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«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»

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See: AFME, submission of evidence, pp4,6; BVCA, submission of evidence, p14; FBCC, submission of evidence, p5; IMA, submission of evidence, p5; JP Morgan, submission of evidence, p4; and RBS, submission of evidence, p4.

See: BVCA, submission of evidence, p14; and JP Morgan, submission of evidence, p4.

72 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

3.120 There were broadly positive views on the provision of guidance and public statements from the ESAs, which can help to clarify rules for national supervisors and firms.152 However, a couple of respondents noted the excessive or unnecessary use of guidance, notably by EIOPA.153 There was also some concern over the use of Q&As, in particular when these do not provide greater clarity with regard to rules, as well as the time it takes, in some instances, for ESAs to respond to questions.154 Evidence from the ICAEW also noted, in relation to public statements by ESMA on shareholder cooperation, that ESAs can be slow in reacting to market developments.155

3.121 Many pieces of evidence referred to the resourcing, governance and accountability of the ESAs, with a large proportion of those reflecting on the need for the ESAs to have more resources and in some cases, greater expertise or authority in order to adequately carry out their functions.156 There were also some calls, notably from the Association for Financial Markets in Europe (AFME), for the ESAs to have greater independence from either or both EU institutions and Member States.157

3.122 A number of respondents drew attention to the remoteness of the ESAs and the need for strong accountability, which was considered especially pertinent in light of their increasingly important role.158 The Financial Services Practitioner Panel commented that ‘rule-making at the ESA level is less accountable’ and argued that when ‘detailed rules are created, there needs to be adequate stakeholder engagement and consultation to ensure effective rules’. There was also concern about the divisions, gaps and overlaps between different ESAs and the extent to which respective ESAs have the relevant skills.159 See: AILO, submission of evidence, p2; BIBA, submission of evidence, p5; IUA, submission of evidence, p2;

and Standard Life, submission of evidence, p7.

See: AIG, submission of evidence, p5; and RSA, submission of evidence, p9).

FCA PP, submission of evidence, p9.

ICAEW, submission of evidence, p5.

See: ACT, submission of evidence, p5; AFME, submission of evidence, pp4,5; Baillie Gifford, submission of evidence, p3; BATS Chi-X, submission of evidence, p4; BVCA, submission of evidence, pp13-14; CBI, submission of evidence, p15; CLLS, submission of evidence, p19; Sharon Bowles MEP, submission of evidence, p12; GSK, submission of evidence, p3; IRSG, submission of evidence, p15; JP Morgan, submission of evidence, p4; RBS, submission of evidence, p4; and Standard Life, submission of evidence, p7.

See: AFME, submission of evidence, pp4,5; AFB, submission of evidence, p4; FBCC, submission of evidence, p4; and Lloyd’s of London, submission of evidence, p7.

See: BVCA, submission of evidence, pp13-14; AFB, submission of evidence, p4; CBI, submission of evidence,

–  –  –

The Short Selling Regulation and UK challenge The Short Selling Regulation and the related UK legal challenge provides a test case on the scope of powers that it is possible to give EU agencies.

Article 28 of the Short Selling Regulation confers powers on ESMA to restrict or ban short selling in emergency situations. In May 2012, the UK launched a challenge to the ECJ, contending that the powers conferred on ESMA were unlawful. The UK considered that the powers were in contravention of the principle in the case of Meroni, a piece of case law which established that an EU agency cannot be given a discretionary power that may make possible the execution of economic policy, because of the broad nature of the powers with few limits on ESMA’s discretion in deciding when or how to exercise its powers. The UK also queried whether Article 28 was compatible with the legal base of Article 114 of the TFEU, under which the Regulation was enacted, as Article 114 is focussed on the harmonisation of Member State laws.

The Advocate General’s Opinion (AGO) was published in September 2013 and supported the UK in recommending Article 28 be annulled, on the grounds that the legal base (Article 114 TFEU) was not appropriate, as powers conferred to ESMA enable national decisionmaking to be replaced by the EU-level, and were thus not harmonising powers. Separately, the AGO rejected the UK’s challenge that Article 28 is not compliant with the Meroni principle.

In January 2014, the UK’s legal challenge was dismissed on all grounds. The ECJ found that in an emergency situation any measures taken by ESMA would be harmonising in the interests of protecting financial stability, and so Article 114 TFEU was an appropriate legal base. The ECJ also held that the existence of some delineated criteria on ESMA’s use of Article 28 is enough to show that the powers are not discretionary, so Article 28 does not breach the Meroni principle.

The Bar Council in its response described the Court’s reasoning on the Meroni principle as ‘very troubling’. It argued that the Court ‘while purporting to adhere to Meroni, has applied it in such a way as to deprive it of any real effect’ and concluded that, ‘It is difficult to understand the Court’s decision on any basis other than pure expediency’.





The UK Government has consistently stated that it wants tough financial regulation that works, but that any powers conferred on EU agencies must be consistent with the EU Treaties and ensure legal certainty. The ECJ’s judgment in this case sets a high bar for successfully challenging the discretionary nature of powers which can properly be delegated to an EU agency following Meroni, and has implications for the role of agencies in the EU.

–  –  –

AIG, submission of evidence, p5, on EIOPA.

74 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 D. Impact of the Crisis on the EU’s Approach to Rule-Making

3.124 The previous section highlighted the need, following the financial crisis, for greater integration in the euro area to support stability in the banking sector and for higher standards of regulation and supervision across the EU. The financial crisis also had a significant impact on the EU’s approach to rule-making. There was a shift from a focus before the crisis on more open and competitive markets to a post-crisis emphasis on financial stability, and there was a large and rapid increase in the amount of new legislative proposals. As a result, the EU’s recent approach to financial services rule-making raises a number of fundamental questions about the suitability of the current policy-making framework to deliver the new financial stability objective and the quality of the resulting regulation.

3.125 There was broad consensus among stakeholders about the need for EU-level rules to underpin the single market in financial services, notwithstanding some differences in views across market participants. There was also recognition of the link between the need for compromise in harmonising rules in return for the ability to passport across the 28 Member States – this is, in effect, the fundamental tension between the harmonisation of rules and UK sovereignty. Even though the international nature of the UK’s financial sector and the importance of access to markets suggests that harmonisation should be in the UK’s interest, greater harmonisation of rules necessarily results in the loss of sovereignty which is important to the UK.

3.126 There are, however, key questions as to whether the current approach to EU-level rules is in the UK’s national interest. Evidence from stakeholders raised a number of significant concerns, most notably on the recent pace, volume and focus of EU legislation, the failure to differentiate between financial services sub-sectors, the lack of proportionality, and insufficient recognition of the subsidiarity principle.

The Approach to EU Regulation Since the Crisis

3.127 EU regulation can take a number of forms, both with regard to the way in which it is delivered and the approach it takes to harmonisation. But a significant overarching feature of EU financial services regulation since the financial crisis has been its sheer quantity.

Over the last ten years, there has been a roughly ten-fold increase161 in the volume of EU law on financial services as international standards have become more detailed and national rules have been replaced by EU-level rules, many of which are additional to rules that legislate and implement global commitments.

3.128 There was near-universal agreement among respondents that the volume of legislation in the last five years needed to be a strictly temporary phenomenon and that legislative reforms should now be given time to bed down. An insurance roundtable discussion noted that the ‘current volume and speed of developing regulation is unsustainable’. Evidence from the Wealth Management Association (WMA) also emphasised that the pace of change is a problem in itself: ‘The constant flow of excess new legislation can make it difficult to implement existing material in the pipeline before more legislation introduces more change’.

–  –  –

3.130 In addition, while there was general acceptance of the need to take robust action to address the problems revealed by the crisis and recognition of the role this has played in driving new legislation, stakeholders also considered it important to achieve the right balance between ensuring financial stability on the one hand, and the need to support growth and promote competitiveness on the other.162 Differentiating Between Sectors

3.131 The weight and impact of rules also need to be considered in the context of a financial services industry which is composed of different sectors and participants addressing different needs and customers. Appendix I sets out in more detail some of the key differences between the various financial services sectors, such as banking, building societies, insurance, fund management, pensions and market infrastructure, as well as related professional services.

3.132 A particularly important distinction is to be drawn between wholesale and retail markets.

Wholesale financial markets generally concern transactions between larger entities such as financial institutions, investment firms, public sector organisations and large companies, and are integrated on a global basis. Operating across multiple jurisdictions, these financial institutions and firms are subject to prudential regulation that is often formulated by global SSBs before being given legal force at EU or national level.

3.133 In contrast, retail markets provide services to individuals and small businesses.

These markets exhibit relatively little cross-border activity, and have distinct national characteristics reflecting differences in culture and local requirements in areas such as taxation and national market structures. In its response, RSA explained why insurers tend not to provide cross-border insurance services remotely. This is because of the significant variations in regulatory, legal and taxation requirements. These make it difficult to ensure that a customer is fully compliant across jurisdictions, for example in areas covered by compulsory insurance (400 in Spain, 120 in France and four in the UK), or has access to national insurance pools, for example, for losses resulting from terrorist attacks. RSA stated that practical issues such as claims handling, the language of customers, and the differences in compensation awards resulting from differences in national tort law and court rulings ‘are the main factors that lead insurers such as RSA to offer services crossborder via branches rather than on the basis of freedom of services provision’.163 CBI, submission of evidence, p4.

RSA, submission of evidence, pp2, 8.

76 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

3.134 A further example of the potential differences between retail markets in Member States was provided by the BBA, which drew attention to the differences in consumer credit, as shown in the table below.164

–  –  –

3.136 More broadly, the Financial Conduct Authority’s Smaller Business Practitioner Panel commented that, ‘European-wide rules may also be less appropriate if the maturity of markets differs substantially, as is often the case’. It cited the example of very different life assurance markets across the EU and concluded that, ‘Single solutions to tackle the issues might not work for immature markets, and may be burdensome for markets which have tackled the problem with other solutions’.

3.137 RSA identified a number of issues for insurers and consumers when considering what kind of greater market integration is feasible. These include: ‘know your customer’; language;

culture (including expectations of the local policy-holder); the form and prevalence of fraud (particularly in the case of motor insurance); the tax and supervisory environments; the cost of setting up effective claims management (for example, in property insurance, an insurer will need to build up relationships with builders, roofers, plumbers, electricians etc);

and understanding the true risk proposed for cover and the amount of cover needed (for example, the same insured event might lead to a e5m liability claim in one country and just e100,000 in another, due to differences in domestic economies and litigation costs and awards).165



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