Mr Arthur Docters van Leeuwen Chairman Committee of European Securities Regulators 4 April 2005

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1 Telephone: Local fax: Mr Arthur Docters van Leeuwen Chairman Committee of European Securities Regulators 4 April 2005 Our ref: Europe Dear Mr Docters van Leeuwen CESR's Draft Technical Advice on Possible Implementing Measures of the Directive 2004/39/EC on Markets in Financial Instruments Second Consultation paper We were grateful for the opportunity to take part in the MiFID Consumer Day on 22 March. It was a valuable initiative from our point of view and I hope that such processes will be embedded in CESR s method of working. Mr Demarigny suggested that it could be valuable to have a special meeting with consumer groups to discuss more fully how a dialogue between CESR and consumer groups should be structured. That seems to us a most valuable suggestion and we will set out in a subsequent letter some thoughts and ideas on how that dialogue could be structured, drawing on the experience of this Panel and also looking at the experience of the FINUSE committee established a year ago by DG Internal Market. Meanwhile, given the considerable time-pressures that you are under to produce your advice on MiFID, I thought that it would be useful to set out our views on the issues that you raised in the two papers discussed on the Consumer Day. The Consumer Panel's remit extends to retail consumers (including small businesses) only and our comments on the proposals are made in this context. There are two areas covered in the proposals which cause the Panel particular concern. The first relates to the scope of "investment advice". We have set out our views in detail in our paper of 20 January. We were and continue to be opposed to

2 any requirement that those who provide only generic (as opposed to specific) advice should require authorisation under MiFID. Our second concern relates to the types of financial product that retail consumers will be able to buy on an "execution only" basis. We acknowledge that this is a difficult area, but nevertheless we view the proposed split between complex and noncomplex products as an arbitrary one that does not adequately capture the significant features of a "complex product". We urge CESR to reconsider this proposal. Issues on Regulation of Markets under MiFID CESR/ Requirements for instruments to be admitted to trading on regulated markets We are content with the proposals that you have tabled, though we noted the comment by the Commission that there might be further work on bonds to reflect issues arising from the Parmalat collapse. 2.2 Content of market transparency and possible exemptions from that transparency We recognise the overall context of the directive within which you are working and have no objections to the proposals that you have tabled. We do however hope that these proposals will not lead to increased costs for private investors in markets which have operated without problems up to now. 2.3 Regulation of systematic internalisers To be frank, we find it very difficult to comment on the detail of the advice on this subject (eg why 1 billion euro free float rather than 2 billion), although we have no specific objection to the proposals as they stand. Issues on Regulation of Intermediaries under MiFID CESR/ Scope of the service of investment advice We set out our views more fully in our paper to you of 20 January. In brief, we share 2

3 the view that the regulation of advice given by an authorised person must cover generic as well as specific advice. However, where the person only gives generic advice, that should not trigger a requirement for authorisation. The Chairman of the afternoon session raised a question on this latter point when he asked how that would apply if a financial group established within its structure an entity which only gave generic advice but also had entities which gave specific advice. Our view is that one relevant factor is the relationship between the various entities and in particular whether there are in reality expectations and arrangements for people who have received generic advice from the first entity to be handed on to the other entities for specific advice. Our objective is to encourage the provision of genuine generic advice, not to open up avenues for commercial players to avoid their proper responsibilities for the whole range of advice that they give. There should be an effective means of exclusion or exemption from the regime for those providing only true generic advice. 2.2 High level principles of Article 19(1) of MiFID We agree with your proposals fully on loans and application of best execution to portfolio managers etc. 2.3 Information requirements Conflicts The discussion at the Consumer Day did not perhaps come to an absolutely definitive conclusion but we stress a number of points. There needs to be clear and effective communication with consumers at the appropriate and critical time about conflicts. Long and complicated disclosures at an early stage in a relationship should not be a reason for not giving specific information about a particular issue at a later stage. Use of the internet is an appropriate method for communicating with some consumers, but should not be relied upon as the only means. 3

4 2.3.2 Information on services and/or products and marketing. We would support the provision of clear and concise summaries of the key facts of products and services, but we also agree that retail consumers must also have the full details of the contractual relationship between the investment firm and themselves. Firms must not be allowed to attempt to reduce or remove the protections given to retail consumers under the Directive or more generally and we think that in addition to what was discussed at the Consumer Day, CESR should also consider building in an explicit reference to the obligations of firms under the Unfair Contract Terms Directive (Council Directive 93/13/eec). Our view is that the financial services sector pays relatively little heed to the letter of this Directive and practically none to the spirit. On timing and content, we share the general reservations expressed at the meeting about relaxations in this area. 2.4 Process driven protection Suitability test and appropriateness test We confess that we find the discussion of these two topics slightly surreal. We are concerned that if these proposals were adopted, they would provide loopholes through which some firms would attempt to escape their proper responsibilities to genuine clients. So if firms are unable to get the information that they need to understand their client s overall position, they should tell him that they cannot act for him until that is remedied. Non complex financial instruments This is not at all an easy area to deal with. It is an important one defining the boundaries of execution only business. The chain of argument that drives CESR to the conclusion that any product with derivatives embodied in it must be considered complex is superficially compelling but, as was pointed out in the meeting, it is undermined by the fact that UCITS can have derivatives embodied in them. In addition, from a retail consumer perspective 4

5 there could well be products which do not have derivatives embedded in them and yet are complex and should not be sold on an execution only basis. There are on the market in the UK products which offer exposure to the Stock Exchange but with a guarantee as to capital protection if the market falls. The terms can be clearly set out, though the product mechanism involves the use of complex derivatives. These can currently be sold on an execution only basis. We think that the CESR approach would prohibit this in future. If this is correct, we think that CESR needs a much more intellectually coherent and convincing case for such a step than it has presented up to now. We do very much recognise the pressures that CESR is under to produce its advice, but we are seriously worried about this subject as we do not wish to see existing consumer choice and freedom restricted by a definition that is unrealistic Best Execution Our general approach is that of the four key requirements set out in our paper about best execution, the first, the second and the fourth offer most protection to consumers and the scope for the provision of information to improve consumer protection is rather limited. We doubt that the vast majority of consumers would even read it, let alone draw useful conclusions from it. It could well get in the way of more important information. Disclosure of information on conflicts of interest We are absolutely clear that there must be the fullest and clearest disclosure of any arrangements with venues that involve incentives to select venues for reasons other than execution quality. Explicit consumer consent should be required on the basis of full and fair explanation of what is involved, if such arrangements are not to be outlawed in whole or in part. Risk Warnings on client instructions We agree with you Record keeping We agree with you. 5

6 Record of phone calls Whilst we see the case for permitting some small firms not to record telephone calls, the question arises (which was not discussed at the meeting) of what should be done instead. 2.6 Customer agreement. Please see our comments at above. Yours sincerely Ann Foster Chairman Financial Services Consumer Panel 6