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Brussels, 25th September 2003

Investment services: Commission welcomes European Parliament backing for proposed Directive

The European Commission has welcomed the European Parliament's vote approving at first reading the proposed Investment Services Directive. The Parliament has endorsed the main principles of the Commission's November 2002 proposal (see IP/02/1706 and MEMO/02/257), which aims to overhaul existing legislation in response to the far-reaching structural changes in EU financial markets over the last decade. The proposed Directive would increase harmonisation of national rules and give investment firms an effective “single passport”, which would allow them to operate throughout the EU on the basis of authorisation in their home Member State. It would also make sure investors enjoyed a high level of protection when employing investment firms, wherever in Europe they were located. It seeks to establish, for the first time, a comprehensive regulatory framework governing the organised execution of investor transactions by exchanges, other trading systems and investment firms. The text as agreed by the Parliament will now be forwarded to the Council for consideration.

Internal Market Commissioner Frits Bolkestein said: "Today's vote is a real boost for our prospects of getting the Financial Services Action Plan completed by the 2005 deadline. I would like to thank the European Parliament for their efforts to find solutions to a number of controversial issues, especially over the important question of pre-trade transparency. I think the suggestions that we now have on our table are a very good basis for working out an acceptable compromise. I now urge the Council to move quickly to adopt its Common Position. This Directive would achieve two fundamental objectives of a truly integrated European capital market. It would allow investment firms to work anywhere in the EU without having to negotiate an obstacle course of divergent national regulations. And it would ensure a high level of Europe-wide protection for investors against the cheats and wide boys who sully the good name of ethical operators and of the markets as a whole."

Discussions in the Parliament centred on the "internalisation" of client orders by investment firms. Internalisation is where banks and other investment institutions process client orders in-house without going through a regulated market, for example if a client has placed an order to sell a particular security and another client or the bank itself is willing to buy.

The Commission's proposal sought to ensure that internalisation would be limited to situations where it is demonstrably in the client's best interests and that it would be subject to transparency requirements avoiding market distortion.

The main principles of the text adopted by the European Parliament are in line with the Commission's proposal. In particular, the principle of a pre-trade transparency obligation by which investment firms have to reveal to the markets details of client orders and, if the firms are trading on their own account, some indication of the terms on which they themselves stand ready to buy or sell a specified share - is maintained for transactions of a standard market size. Moreover, the notion of "systematic internalisation" has been clarified.

Another important issue is the application of the "suitability test" when assessing clients needs and interests. According to the amendments proposed by the EP, a suitability test is required only in cases where the client is receiving investment advice. This means that "execution only" services where the investment firm is merely carrying out clients' instructions - can be provided without any need for a full suitability test. This amendment is broadly in line with the Commission's position.


Structural changes in EU financial markets have made new legislation on investment services necessary. The intensification of linkage between national financial markets has meant that the 1993 Investment Services Directive, which relies heavily on mutual recognition, no longer provides adequate investor protection, sufficiently guarantees market efficiency or provides an effective legal foundation for fully realising the extensive benefits of an integrated financial market.

The proposal is for a framework Directive in line with the February 2002 agreement with the European Parliament on improving the regulation of EU securities markets, following the recommendations of the Committee of Wise Men chaired by Alexandre Lamfalussy (see IP/02/195). It therefore confines itself to setting out the general high-level obligations which Member State authorities should enforce. More detailed implementing measures will be set down by the Commission, following consultations with market participants and Member States, and taking into account advice from the Committee of European Securities Regulators (CESR).

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