«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»
The UK’s position is that the relevant provisions lack an evidence base and were not supported by the Commission’s impact assessment. The resulting regime, in the view of the UK, is not fit for purpose and will not improve stability across the banking system, and will lead to an increase in fixed salaries which would run directly counter to the objectives of the legislation. The UK is also challenging the provisions on Treaty base (in particular, breach of the restriction in Article 114(2) TFEU on provisions concerning the rights and interests of employed persons) and other grounds.
Furthermore, as some respondents noted in the Call for Evidence, the introduction of the provisions without following better regulation standards constitutes serious deficiencies in the EU’s legislative process – a matter that is particularly serious in this case due to the potential impact on the competitiveness of the EU. For instance, evidence from the CLLS notes that, ‘The CRD IV remuneration provisions are another example of where inadequate policy formulation and consultation has resulted in highly prescriptive rules that deny national authorities the ability to tackle misaligned incentives in a way which meets their market conditions’.1 It is notable that, when asked by the press whether there was evidence of a link between the size of bonuses and the risk of bank failure, one of the MEPs proposing the amendment replied, ‘There is no evidence. But the banks do not have evidence that the way they do things today works either’.2 In addition, see evidence from the BBA (p. 14) and the Bar Council (p. 8).
4.15 Evidence on the quality of Commission consultations was mixed. The BBA considered the consultation stage to be transparent and provide a good opportunity for interested parties to engage with policy-makers.5 The Financial Services Consumer Panel praised the Commission for having ‘undertaken significant positive reforms with regard to consumer representation [...] and has also created its own consumer and civil society advisory group by setting up the FSUG [Financial Services User Group]6 and provided the group with significant financial resources’, but also noted that there is ‘a lack of transparency within the European institutions and during the policy making process [...] Currently the Commission is not required to respond formally to opinions from its FSUG consultative group’.
4.16 However, a number of respondents criticised the Commission for approaching consultations with a closed mind and for providing insufficient time for responses or to consider responses.7 For example, the CLLS stated that, ‘trade associations and other respondents often find that they have to commission their own detailed cost/benefit reports as part of their responses to consultations; but this is often too late to influence conclusions’. The Investment and Life Assurance Group (ILAG) commented that, ‘As a medium sized trade body with limited resources we find it very difficult to get our voice heard’. BIBA commented that the open hearings it has attended have left it ‘with the strong impression that these are simply a box ticking exercise where little if any of the hearings take into account the points raised in evidence’.
4.17 A number of pieces of evidence also commented on the poor timing allowed for consultation.8 The ICAEW cited EMIR, the Short Selling Regulation and the review of the Market Abuse Directive as examples, ‘all of which had consultation periods of less than one month’ – see Figure Eleven for duration of key consultations undertaken by the Commission on financial services legislation since the crisis.
4.18 The joint response of the Law Societies commented that the first consultation over the AIFMD ‘was open over a Christmas holiday and truncated. It would have been preferable if the initial consultation would have been longer and better researched’. ILAG pointed out that, ‘consideration of the day to day practicalities of change can also be vitally important in framing new legislative proposals. The current consultation process does not allow sufficient time for these views to be properly expressed and considered. What is often missed through this approach is the Practitioner and Consumer view, both of which can add real value and, in our experience, avoid much wasted debate’.
BBA, submission of evidence, p14.
For further information, see: www.ec.europa.eu/internal_market/finservices-retail/fsug/index_en.htm, accessed June 2014.
See: CLLS, submission of evidence, p22; AFB, submission of evidence, p5; CBI, submission of evidence, p17;
ILAG, submission of evidence, p4; WMA, submission of evidence, p13; RSA, submission of evidence, p10;
BIBA, submission of evidence, p6.
See: ICAEW, submission of evidence, p5; NAPF, submission of evidence, p18; FCA PP. submission of evidence, pp9-10; and the Law Societies, submission of evidence, p7.
90 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
Source: European Commission Implications for Policy-Making
4.19 Policy-making is a challenging task and requires a combination of technical knowledge, open consultation, impact assessments informed by an economic analysis of markets, and high quality legal input to ensure that the proposed rules are clear and unambiguous and have the correct Treaty base. Where these conditions are not met, the resulting policy, and the rules that give effect to that policy, is likely to have a detrimental impact on markets. Evidence highlighted a number of policy failures and issues with legal drafting.
Chapter 4: EU Policy-Making Process 91Diversity of Market Structures and Subsidiarity, and the Lack of Proportionality
4.20 A particular criticism was that EU policy can fail to recognise and accommodate market structures in some Member States that are different from those in others.9 A failure to recognise that different market structures create different risks indicates that the principle of subsidiarity may not be being properly applied, and will lead to rules being applied to address a risk which does not arise or is not necessarily better dealt with at the EU, compared to the national, level.
4.21 Given criticism of the Commission’s impact assessments, it is perhaps unsurprising that there is also criticism of the proportionality of the resulting proposals. Impact assessments are designed to help policy-makers assess the proportionality of their proposals for example by assessing the costs that will be imposed on existing firms, the incentives which the proposed rules will create, and the changes in market behaviour that may result.
Therefore, inadequate impact assessments are likely to result in proposals whose costs and benefits have not been rigorously analysed and therefore may not be proportionate.
See paragraphs 3.144-3.153 in the previous chapter for a more detailed discussion of the evidence on each of these issues.
One Size Fits All, Despite Different Risk Profiles
4.22 A common set of EU-wide rules also needs to be calibrated to the risks which institutions of different types face. Particular criticism was directed at the application of prudential requirements designed for banks and investment banks to smaller investment firms, such as stock-brokers and fund managers.10
4.23 The BSA stated that the way the EU has implemented international accords ‘such as Basel 2 and 3 (intended for major internationally active banks) as Single Market measures has necessitated their application to all EU credit institutions down to the smallest domestic savings bank. This has imposed disproportionate, and unnecessary, burdens on small firms’.11 It cites as an example, ‘the imposition of harmonised regulatory reporting, known as COREP [...] which has imposed a colossal burden and very substantial costs, as confirmed by the PRA’s own estimates, which give alternative costs for building societies only on two different methodologies, of £189m and £278m, but to no apparent benefit.12 PRA does not intend to make much use of CoRep outputs, but instead will impose its own entirely separate prudential reporting regime’. Evidence from the British Private Equity & Venture Capital Association (BVCA) criticised the EU’s FinRep/CoRep regime for similar reasons.13
4.24 NAPF criticised EU policy-making for seeking ‘to apply to pension schemes the same solutions [that] have been developed for hedge funds, banks and insurance companies, even though the risks posed by pension schemes are quite different’. NAPF criticised See: Bar Council, submission of evidence, pp2-3; FCA SBPP, submission of evidence, p4; BIBA, submission of evidence, pp2-3; Barclays, submission of evidence, p3; NAPF, submission of evidence, pp11-12; FCA PP, submission of evidence, pp6-7; Lloyds, submission of evidence, pp3-4; RSA, submission of evidence, p3;
WMA, submission of evidence, pp4, 6; and BSA, submission of evidence, p3.
See: CLLS, submission of evidence, p4; BSA, submission of evidence, p2; LME, submission of evidence, p2;
WMA, submission of evidence, pp3, 9; BVCA, submission of evidence, pp3-8; Lloyds, submission of evidence, p5; NAPF, submission of evidence, pp11, 13-14; and Equity Release Council, submission of evidence, p4.
In addition, see WMA, submission of evidence, p3.
CoRep is the common regulatory reporting framework for reporting risk and covers capital adequacy, credit risk, market risk, operational risk, group solvency, losses from the property book, securitisations and large exposures. FinRep is the EU’s harmonised regime for the reporting of financial information to the regulator. Both FinRep and CoRep are provided for by the CRD.
BVCA, submission of evidence, p5.
92 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 EIOPA, in particular, for seeking to apply a new approach to pension scheme valuation, ‘the holistic balance sheet’, which would have the effect of increasing the deficit on UK defined benefits by 50% or £150bn. Such a policy, if adopted, would, it argues, ‘significantly increase funding requirements for DB [defined benefit] schemes, leading to more scheme closures and sponsor bankruptcies; and undermine economic growth’.
It also cited research undertaken by Oxford Economics, which estimated that by the mid-2020s the effect of applying a capital regime for insurers to pension funds would result in GDP being 2.5% lower than it would otherwise have been, business investment being 5.2% lower and employment being 0.5% lower, that is 180,000 jobs that would not have been created.
4.25 The London Metal Exchange (LME) stated that it is important that, ‘the virtues of greater harmonisation and moves towards regional supervision [...] are carefully balanced against the specificities of individual markets to ensure that any unintended consequences of such moves do not create even greater risks to the system than the ones they are seeking to mitigate’. It cited, as an example, the failure to recognise such specificities during the MiFID II trilogue discussions on position limits, which ‘having set out with the well-intentioned objective of establishing limits on agricultural food prices, are now putting in place a universal position limit regime encompassing all commodities, without enough consideration of the LME’s own existing position management controls tailored to the specificities of our market. Put simply, a one-size-fits-all approach to European policy such as this is not appropriate’.
Lack of Clarity About the Purpose, Detail and Outcome of Rules
4.26 Respondents also criticised the failure of policy-makers to identify with sufficient precision the purpose of the rule, for example whether it was to address a problem, open a market, protect consumers or safeguard financial stability, or to ensure that the rule was adapted to that purpose.
4.27 A lack of clarity about the purpose of a rule and an absence of clear focus on the target can lead to perverse outcomes. The BBA cited the recast Insurance Mediation Directive as ‘a good example of the unintended consequences that can affect some European legislation’.14
4.28 Standard Life commented of CRD IV and Solvency II that, ‘In both cases we strongly agree with the principle of the intended purpose of these prudential regulations. However, we feel that lengthy rule books that run into the thousands of pages and are at an extremely granular level of technical detail may not be helpful and may even constrain market access to new entrants... a more proportionate approach to both the volume and level of detail in these regulations is likely to result in better regulation and a safer industry’. It is worth noting that prudential requirements can require a detailed calculation of capital adequacy, an approach which is often supported by industry in providing for greater sophistication and risk sensitivity. However, the BSA also drew attention to the risks resulting from overdetailed rules.15 Failure to Consider the Cost of Short Implementation Deadlines
4.29 The time firms are given to adapt their systems to new rules has a considerable impact on the cost. Firms spend considerable amounts of money upgrading computer systems, In addition, RBS, submission of evidence, p4.
changing their marketing material, and amending the terms and conditions of their customer agreements. As a result, the cost of new regulatory requirements in these and other areas will be lowered when they can be planned in advance and will, conversely, be significantly increased where implementing deadlines are short.
4.30 Evidence from respondents was critical of the failure of EU policy-makers to consider the costs both of short implementing deadlines and of changing proposed rules late in the day.16 The CLLS cited CRD IV as an example of a lack of proper focus by the EU on implementation. The original implementation deadline for CRD IV was 1 January 2013.
At that date, the legislation had not been agreed, but no alternative date was provided.