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3.152 BIBA listed around 20 areas of EU rule-making that impact on its members, and added that, ‘This is a staggering volume of new regulation to put on a sector over the course of a few years. We therefore strongly feel that the right level has NOT been achieved’. In addition, the WMA cited a report published by KPMG that ‘wealth management firms spend between 10%-20% of their turnover on regulation’, and that for some firms this represents ‘up to 50% of profits’.
3.153 The EU’s proposed Regulation on Indices Used as Benchmarks has also given rise to concerns. The Regulation is based on, but goes beyond, the principles for financial benchmarks agreed by IOSCO. It would apply to all benchmarks used in financial instruments or contracts, or used to measure the performance of an investment fund, regardless of size or impact. In a reasoned opinion issued in December 2013, the House of Commons European Scrutiny Committee set out its view that the proposal does not comply with the principle of subsidiarity, on the basis of the varied nature of the benchmarks covered, the burden that would be imposed, and the scope for effective national-level benchmark reform.178 The Form of EU Legislation
3.154 The form taken by EU legislation, most significantly in terms of directly applicable Regulations or Directives that need to be transposed into domestic law, also has an impact on how market sectors are regulated. The issue of the most appropriate legislative instrument attracted a spectrum of views from respondents. A recurring theme is that there are advantages and disadvantages to both, depending on the circumstances, and that a balance needs to be struck between greater, more effective harmonisation and the need for flexibility, for example to reflect local market conditions and characteristics.
We believe that there should not be a preference for one form of legislative instrument over another, and at all times the best instrument should be used.
3.155 Respondents active in wholesale financial markets generally favoured the use of Regulations, for their benefits in establishing a level-playing field and consistency.
Directives were, however, seen as more appropriate for retail financial markets. The potential benefits of either approach are dependent on additional considerations, such as clear policy development by the EU and effective transposition by Member States.
For example, the CLLS warned that ‘Regulations can also result in unintended national disparities, for example, where key concepts are not adequately defined’.
3.156 APFA, while favouring the use of Directives for their flexibility, also expressed reservations that an approach to implementation of Directives that relied on ‘copy-out’ could negate their advantages:179 ‘whilst firms do not want gold-plating (which we would define as substantive requirements beyond what the directive requires), they do want clarity as to what is required and for the regulator to exercise more discretion when implementing directives so as to ensure the rules provide certainty’.
Further details available at: www.parliament.uk/documents/commons-committees/european-scrutiny/RO%20
‘Copy-out’, as the name suggests, is where the implementing legislation adopts the exact same wording as that of the Directive or where it cross-refers to the relevant Directive provision, rather than adjusting to accommodate local characterisitics while still achieving the intended outcome.
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3.157 A further dimension, usually used in connection with Directives, is the use of minimum or maximum harmonisation. Respondents again generally felt that context was key to determining which approach should be favoured, with the nature of the activities being regulated and the degree to which harmonisation was the aim being essential considerations.
Fundamentally, any assessment of the use of minimum and maximum harmonisation must focus on the underlying objective of the measure in question. Maximum harmonisation is justified where markets and consumers are cross-border and when differential rules would give rise to undesirable externalities. Minimum harmonisation is appropriate when supervisory judgement is required in the application of rules.
3.159 Some respondents thought that effective enforcement was another important consideration with regard to harmonisation.180 In practice, the benefits of EU-level rules are undermined without action to ensure that breaches of EU obligations, such as late implementation, are reviewed and addressed on a consistent basis across the EU.
See: CLLS, submission of evidence, p11; and BBA, submission of evidence, p6.
Chapter 4: EU Policy-Making Process
4.1 This chapter considers evidence on the quality of policy-making, the legislative process and the controls of these processes in the area of financial services. In short, it covers the question of how effectively the EU exercises its current competences. The evidence sets out that, while there may be broad, if not universal, support for the balance of competences as intended in the EU Treaties, there are widespread concerns regarding the quality of EU-level rules and the policy-making process.
4.2 The financial crisis exposed a large hole in the rules that govern financial institutions, especially banks. In the wake of the crisis, the Financial Stability Board (FSB) agreed to a regulatory agenda of 67 recommendations in 2008, to be taken forward by the sectoral international standard setters. These were then given stronger political direction at the G20 Pittsburgh summit in September 2009 (see paragraph 1.12).
4.3 These standards then fell to local jurisdictions to apply. Within Europe they were implemented at the EU level. The resulting volume of legislative initiatives was such that the Commission estimated that around 40% of all its legislative activity in 2010-2011 was focused on financial services.1 It is therefore only to be expected that the better regulation standards adopted by the Commission would be stretched in view of the volume of legislation proposed during this period.
4.4 In terms of reactions to the quality of the EU policy-making process, views from stakeholders were mixed. Evidence from the International Underwriting Association (IUA) noted that, ‘overall we find EU processes to be effective and accountable’, and the joint response from the Law Societies observed that, ‘as a general rule the EU policy-making process on financial services legislation is satisfactory’.
See, J. Welch, and P. Parker, ‘European Financial Services’, in G. Walker, R. Purves and M. Blair QC (eds), Financial Services Law, 3rd ed. (2014), p94 footnote 46.
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4.5 However, most respondents felt that there were significant short-comings in the policymaking process. A minority felt that this was due mainly to the volume of legislation that the EU has needed to adopt following the financial crisis. On the other hand, a large majority of respondents took a different view.2 For example, the CLLS stated that its ‘overall conclusion is that the legislative process at the EU level is flawed, and the problem is not whether the level of detail in EU rules is consistently too great or too general, too restrictive or too liberal, but that it is not properly informed by agreed policy considerations that have been the subject of effective consultation’.
4.6 Moving beyond generalised assessments, almost all industry respondents have detailed
and targeted criticisms to make, covering:
• The quality of the Commission’s impact assessments, consultations, and policymaking and policy proposals;
• The transparency, evaluation and quality of changes made to Commission proposals by the Council and Parliament and the way in which common texts are then agreed in trilogue discussions; and
• The quality of subordinate legislation.
4.7 The rest of this chapter looks first at policy-making in the Commission and then at the legislative process both for Directives and Regulations and for subordinate legislation, including Level 2 delegated acts, implementing acts and Binding Technical Standards (BTS). It concludes with detailed consideration of some options to improve the policy process.
Commission Policy-Making Policy Expertise
4.8 Respondents had few criticisms to make where the Commission had consulted properly or faithfully transposed international standards. The Wealth Management Association (WMA), for example, praised the Commission for taking ‘steps to ensure that its staff has sufficient expertise in specific areas to draft relevant consultation documents and legislative proposals’. There was, however, pointed criticism where proper consultation had been lacking or international standards had not been followed, and in these areas the quality of Commission policy expertise was then called into question. The AIFMD and FTT were two frequently cited examples (for details see boxes in Chapter Three).
See: CBI, submission of evidence, pp5-6; CLLS, submission of evidence, p13; Baillie Gifford, submission of
4.9 Criticism of Commission expertise was not confined however to the AIFMD or the FTT. NAPF stated that, ‘A key concern is that too much EU policy is developed as an internal exercise within the EU institutions, rather than in collaboration with practitioners and experts in the field’. The Wholesale Markets Brokers’ Association (WMBA) similarly commented that, ‘Lower level staffers and secondees tend to listen to industry, often as a consequence of unfamiliarity with the content; but all expert input tends to be ignored at a more senior level because of what would appear to be a much stronger political culture within these bodies’.
4.10 Many Directives and Regulations delegate subordinate legislative authority (Level 2) to the Commission, and the quality of the Commission’s policy and decision-making in this area was also criticised. For example, the CLLS noted that the Commission rejected ESMA’s technical advice to delay the EMIR reporting date for exchange traded derivatives in the ‘interests of achieving a political goal’.3 Impact Assessments
4.11 Many respondents considered the Commission’s impact assessments to have been inadequate, concentrating on the benefits assumed to arise rather than critically assessing whether or not they were likely to do so.4 The impact assessments were also criticised because they failed to reflect the costs imposed on the industry and the incentive effects, i.e. the ways in which the new rules might change the behaviour of market participants.
4.12 For example, the CBI stated that, ‘too many rules are being put forward with unconvincing evidence of the overall benefits or with weak assumptions and a weak evidence base’; and BATS Chi-X noted that, ‘little or no research or empirical data was gathered prior to draft legislation being published (including) proposals to regulate high frequency trading, to limit dark book trading through waiver caps and to introduce a European financial transactions tax’. The Payments Council considered that, ‘all new legislation needs to be impactassessed, not only against the current (unregulated) environment but also against other current and proposed legislative instruments’.
4.13 A number of respondents also referred to the introduction of the remuneration cap provisions in the late stages of the CRD IV/CRR negotiations as a further example of a case in which new measures have been introduced without appropriate analysis (see box below).
The CLLS also noted that the Commission delegated legislation (Regulation 231/2013) for AIFMD adopted rules which ignored the recommendations of Europe’s regulators in ESMA, which had been informed by proper consultation with the industry.
See: CBI, submission of evidence, p15; CLLS, submission of evidence, p22; BATS Chi-X, submission of evidence, pp1-2; FCA Practitioner Panel, submission of evidence, p10; BIBA, submission of evidence, p6; RSA, submission of evidence, p10; IMA, submission of evidence, p6; and NAPF, submission of evidence, p19.
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4.14 In some instances, the Commission has produced proposals based on impact assessments which have been considered inadequate by the Commission’s own Impact Assessment Board. The most recent example of this is the draft revision to the Directive on Institutions for Occupational Retirement Provision (IORP), where the accompanying impact assessment twice received a ‘Negative’ opinion from the Board. The Impact Assessment Board performs an important role, helping to ensure that Commission impact assessments are of high quality so that the evidence base for proposals can be relied upon. The opinions of the Board should be carefully considered with reservations about impact assessments properly and transparently addressed before proposals are made.
Producing proposals without a robust impact assessment risks undermining confidence in the ability of EU institutions to develop effective, proportionate, evidence-based legislation.
Capital Requirements Directive (CRD) IV Bonus Cap One of the amendments adopted by the European Parliament to the Commission’s proposal for the Capital Requirements Directive (CRD) IV was to cap bonus payments to bankers at one times salary or twice times salary with shareholders’ approval. This amendment was subsequently agreed at Trilogues despite UK opposition and now forms part of CRD IV.
The UK is challenging before the ECJ the lawfulness of the bonus cap ratio provisions in Article 94 of CRD IV and other related remuneration disclosure provisions in the Capital Requirements Regulation (CRR).