutional Monitoring Group reports have shown the Lamfalussy framework is proving to be a significant improvement on the previous legislative approach. 6

7 Considerable work needs to be done in relation to the development of Lamfalussy Level 3 (supervisory co-operation) and Level 4 (enforcement). The principal focus, to date, has been on Primary and Secondary EU legislation (Levels 1 and 2). We consider that over the next 4 to 5 years much of the focus of EU work should be on Level 3 and 4 of Lamfalussy. There is considerable scope for enhanced co-operation and common approaches without the need for new legislation. However, Level 3 work should be geared to achieving the objectives set out in the Securities Expert Group Report. Consequently the Level 3 committees should report to the Parliament, the Council and the Commission on the work which they are doing to achieve these objectives, and should fully involve market participants in their Level 3 work. The BBA considers that the Lamfalussy arrangements are organic, rather than static, and will develop over time as the EU institutions, the regulators and market participants work together to develop more effective ways of striking the right balance between regulatory oversight and encouragement of economic growth. (3) General Principles and Methodology for Prioritising further EU action We consider that it is important that the EU has clear objectives in developing its legislative and regulatory approach to the single market. The Securities EG sets out 12 principles which should, in our view, constitute the objectives to which the Council, the Parliament, the Commission, regulators and market participants should work. 4 Eight of these principles have already been endorsed by the EU as part of its endorsement of the original Lamfalussy Report. The BBA supports those principles. We agree with the Banking EG report that The focus needs to be on ensuring that fragmented market places are truly open to competitive forces. 5 We support the general emphasis on transparency in policy formulation for legislation, rules and supervisory practices. 6 With regard to which retail financial services is EU level legislative intervention needed to support cross-border activity? There are few products that lend themselves to true integration. Further integration efforts should be supported by a comprehensive study of the retail markets and a full impact assessment including a cost benefit analysis. We recommend use of the Forum Group concept, as demonstrated by the Forum Group for Mortgage Credit, to identify barriers, assess the impact of these barriers and make recommendations. Consideration should be given to the full range of regulatory tools available. In the UK financial services sector there are several positive examples of self-regulation. The Banking Code is acknowledged by consumer groups, Government and regulators as well as industry as providing consumer protection and transparency whilst not trammelling 4 See paras. 19 and 20 of the report 5 Para E.g. Banking EG report para. 15 7

8 market innovation and customer choice. We understand that the Commission s experience of self-regulation at an EU level has not been entirely positive. Perhaps the key is that self-regulation takes time to work. Our Banking Code was first written twelve years ago, and only in the last few years has it fully developed into a Code reviewed every two years by an Independent reviewer consulting consumer groups an others, and backed up by hard hitting compliance machinery with teeth. Our views are consistent with those of the Banking Expert Group as expressed in paragraph 17 of their report. Whilst we are not in principle opposed to legislation it should only be used when a barrier has been identified and when all other options to address the issue have been evaluated fully and rejected as non-workable. It is essential that where legislation is deemed to be necessary it must be entirely compatible with developing a single market in retail financial services. Deletion of the internal market clause in the Unfair Commercial Practices Directive is both unfortunate and could set a dangerous precedent. We agree that it is important to continue to monitor the extent to which integration is occurring in different jurisdictions and across the EU as a whole. We are therefore supportive of the development of a methodology for setting appropriate indicators of integration. We also support the recommendation of the Securities EG that FSAP measures are monitored in order to determine their effect on integration. 7 and the recommendation of the Banking EG that the EU institutions should conduct a public impact study on the results of the FSAP within 4 years after its completion (i.e. in 2009) and publish policy conclusions. 8 Consistent with this we also believe that a Post Implementation Review should be undertaken within four years of implementation of any additional legislation. In the view of the BBA s members continuing integration work on prudential supervision and clearing, settlement and payments are a priority for banking and securities but otherwise the main priority areas for further integration are in the asset management and insurance sector. 4. Improving Supervisory Convergence and Enforcement Supervisory Convergence The BBA agrees with the Banking and Securities EG reports that supervisory convergence is a priority for large cross-border entities. It is important, however, that convergence is carefully thought through. Two important considerations are: That great care is taken to ensure the right balance between harmonised rules and flexibility. In general, with some exceptions, harmonised rules usually work best if they are high level. Much can be achieved by developing convergent practices through the more flexible Level 3 which allows scope for achieving equivalence 7 Para Banking EG report: Recommendations for Action p.22 8

9 without absolute uniformity. Taking great care about the type of legislative instrument chosen. The EU Parliament and the Inter-Institutional Monitoring Group have favoured the more frequent use of Regulations because of their speed of implementation and the limited scope for member states to deviate from their text. However, the down side of regulation is that they are inflexible and if they are too detailed they can do considerable damage to business models. We generally prefer careful case by case consideration of the form of legal instrument chosen and no particular bias in favour of the use of Regulations or Directives. A key element in convergence is in the area of prudential capital. We agree with the Banking EG report: Prudential oversight over institutions business and competition are the most encompassing issues at stake. Targeted measures in these areas are desirable. They have the potential to increase domestic and cross-border efficiency and are a concrete step towards further integration. Prudential supervision and competition have increasingly a cross-sector dimension, as similar services may be provided by different types of institutions. 9 In view of this we see the creation of CEBS and CIOPS, in addition to CESR, as a significant step towards developing more convergence. This will be a long term process, however, with much of the work being closely related to the passage of the Capital Directive and Solvency 2 during the next few years. The extension of Lamfalussy to banking and insurance gives the opportunity for much of the technical detail of these important Directives to be capable of change through comitology. We support the Banking EG report s call for the Capital Directive to combine flexibility with technical details; to reflect the risks of very different types of institutions; and to reconcile national particularities with a level playing field in Europe s financial sector and beyond. 10 We are glad to see that the Proposal published by the Commission appears to seek to deliver this outcome. We envisage that the three Level 3 committees (i.e. CEBS, CESR and CIOPS) will play an important role in the development of common prudential approaches. We welcome the creation of regular routine meetings ( 3L3 meetings ) between high level representatives of these committees with a view to dialogue and convergence of practice. We also welcome their commitment to an open dialogue with the financial services industry and its users. We also welcome the increased dialogue between European regulators and US regulators exemplified most recently by the announcement of a more common approach to regulatory issues by CESR and the SEC. This approach is consistent 9 Para Para. 22 9

10 with a number of messages from the reports about the need to take into account regulation in other major global financial markets. We consider that the European regulators and the European institutions should do more to encourage consultation processes in international regulatory bodies. While the Basel Committee has consulted widely in relation to the Basel Accord IOSCO, the international securities regulators organisation, has frequently published proposals without consulting the industry. The Financial Stability Forum and the Joint Forum of Banking, Insurance and Securities regulators are two bodies within which European regulators could raise the issue of better international consultation practices. There have also been difficulties with the approach the IASB has adopted towards industry participants affected by their standards particularly IAS 32 and 39. This said, the IASB seems now to recognize that there have been shortcomings in its consultative process and has already commenced a substantial review of its consultative arrangements. In the banking, securities, asset management and insurance sectors we advocate the development of a lead supervisor approach. This should apply to both prudential and conduct of business regulation. We consider that increased co-operation among EU regulators will build greater confidence in each other and that such an approach will be the best way of dealing with institutions with significant presences in more than one member state. Consequently we support section of the Banking EG report. We also agree with both the Banking and Securities EG reports that: Increased supervisory disclosure will be important: national regulators should publish their rules, together with a regular and detailed commentary on implementation activity, including the reasons underlying their approach. 11 Enforcement We agree that the Commission needs to place more emphasis on enforcing existing EU laws and should, consequently allocate more of its budget in order to achieve this. Given that the existing enforcement framework is relatively slow and expensive to operate, however, we advocate more up front attention to the way in which member states implement Directives and to existing barriers to the legitimate exploitation of EU law freedoms in the financial services area. For the reasons given above, however, we do not advocate an assumption that using Regulations will help standardise implementation. Regulations may be capable of being 11 Banking EG report para

11 used more frequently but it will still be important to give equal opportunities to the Directive as an EU legislative instrument. (5) Views on Priorities Set by Expert Groups Top Priorities As mentioned at the start of this response we see the major priority projects for the EU in the banking and securities sectors as being: Risk Based Capital Directive (legislation coupled with CEBS and banking industry working closely together at Levels 2 and 3). Clearing, settlement and payments (DG Competition, industry/market solutions. A risk based approach to anti-money laundering (legislation coupled with close work with supervisors and industry); Supervisory convergence and developing the Lamfalussy process (principally CESR, CEBS and CIOPS working closely with industry; IIMG to monitor progress and recommend). The Corporate Governance Action Plan and striking the right balance within it. (Commission and others, as necessary, including industry). The 5 overarching priorities described above (EU institutions for better regulation at EU level, Commission and member states with industry input for better implementation and enforcement, Commission, supervisors and industry for alternatives to legislation, Commission, Level 2 and 3 Committees and industry with IIMG for improving Lamfalussy, Commission, member states, regulator and industry for recognizing global requirements and the need to foster innovation.) The application of International Accounting Standards by listed companies in Europe by 1 January 2005 and associated international accounting issues in the period beyond that date. All of these are identified by the reports as priorities except money laundering. It seems obvious to us that this is an extremely important issue for the next few years in view of the attention which FATF has given to financial crime recently and in view of concerns internationally about safety and security from terrorist attack and international crime. We would submit that although anti-money laundering legislation applies to a very wide range of institutions it has its most significant impact on financial services institutions and should be seen as an integral part of the Post-FSAP agenda. 11

12 Important Issues which are not Top Priorities Retail legislation We agree totally with the Banking Expert Group that any barriers should be addressed in the medium term and would stress the need to allow adequate time for consultation. We consider the value chain approach promulgated by the banking group to be very useful. Consumer confidence is essential and consumers natural tendency will be to turn to a retail financial services provider with which they are familiar. This raises the important issue of harmonisation. Minimum harmonisation allows Member States to introduce, or maintain, more stringent requirements by means of their national legislation and acts as a deterrent to providers of retail financial services and a major obstacle to further integration. On the other hand full harmonisation would lead to confusion for consumers and significant changes in national markets. We support full harmonisation of those retail banking elements that are essential to foster cross-border competition as the most effective way of creating an internal market for retail banking services. Such an approach would enhance consumer confidence whilst acting as stimulus to providers and not eroding customer choice. If the benefits of competition and innovation are to be maximised the Commission should ensure that general good provisions are not being used to protect vested national interests in areas such as consumer/investor protection legislation. Less Important Issues where useful work might nonetheless be done More legal underpinning for netting regimes. Improving the legal underpinning for securitisation. Issues where we are less inclined to support the Expert Groups Taxation where it may be possible to develop short, targeted measures relating to taxation e.g. possibly in relation the different VAT treatment of intra-group transfers we would be supportive of action. However, while we recognise the difficulties which taxation regimes produce for pan-european banking and securities business we do not believe that there will be an easy solution to greater taxation discrepancies across the EU and consider that it is inappropriate to expend significant energy at this point in time on significant tax-related legislation. We are not supportive of EU legislation in relation to credit rating agencies. (No EG proposed this - but we are aware that others, such as the European Parliament have considered this.) We consider that the role of credit rating agencies is frequently misunderstood and there is a significant danger that any legislation would do more harm than good and might undermine the usefulness of credit ratings as a basis for many commercial decisions within the financial markets. 12

13 Any discussions about the possible regulation of credit rating agencies need to be conducted globally in international for a such as the Financial Stability Forum, the Joint Forum, IOSCO and the BIS. These discussions should be shared with the global financial services community who should be given an opportunity to comment before any regulatory approach is finalised. (6) BBA divergences from the Reports These have been identified elsewhere in this response and are: Much more priority needed for a risk-based approach to anti-money laundering. Particular emphasis on the advantages of self-regulation. We are more sceptical about the practical prospects for taxation legislation. We do not support legislation for rating agencies but agree that any regulation of rating agencies must be developed through international dialogue with non-eu regulators. (7) Contact Details We trust that these comments are constructive. We would be happy to speak with you further about them. If you wish to do so please contact me on or Michael McKee on Yours Sincerely Ian Mullen Chief Executive Officer 13