rose to move, That the order laid before the House on 18 December 2006 be approved.
The noble Lord said: My Lords, I shall speak to the three other instruments before us as well. They implement the EU’s markets in financial instruments directive. I hope that the House will tolerate my referring to it as MiFID for the rest of my speech.
MiFID is a cornerstone of the EU’s financial services action plan. It regulates the buying and selling of shares, bond derivatives and other financial instruments. Through a mixture of competition between intermediaries and markets and core investor protection rules, MiFID seeks to increase the depth and liquidity of Europe’s financial markets.
This is a directive on which much ink has been spilled. Under lurid headlines such as “Day of the Triffids” and “EU’s Monster of Madness”, many articles suggested that the directive is an example of inflexible, overburdensome regulation—regulation that will erode London’s international competitiveness. I contend that that is not the case. I believe that MiFID demonstrates the value of engaging with Europe on financial services issues. Most of Europe’s major financial services firms have a presence in London, and many London-based firms do business across Europe. In these circumstances, it is vital to our interests to have an effective regime for cross-border business in Europe.
MiFID replaces an existing directive—the investment services directive. The ISD does not provide an effective basis for investment services and activities in the European Community in the 21st century. It subjects firms doing cross-border business to multiple regulatory regimes and allows member states to retain anti-competitive arrangements for share trading.
The Commission was therefore right to seek to replace the ISD. MiFID simplifies the regulatory regimes applying to cross-border business. It opens up share trading in all member states to competition, and we are already seeing benefits from this change; new schemes are proposed such as Project Turquoise, a multilateral trading facility launched by investment banks that will be based in London.
The controversy over the directive has in large part been focused on its investor protection provisions and its transparency regime for share trading. As Commissioner McCreevy has made clear, developments in these areas were essential to make progress on the passport and competition in securities trading. Member states wanted reassurance that market opening would be balanced by effective protection for investors.
The Commission has sought to create an investor protection regime that is flexible and proportionate. In several areas, the directive’s investor protection rules are less extensive than those that they will replace in the UK. They also afford, as currently in the UK, different levels of protection to different categories of investor. The highest level of protection is reserved for retail investors. The directive also allows member states to retain additional protections where those can be justified against strict criteria. This process was backed by the UK and we will be notifying the Commission that we are retaining a small number of national rules.
The transparency regime is in the first instance limited to the equity market and the Commission has said that it will be alert to any signs that the changes are having unintended consequences. A review has recently started to consider the extension of the requirements to other markets. The Commission has emphasised that the review is seeking evidence of market failures, and we will work closely with the FSA, firms and the Commission.
There will be a cost in adjusting to the regulatory regime under the directive. The FSA has put this cost at between £750 million and £1 billion in the United Kingdom. It has also suggested that the directive might bring direct benefits of £200 million a year and indirect benefits of a further £240 million a year.
I turn to the implementation of the directive in the United Kingdom. Responsibility is split between the Treasury and the Financial Services Authority. Given the structure of financial services regulation in the UK, the FSA will undertake the greater part of the implementation through changes to its handbook. Given the split of responsibilities, we have worked very closely with the FSA on implementation to ensure that the whole hangs together. In addition to formal public consultation, we and the FSA have, since 2005, had meetings with the main trade associations approximately every six weeks, in addition to a host of other meetings with trade associations and firms. Both we and the FSA have tried substantially to mirror the language in the directive to avoid overimplementation.
The legislation that we are discussing can be split into two parts. The regulated activities order and the exemption amendment order deal with the scope of the implementation of the directive. The main implementing regulations and the Uncertificated Securities (Amendment) Regulations deal with other aspects of the implementation of the directive.
In respect of the scope of UK regulation, we had extensive discussions on the best approach to revisions to the regulated activities order. The order implements the scope of several directives but largely using language developed domestically rather than taken from directives. We considered integrating language taken from the directive into the substantive articles of the order. However, much in the current regulatory regime, including fees, hangs off the order’s current structure. We therefore decided to opt for an approach that keeps the current structure largely intact to minimise the disruption for firms.
Within this minimalist approach, the amendments to the order do three main things: they indicate more clearly where exclusions from UK regulation can be over-ridden by MiFID; they introduce a new activity of operating a multilateral trading facility, or MTF; and they expand the coverage of financial instruments caught by regulation.
MTFs are already regulated in the UK by virtue of Article 25 of the regulated activities order, which covers arranging deals in investments. However, the activity was included in MiFID because of previous arguments between member states about whether this activity was caught by European regulation. We therefore felt, and industry largely agreed, that the clarity in MiFID should be copied across to domestic legislation.
MiFID covers a slightly wider range of derivatives than are currently caught under UK regulation. In particular, it covers a wider range of options, principally physically settled options on commodities, and a wider range of credit derivatives. Changes are therefore needed to the scope of derivatives caught by the articles of the RAO dealing with options, futures and contracts for difference.
Some concern has been expressed that the implementation of the directive might bring foreign exchange forwards into the scope of the RAO. We have been in contact with the Foreign Exchange Joint Standing Committee. Our view is that MiFID does not alter the current test for determining whether such instruments are inside or outside the regulated activities order.
The main implementing regulations cover a wide variety of issues in just over 30 pages of legislation, but, despite the length, they do not fundamentally remake the UK’s regulatory regime under FSMA. They essentially amplify existing requirements.
The issues that I have highlighted in this contribution illustrate two broad points: the efforts that we are making to implement this in a practical and proportionate manner; and the fact that the directive is more liberalising and flexible than it is often given credit for in the UK. Creating a truly integrated market for financial services in Europe depends on more than legislation, but legislation is necessary to provide a framework to facilitate integration by breaking down national barriers. MiFID breaks down barriers and promotes competition. Accordingly, I commend the order to the House. I beg to move.
Moved, That the order laid before the House on 18 December 2006 be approved. Fifth Report from the Statutory Instruments Committee and Sixth Report from the Merits Committee.—(Lord Davies of Oldham.)
My Lords, I am grateful to the noble Lord, Lord Davies of Oldham, for his comprehensive introduction to the orders before us this evening. I wish that I could give such a warm welcome to the orders themselves.
I expect that all those years ago in Lisbon the Government thought that going along with the EU Council as good Europeans was a good idea when they approved the financial services action plan. It seemed like a good idea to create a single European market in financial services, as that would provide wider and deeper capital markets, which would in turn benefit businesses and individuals with better-value sources of finance. But that terrific idea has turned into a monster comprising 17 directives at a cost to the UK of anything up to £24 billion over the next three years to 2010—the magical date for the implementation of the Lisbon agenda. The cost to the whole of the EU will be around three times that figure.
The UK has easily the most successful and sophisticated financial market in the EU. From a consumer protection perspective, it is hard to see why the cost bears so heavily on the UK. That cost will not help the UK to remain one of the two big players on the global financial stage. The FSAP is focused on intra-European issues, which may be fine for most of Europe’s financial markets, but the only real global player in the EU is London and the FSAP does nothing to help London to succeed in global financial markets.
The financial services action plan may well go down in the financial history of this country, if not the whole of Europe, as a costly mistake, but we are not here to debate the FSAP. We are here to concentrate on MiFID, as we are allowed to call the directive this evening, which is being implemented by the orders before us and some other negative instruments.
It is perhaps no surprise that our general view is not quite on all fours with that expounded by the Minister. The most that we can say is that these orders make the best of a bad job. The history of the passage of MiFID through Europe is a lesson in itself. The original requirements as contained in a second investment services directive were deregulatory, but they were defeated by an unholy alliance of France, Italy and Germany protecting their own investment exchanges. An ambush in ECOFIN in 2003 with an inexperienced Treasury Minister representing the UK resulted in the pass being sold. How often have we heard of that toxic combination—three countries at the heart of the European project protecting powerful vested interests at home up against a UK that did not have its full firing power in action? Perhaps even more appalling is that the final formal adoption of MiFID took place in 2004 at an Agriculture and Fisheries Council, which could not pretend a competence in the extraordinarily complex issues lying behind the directive.
The Minister who let us down at ECOFIN, who is no longer in Parliament, said at the end of the meeting that the result was,
“misguided and profoundly anti-competitive”.
At the same stage, Sir Callum McCarthy, chairman of the FSA, called it a,
“bad result for Europe and an unattractive result for the UK”.
In practice, some of the worst aspects of that directive have been mitigated through the subsequent processes in the European Parliament and by the Committee of European Securities Regulators, but this end result is not the finest hour for Europe and it is certainly not the finest hour for the UK’s financial services industry. The processes of European Union rule-making leave much to be desired, but our financial services industry has demonstrated its qualities of pragmatism and adaptability. The industry has concentrated on working with the Government and the FSA on practical implementation approaches that minimise any potential harm from MiFID. I acknowledge that the Treasury and the FSA have consulted extensively and have made changes in response. The views that we have received from many different parts of our financial services industry have been unanimous on the constructive way in which the Treasury and the FSA have approached their tasks. But let us not pretend that the financial services industry was doing any more than making the best of a bad job.
We can see how bad a job is involved by looking at the costs and benefits. Even the regulatory impact assessment concluded at paragraph 33 that,
“the one-off cost of implementation significantly exceeds the expected ongoing benefits”.
There are very wide estimates of costs and benefits contained in the RIA—the Minister cited some figures this evening—but the FSA calculates implementation costs in the range of £0.9 billion to £1.2 billion with ongoing costs of £100 million. The direct benefits are said to be around £200 million per annum. No business in this country would contemplate an investment on the basis of those metrics. Many of the costs bear disproportionately on the smaller end of the industry, such as independent financial advisers, who believe that the costs will not produce any tangible benefits for consumers or for the firms concerned. One of the problems is that many of the costs remain unclear because the precise nature of implementation remains unclear—an example here is the nature and scope of investment managers’ transaction reporting obligations. MiFID is yet another example of European regulatory burdens being imposed by a Government who have not put the UK’s interests first.
The Government are desperately keen to get this order through this week so that the FSA can issue yet more rules within the deadline of 31 January for transposing the directive, but I hope that the Minister will explain to the House where we sit in the context of other EU countries. I have been told that the only other country in the EU that is ready to transpose the directive by 31 January is Bulgaria, but I expect that that is common title-tattle. When will France be transposing the directive? What about Germany, Italy, Spain and the other countries that claim some significance for their financial services industries?
I should also mention the status of cross-border business. I am sure that the Minister has read the consultation documents from the Committee of European Securities Regulators on the implementation of MiFID. Regulators always come in for their fair share of criticism, but committees of regulators who are not accountable to anyone are even worse. But in this case CESR has produced some good analysis of the passport proposals. Its report published last month shows the very real difficulties that exist under the MiFID proposals for home and host regulators. The MiFID proposals envisage that a host regulator regulates “conduct of business” requirements of a branch, while the home regulator concentrates on “organisational and control matters”. As the Minister will know, such a distinction is not one that exists in a pure form in the real world and hence it requires a very high degree of co-operation between the various regulators to ensure that there is a seamless approach to regulation.
Let us take the example of a branch of a company based in country A that operates in country B but also trades, without having a branch, with the citizens of country C. The various regulators will have to make sure not only that country A and country B regulators do not overlap with each other or leave regulatory gaps but also that the activities in country C are covered, presumably by the regulator of country A, since country B’s regulators will have no locus. This is not about administrative protocols; at heart, it is an issue of consumer protection.
Is the Minister happy that the access to comparable consumer redress arrangements will exist throughout Europe before firms start to trade throughout Europe on the basis of MiFID? We are rightly proud of our consumer arrangements for complaints and compensation. Can the Minister assure the House that if a Polish financial services business, for example, has a branch in Denmark through which it trades with UK consumers, our consumers will have redress arrangements comparable to those that exist for wholly UK business? If the Minister cannot answer that question strongly in the affirmative, will he explain on what basis the Government consider it appropriate that these orders should be approved?
I understand that CESR is still issuing consultation papers on various issues, which means that some issues will be resolved after the FSA has issued its rules. This in turn means that there remains significant uncertainty for UK firms that want to proceed with detailed implementation so as to be ready for the November 2007 implementation date. Will the Minister say something about those remaining issues and how the Government expect the FSA to deal with the possibility that the goalposts will be moved before we reach implementation?
Lastly, the Minister will be aware that the scale of MiFID implementation will stretch the resources of all financial services firms, both big and small, not only for the rest of this year but for some time to come. There simply is not the capacity to cope with any more regulatory requirements other than those that are absolutely essential. Will the Minister confirm that the Treasury and the FSA are fully aware of this and committed to giving the industry a proper breathing space to absorb MiFID, and that, if necessary, they will stand up to Europe on further regulatory burdens in this area?
My Lords, I begin by thanking the Minister for the clear way in which he introduced the regulations. The importance of the regulations stems from the importance of the financial services sector in London and the rest of the UK. The industry has grown much quicker over the past 10 years than even many of those in it would have expected—and it continues to grow today.
While I agree with the noble Baroness, Lady Noakes, that one great success of London has been its ability to be seen as a global player and that much of the growth in business within London has stemmed from transactions outside the EU, it remains the case that the EU is a potentially large source of further growth for the financial services sector in London. Therefore, the financial services action plan serves and will serve to benefit London arguably more than any of its competitors in the EU because it has the strength and ability to compete to a greater extent than many of its competitors in the EU.
However, I agree with the noble Baroness’s critique in another respect, which has some relevance to the future activities of the Government. I refer to the way in which the Government dealt with the negotiations and their failure in ECOFIN adequately to represent our best interests. One of the least attractive features of the Chancellor’s performance of his job has been the contempt with which he has dealt with European debate and discussions, his unwillingness ever to attend any of the relevant meetings and, when he has attended, his extreme enthusiasm for leaving halfway through—very often with only a very junior Minister in attendance. I hope that when his successor takes up his job in the summer he will give a suitably greater importance to the work of ECOFIN and the other EU institutions with regard to financial affairs. One abiding lesson of any round of negotiations—and certainly one that I was taught as a young man in politics—is that you have to attend all meetings and stay to the end. That is a lesson that I am sure that the Chancellor follows with internal Labour Party meetings; it is a pity that he has not followed it with regard to EU meetings.
When one is looking at detailed regulations such as these it is very tempting to consider a small number of issues with complete and total erudition and then to look the Minister hard in the face and ask him if he is satisfied with them. I was very tempted to do that in this case, in respect of the crucial issue of systematic internalisers. I wanted to ask him whether he was satisfied that the costs envisaged in implementing the new systematic internalisers were appropriate in all circumstances. However, I felt that as he was relatively new to his job such a question would be unfair—so I will not ask it.
The key issue around the regulations, which the noble Baroness raised, relates to the burden and cost. From reading the RAO about the costs, it is obvious that it has been much easier to make an estimate of the costs than it has of the benefits. When I see that the benefits are thought to be in a range of nought to £6.6 billion and that probably it will be £240 million as a second-order benefit, I have severe misgivings about any aspect of these figures whatever. But I want to correct the noble Baroness, if I heard her correctly. I think that she said, in paragraph 33, that the one-off cost of implementation significantly exceeded the expected ongoing benefits, whereas what it says is that,
“the one-off cost of implementation significantly exceeds the expected on-going costs”.
In other words, it will cost a heck of a lot to get the new systems up and running. There will be costs thereafter but, on an annual basis, it is very much less than the start-up costs. That certainly seems a logical situation, given that the costs relate largely to new systems and training.
While it is difficult to establish this area of costs at this point, it is the key issue that the regulations raise, given that the underlying basis of the regulations was set out in the directive and that we are not addressing the directive. In drawing up these regulations, are the Government satisfied that they have kept the gold-plating tendencies of the Treasury at bay? Equally, are they satisfied with regard to the FSA handbook that the way in which the directive is being implemented minimises the regulatory burden rather than gold-plates it? Can the Minister confirm whether the timetable for revisions to the FSA handbook, which is due to be produced by the end of the month, will be met?
I take the noble Baroness’s point that we may be ahead of other member states in implementing this directive—but I thought that as a general principle we were in favour of meeting our obligations and when other people do not meet theirs we point it out to them as forcefully as we can.
There is inevitably a lot of speculation about how these regulations will work in practice, whether they will need amending and whether they have been implemented correctly. If there is any sector of the UK economy which is capable of making sure that any set of regulations works to its advantage, I am pretty confident that it is the City of London. With that thought in mind, I am happy to support the regulations.
My Lords, I am grateful to the noble Baroness and to the noble Lord for speaking in the debate. The indulgence which the noble Lord, Lord Newby, extended to me was quite unnecessary and even ill placed. There was never a hope that I would get the same indulgence from the noble Baroness, Lady Noakes. The noble Lord might as well have been as critical as he wished because I was certainly going to be tested on my defence of the regulations by the noble Baroness. I thank her through gritted teeth for her contribution.
I heard what the noble Baroness said about our recent history on Europe and the development of MiFID. Her interpretation of history reflected a general party position which is somewhat distant from things European. Some members of her party still have reservations about progress towards a single market, of which this measure is a significant contribution. Her interpretation of recent history is in sharp contrast to that of the noble Lord, Lord Newby. His party thinks very differently about the benefits of Europe. Between the Scylla of being hostile to Europe and the Charybdis of being over enamoured of Europe the Government pursue a steady course between two such dangers and emerge into the safety of what we propose on the implementation of MiFID.
I hear what the noble Baroness says. She is absolutely right that we anticipate only relatively minor players being involved, if I can describe Bulgaria and Romania as minor players in financial markets. We expect them to sign up on the same date as we do. The noble Baroness is right that there are indications that France, Germany, Italy and Spain may sign up a little later in the year. Is that a disadvantage to London and the United Kingdom? I think not. We will be able to take advantage of the already greatly advanced dominant position which London enjoys in the capital markets of Europe. We will be able to exploit that situation. However, I recognise that it is entirely right that we should give satisfactory assurances on the queries which the noble Baroness raised on some of these issues.
On the timing issue, as the noble Lord, Lord Newby, said, it does the reputation of this country nothing but good that we should seek to sign up to the implementation of the directive on the designated date. It will also give a very clear indication and steer to all British firms on what adjustments have to be made. We have been in extensive consultation with them. I hear what the noble Baroness says—that there are reservations about certain parts of the directive. However, she will recognise that we have been in substantial consultation with the industry in the lead-up to this position. We can see no advantage—we have not been lobbied intensively by the industry as a whole—in being tardy in signing up to the directive. However, the industry has sought assurances on certain aspects of the operation of the directive.
The noble Baroness put forward the major premise that the Government had not driven a hard enough bargain in Europe during the negotiations. I put aside the rather trivial point about the fact that a meeting of agriculture Ministers signed up to the measure. That is true but it was merely a question of procedure. The agriculture Ministers had a very clear note from the Treasury explaining exactly what the British position and that of the rest of Europe was. It was merely the sanctioning day. I do not think that anything can be read into the fact that the final signing of the directive took place at an agriculture council meeting. However, I should emphasise what the directive does and what we achieved in our negotiating position. We have achieved an improved passporting regime and effective competition between execution venues. We have aided the liberalisation of the means of trade and transaction reporting and advanced principles based on implementing the measures. Behind all this is the great strength of London and the United Kingdom in this area, which we brought to bear in the negotiations.
I recognise that the noble Baroness expressed anxieties. She asked whether the cost-benefit analysis stood up. At this stage, certain aspects of cost-benefit analysis are open to challenge. That goes without saying. That applies to the noble Baroness’s figures even more than to mine. I scarcely recognise the figure of £24 billion of costs that she produced.
My Lords, I am grateful to the noble Baroness for clarifying that issue. I had forgotten that we had ranged over such an extensive history and had made such a projection forward to 2010 that I had to adjust my figures as I was concentrating on the orders before us. The House will forgive me if I made that mistake.
The noble Baroness asked about security for investors. This anxiety about the small independent financial adviser is ill placed. If the small independent financial advisers are not covered by this directive, and although anxieties might be expressed about what might develop in the future, we will cross that bridge when we come to it. They are not covered by the directive. I therefore do not think that I have anything in particular to say about that.
There was a question about whether we succeeded in keeping gold-plating at bay. The Treasury and the FSA are making only very limited additions to the directive where there is a very clear-cut case of advantage to the United Kingdom citizen. The FSA rules will be produced this week and the truth of what I am saying can be examined then by noble Lords opposite. We are conscious that we do not want to add to this directive save in so far as we have clear instances where we can give benefits to the people of the United Kingdom in the extra security which we already have in place and which we have signalled to the Commission we intend to sustain. That is a long way from selling the British people short on the development of this directive. As the noble Baroness was kind enough to recognise, the directive forms a key part of the FSAP and represents a step towards the objective of an integrated European capital market. It will reduce the cost of capital and facilitate enhanced growth and employment. Why should we not welcome the development of this initiative, knowing full well that we have a financial industry that is best placed to take advantage of these circumstances?
MiFID is also an important test of the new Lamfalussy approach to European legislation. The efforts that the CESR, the Commission and national authorities have put into delivering the necessary clarity at level 3 are to be applauded, as is the work of the trade associations in producing their own guidance, for example, via MiFID Connect.
The four pieces of legislation that we are considering today represent the backbone of the Treasury’s responsibility as regards transposition, with the majority of the work being done by the FSA by its rules. That is why the noble Lord, Lord Newby, is right to emphasise how important it is to see how the FSA intends to square up to its obligations, which will become clear by the end of this month.
Significant attention has been given to the cost of implementation. We have done our bit to help minimise this by working closely with firms throughout the process. The noble Baroness was kind enough to recognise that substantial consultation has gone on in the development of this work, limiting the changes to the current structure and introducing saving transitionals to ease the move from ISD to MiFID. There is a cost to this transition; that goes without saying. As I have indicated by the figures that I quoted in my opening statement, the costs are not insubstantial. Nevertheless, the benefits are not insubstantial either, and we are well placed to reap those benefits.
The legislation and the MiFID regime are an important step towards a truly integrated market for financial services in Europe. MiFID breaks down barriers and promotes competition. As the House will recognise, we in this country have been praised for the competitiveness and openness of our financial services and the market that we operate. We take pride in that position, and we recognise that, worldwide, London has great pre-eminence in these terms. There is absolutely nothing for us to fear from MiFID; rather there are opportunities that we should seize.
On Question, Motion agreed to.