«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»
3.70 As regards the UK’s approach to its own rules in relation to EU regulation, there were also a number of criticisms in submitted evidence which focused on the use of flexibility, guidance, ‘front-running’83 and ‘gold-plating’.84 Evidence from APFA and the CBI emphasised that UK regulators have not provided UK firms and individuals with the same flexibility that EU regulators have afforded firms in other Member States.85 Several stakeholders also encouraged the UK authorities to take a more active role in providing guidance in the interpretation of EU rules, and noted that UK regulators have publicly disagreed with the Commission, and that it has been useful for firms to have guidance from UK regulators on EU rules in order to help determine how to comply with them.86
3.71 Although some evidence referred to instances in which ‘front-running’ by the UK had effectively helped to shape EU-level regulation, there were many references to risks and potential disadvantages.87 Evidence highlighted the costs and uncertainty it can cause for firms during the period where UK rules are in place but EU legislation is still being developed, as well as the need to use political capital to defend an existing UK BBA, p13 and RBS, p5, submissions of evidence.
CBI, p12 and CLLS, p19, submissions of evidence.
APFA, p3, Sharon Bowles MEP, p19, HSBC, p8 and the IRSG, p16, submissions of evidence.
Proposals by the European Commission based on the recommendations from the Report of the European Commission’s High-level Expert Group on Bank Structural Reform (the ‘Liikanen report’).
‘Front-running’ occurs when domestic legislation is proposed or enacted prior to the proposal or enactment of EU legislation.
‘Gold-plating’ is the layering by national authorities of additional requirements on top of those specified in EU legislation or the use of national discretions to apply additional requirements beyond the original requirements, i.e. over-implementation.
CBI, p12 and APFA, pp2-3, submissions of evidence.
BVCA, pp15-16 and CLLS, pp2 and 21, submissions of evidence.
The Law Societies on BRRD, p6; the IRSG on MiFID and MAD, p16; and BCCL on MiFID, IMD and PRIPs, p3, submissions of evidence.
56 Review of the Balance of Competences between the United Kingdom and the European Union:
The Single Market: Financial Services and the Free Movement of Capital approach.88 Several stakeholders, including the City of London Law Society Regulatory Law Committee (CLLS) and the Policy Network, also drew specific attention to the mixed impact of the UK’s development of its proposal for structural banking reforms following the recommendations of the Independent Commission on Banking (ICB).89
3.72 In addition, evidence drew attention to the potential weakening of UK standards if domestic legislation is overridden, where UK firms and practitioners are at a competitive disadvantage compared to those passporting in, or where consumers receive less protection than previously.90 The Treasury Select Committee has, however, noted the challenges faced by UK regulators in relation to potential front-running: ‘The FSA and its successor bodies will always be faced with difficult decisions over whether to proceed with UK specific legislation quickly, or wait until things have cleared at a European level’.91
3.73 Evidence from stakeholders also reflected concerns about ‘gold-plating’. Respondents emphasised the detrimental impact this can have in terms of causing confusion, undermining the original objective of the legislation, creating additional costs, reducing the competitiveness of UK firms, and working against the purpose of the Single Market.92 FCA SBPP, submission of evidence, p6, and BSA, submission of evidence, p2. BBA, submission of evidence, pp13-14, also refers to estimated costs to industry of the UK introducing bail-in on an earlier timeframe than the BRRD, as set out in the HMT, Banking Reform Act 2013: Final Assessments – Impact Assessment: Bail‑ In (2014). The cost impact of bail-in is, however, hard to estimate and observe; since the introduction of the Banking Reform Act in December 2013, there has been no observable impact in terms of higher costs due to bail-in.
The Law Societies, submission of evidence, p3, considered that ‘front-running’ EU legislation on structural banking reforms had created a degree of uncertainty and potentially increased costs of planning and restructuring for practitioners. However, the Policy Network noted in its December 2013 paper for the City of London Corporation, Britain’s Financial Services Industry in a Changing Europe (2013), that the UK has had a sizable impact on the development of thinking in this area and so arguably has managed to be more influential than if it had not brought forward legislation. It also notes that the large size of the UK banking sector and the related risks of inaction merited swifter action in the UK than elsewhere.
CLLS, p17, Financial Services Consumer Panel, p1, and BSA, p2, submissions of evidence.
Treasury Select Committee, Report on the Retail Distribution Review, 15th Report of session 2010‑2012 (2011), paragraph 89. Available at: www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/857/857.pdf, accessed on 12 June 2014.
See: Royal Sun Alliance, submission of evidence, p4; Bank of America Merrill Lynch, submission of evidence,
The UK Retail Distribution Review Several respondents noted the UK’s tendency to take a more comprehensive or tougher approach to regulation of retail markets, noting the Retail Distribution Review (RDR) as a specific example.1 Many of these respondents were positive about the impact of RDR, citing it as an example of where the UK at a national level can move quickly to introduce new regulations that protect consumers. The rules, which came into force on 1 January 2013, aim to address conflicts of interest in retail financial advice by preventing product providers from paying commission to financial advisors. The rules also seek to raise the professionalism of the sector by increasing the qualification requirements for advisors. In its notification to the Commission, the then FSA justified these as necessary to deal with the risks posed by the relatively complex market in the UK.2 The British Chamber of Commerce for Luxembourg (BCCL) noted that the UK’s regime had influenced legislation in other Member States and shaped Commission proposals.3 However, the CLLS cautioned that European proposals rarely live up to the high standards in the UK, and claimed reforms ‘specifically aimed at changing the conduct of retail business [...] have generally been at best harmless but equally have a propensity to damage the interests of UK retail customers [...] In the majority of instances they will be seeking to cover an area that is already adequately covered in the UK by existing UK domestic rules, resulting in ‘layering’ of Regulations’. APFA had stronger views and noted that this approach added to the complexity of the FCA rulebook, while WMA and Baillie Gifford pointed to the costs of having to ‘dig up the road twice’.4 See: CLLS, submission of evidence, p17; Standard Life, submission of evidence, p3; WMA, submission of evidence, p5; and APFA, submission of evidence, pp1,3.
3.74 The box on the Retail Distribution Review provides further examples of concerns in evidence regarding the interaction of existing UK rules and new EU legislation. The FCA has also made public comments explaining its position on these issues from a regulatory perspective.93 For instance, in its October 2012 Journey to the FCA approach document, the FCA stated: ‘We may take action to address domestic issues even if standards are due to be set internationally at a later date. An example of this is the Retail Distribution Review (RDR), which has led to the UK setting its own conduct rules in the retail investment market despite European standards being developed subsequently. We recognise this has implications for firms and that they may feel they have to implement similar sets of standards twice. In these situations, we will look to strike a balance and carefully analyse the most appropriate action as to whether to hold back domestically or press ahead with our own solutions’. And in its July 2013 follow-up A response to Journey to the FCA – Your questions answered, it responded to the point that ‘some in the industry think we should consider going beyond the EU position in certain policy areas, but believe we should set safeguards around decisions to do this. Firms would like to see a level playing field for UK regulated firms compared with international competitors’. The FCA said that it ‘will consider these factors when developing its positions on EU and international issues’.
58 Review of the Balance of Competences between the United Kingdom and the European Union:
The Single Market: Financial Services and the Free Movement of Capital The UK’s Influence on Financial Services in the EU
3.75 The extent to which rules differ between the global, EU and UK levels is affected by the degree of influence that the UK exercises at the EU level. There were strong views in the evidence on this area, with a general consensus that the UK does have a degree of influence. For instance, evidence from Barclays noted that, ‘the UK does maintain a level of influence, and in particular maintains a reputation as a source of technical expertise which provides it with an ability to lead discussion’.
3.76 However, there were concerns from a broad range of stakeholders that the UK has a disproportionately low level of influence considering the national importance of the UK’s financial sector in terms of its size and contribution to the economy compared to other Member States. There were also references to the UK’s depth of financial markets and expertise, suggesting that the UK is better placed, compared to many other Member States, to make a sizable contribution to supporting good outcomes from the EU policymaking process.94
3.77 Open Europe has argued strongly that although the UK accounts for 36% of the EU financial wholesale market and 61% of the EU’s net exports in financial services, it has far less formal influence in EU institutions.95 In comparison, the UK currently has 9.5% of seats in the Parliament and just over 8% of votes in the Council (see Figure Ten).96 In response to comments that other countries with a dominant position in a certain industry are forced to accept similar trade-offs between national control and potential economic benefits from access to the European market, Open Europe has argued that other Member States have greater protection on regulation of their strategically important industries compared to the UK on EU financial regulation.97 In light of this disparity between national interest and voting shares, there were also calls in some pieces of evidence for the UK to have, either in practice or in effect, a veto on financial services measures.98
3.78 Evidence also focused on the UK’s influence in terms of the Council, Parliament and Commission. Stakeholders generally considered the UK Government to exercise a good degree of influence in the Council, although there were calls for earlier engagement with EU institutions, notably the Commission, in order to shape proposals at the preliminary See: ACT, submission of evidence, p5; AFB, submission of evidence, p5; AILO, submission of evidence, p2;
BATS Chi-X, submission of evidence, p4; BBA, submission of evidence, p13; BSA, submission of evidence, p4;
Business for Britain, submission of evidence, p6; CBI, submission of evidence, pp18-21; CLLS, submission of evidence, p19; Equity Release Council, submission of evidence, p6; and WMA, submission of evidence, pp11Open Europe, Continental Shift (2011), p7.
At present, where legislation is adopted in the Council by Qualified Majority Voting, the total votes of Member States favouring the measure must be 260 or more out of 352 – or 74% The UK, Germany, France and Italy each have 29 votes – or just over 8% The Treaty of Lisbon (Article 16 TFEU – Quality Majority Voting rules) changes the system of voting – it abolishes the weighting of votes and establishes a ‘dual majority system’ for adopting decisions. From March 2017 (after the transitional period has come to an end), the UK will effectively have just over 12.5% of votes in the Council. However, a qualified majority will be achieved if it covers at least 55% of Member States representing at least 65% of the population of the EU. As a result, even though the UK will see an increase in its voting share, the reduction in the threshold for agreement will make it more challenging for the UK to block a proposal. Where the Council does not act on a proposal from the Commission, the qualified majority should cover at least 72% of Member States representing at least 65% of the population. The Treaty of Lisbon also provides for a blocking minority composed of at least four Member States representing over 35% of the EU population. For more details on this and the ‘Ioannina compromise’ see: europa.eu/legislation_summaries/institutional_affairs/treaties/lisbon_treaty/ai0008_en.htm, accessed on 14 June 2014.
Open Europe, Continental Shift, p7.
stage and avoid having to expend political capital in amending proposals later on.99 It was also suggested that the UK authorities should work further to establish alliances with other Member States, and not only other ‘euro-outs’ but also ‘euro-ins’ to help mitigate against caucusing.100 Some stakeholders also questioned the UK Government’s approach to negotiations on certain occasions,101 and while UK regulators and experts were generally considered to be respected by and have influence with EU institutions, stakeholders highlighted the importance of effective coordination between different UK authorities.102