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Brussels, 7th October 2003

Investment Services Directive: Council agreement is major step towards integrated EU equities market

The European Commission has welcomed the Council's political agreement on the proposed Investment Services Directive. 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. It is a crucial part of the Financial Services Action Plan. The European Council called for its definitive adoption by April 2004, before the European Parliament elections. Once the Council has formally adopted a Common Position on the basis of the political agreement, the proposal will return to the Parliament for its second reading.

Internal Market Commissioner Frits Bolkestein said “The Directive will make it easier for businesses to raise money, improve investor confidence and promote growth. The only losers will be those who want to hide behind national barriers to stifle competition and short change issuers and investors. I would like to thank the Greek and Italian Presidencies for taking the negotiations forward so rapidly and effectively. I would also like to thank the Member States for their willingness to make compromises in order to get the agreement we so badly needed. I now hope the European Parliament will show similar flexibility at second reading on the few remaining points of difference. If we can get this Directive through on time, as I think we will, Europe, its financial markets, investors and citizens will all be winners."

The Council's political agreement is broadly in line with the Commission's proposal, presented in November 2002 (see IP/02/1706 and MEMO/02/257) and with the European Parliament's opinion adopted last month (see IP/03/1291). Nevertheless, some points of detail remain to be hammered out at second reading.

On the issue of "internalisation" by banks and investment firms of client orders to buy and sell equities outside regulated markets, the Council has now agreed that it must be allowed in all Member States, whereas some countries do not currently allow it. However, the compromise text attaches conditions to prevent market distortion and ensure investors, particularly retail investors, are not sold short or overcharged through a lack of market transparency.

For deals up to a certain value - the Council has agreed on a threshold value somewhat higher than the Parliament's opinion - investment firms would need 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. For larger deals where it can be assumed professional investors are involved, these requirements would not apply, allowing prices to be fixed by a process of negotiation, which could continue ("price improvement") even after an initial quote. Firms would not be obliged to offer each quote to all their clients, professional and retail they would be able to decide on whom to give access to each specific quote, provided they do not discriminate between investors in the same category.

As far as ensuring retail investors are not sold inappropriate products, the Council's text clarifies and adds some nuances to the Commission's proposal and to the Parliament's opinion. It provides for a full suitability test to be applied when a firm is providing investment advice, no suitability test for execution-only business instigated by the customer and a "light" suitability test for circumstances in between. The Commission can support this solution.

The Council's political agreement also reflects a compromise on when "home country" regulation should apply, in other words in which respects investment firms' activities should be regulated by the authorities in the Member State where they are principally based, and where there should be "host country" regulation" in the Member States where they operate.

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