Sélecteur de langues
Brussels, 16 November 2000
Upgrading the Investment Services Directive (ISD) frequently asked questions (see also IP/00/1314 and IP/00/1315)
Does the Communication on upgrading the ISD herald a substantial shake-up of the Directive?
Yes, because the existing legislation does not adequately reflect the way markets currently operate, nor the huge technical changes (online trading etc) that are taking place. With this Communication the Commission's wants to open a consultation on how the Directive should take due account of the wide range of changes affecting European securities markets. The Commission intends to propose ambitious and far-reaching changes to significantly improve the EU regulatory framework for securities markets.
The Communication charts two broad areas of work :
What in the present Directive needs revision?
The 1993 ISD has relied on a blend of mutual recognition of national authorisation/supervision and minimal harmonisation of core concepts. The broad definitions and core concepts of the ISD have been flexible enough to accommodate evolution in business practices and national supervision. However, the generic nature of many ISD provisions, unsupported by more detailed guidance or implementing measures, also presents drawbacks.
In particular, the effectiveness of the ISD has been mitigated by extensive dilution of the ISD's principle of 'home country control' whereby a firm can operate EU-wide on the basis of mutual recognition of supervision by its home Member State.
However, numerous provisions of the ISD allow for host country intervention in the interests of the "general good".
For example, Article 11 of the Directive provides for host authorities to implement local conduct of business rules in addition to those enforced in the home country of the firm. Though this may be helpful in terms of protecting retail investors, Article 11 is currently applied indiscriminately to inter-professional business. As a result, this large segment of the market is over-burdened with application of rules designed with the small, household investor in mind. In addition, there has often been wide variation in the interpretation and implementation of the ISD at national level for example, as regards implementation of core service definitions, and the designation of "regulated markets".
Since the ISD provides no mechanism for harmonising national approaches to implementation (the issue that is at the heart of the issues under examinsation by the Committee of Wise Men on the Regulation of European Securities Markets chaired by Alexandre Lamfalussy), the Commission considers that a new approach is necessary to overcome these difficulties, seize new opportunities and meet the regulatory challenges of the new securities trading environment. A key element of the review will be to integrate structural solutions for updating ISD provisions.
But beyond correcting these weaknesses in the existing legislation, new rules also need to reflect the fact that securities markets are in a state of unprecedented transition. Market-based financing is in the ascendancy. The volume and pace of change are spurring a massive reorganisation of market infrastructures (exchanges, trading systems, clearing, settlement) along more competitive, efficient and pan-European lines and require a pan-European response from regulators and supervisors. The Communication identifies a first set of issues which need to be tackled so as to firstly optimise the competition and efficiency benefits of these processes and secondly protect the quality, orderliness and integrity of European securities trading across an inter-linked web of trading systems.
What is the link between the Communication on upgrading the ISD and the Communication on the Directive's provisions concerning investor protection?
Conduct of business rules aim essentially to ensure that investment firms act in the best interest of their clients and the integrity of the market. Article 11 of the ISD enumerates key principles which must underpin national regimes of conduct of business protection but problems have arisen due to different interpretations of these principles.
Large numbers of European investment firms are making use of the ISD 'single passport' regime, but often find that in practice that they are unnecessarily burdened by having to comply with two sets of conduct of business rules the rules of the home country of the service provider which are automatically enforced, and those of the country of the investor which generally opt to impose their local rules on incoming investment services. This problem is compounded by the fact that there is no common understanding of what constitutes a "professional investor". As a result, cross-border provision of services to professional clients may be subject to onerous host country rules which have been designed with the retail investor in mind.
This Communication serves two purposes:
However, a formal modification of the ISD Directive will be needed to ensure legal certainty and give force of law to this approach. As a result, this issue features prominently in the forward-looking Communication on upgrading that Directive.
oes the Communication on the ISD's provisions concerning conduct of business rules foreshadow a tougher infringement policy in this area?
Some of the differences in national implementation of conduct of business rules do not fundamentally go against the letter or spirit of the Directive, though it might be useful, ultimately, to amend the Directive to further clarify its application in some areas. However, the Directive also identifies certain areas in which compliance with relatively clear and unconditional provisions of the Directive has been less than systematic. These matters will be kept under close review particularly now that the concept of "professional investor" for the purposes of Art. 11(1) has been clarified in the Communication. Any legal force that might be brought to bear derives from the provisions of the Directive, the Treaty and related jurisprudence and not from the text of the Commission Communication.
Is the analysis and proposed approach for investor protection (including conduct of business rules) consistent with the country of origin principle of e-commerce Directive?
The application of host country rules in the interest of investor protection is, as outlined, a potential barrier to the cross-border provision of investment services and the Commission wants any upgrading of the ISD to clarify jurisdictional issues so as to better reconcile investor protection with the proper functioning of the 'single passport'. It should in particular, as noted, aim to allow inter-professional business to take place subject only to home-country rules.
New proposals to this effect will coincide with the entry into force of the e-commerce Directive (17.01.2002) under which investment firms should be able to provide investment services electronically, subject only to the rules of their country of origin (IP/00/442). The application of the country of origin principle could mean that the current role for or host country authorities is heavily circumscribed (there are limited derogations to the internal market clause of the e-commerce Directive, but they are strictly delineated). In upgrading the ISD the Commission will aim to identify and create the legal and practical conditions for smooth transition to country of origin for provision of investment services to retail investors.
As far as inter-professional business is concerned, this transition can occur without the need for supporting measures.
What are the linkages between the ISD Communication and the Lamfalussy review?
This Communication forms part of a concerted strategy to reinforce the EU's legislative framework for securities markets. The work of the Committee of Wise Men on Securities Markets (Lamfalussy Group) is vital to this and the revision of the ISD is complementary to their analysis. Essentially the Lamfalussy group is responsible for improving the process of rule-making, supervision and enforcement of common securities provisions the "how" question. The review of the ISD attempts to build a consensus on the substantive content of EU legislation the "what" question.
The future proposals for a revision of the ISD, to be prepared during the course of 2001, will build on the definitive proposals of the Group of Wise Men. In terms of timing it therefore makes sense to start drafting those proposals only after the Group of Wise Men publishes its final report in February 2001. Since the Commission proposals on upgrading the ISD will also take into account comments from interested parties via a consultation process, this consultation will run until March 31, 2001 to ensure that the findings of the Group of Wise Men can be taken into account by all respondents.
How will the consultation process be organised? What are the next steps?
The document will be sent to European institutions, national authorities and is available to all interested parties through the Europa web-site (http:.//ec.europa.eu/internal_market).
The final report from the Lamfalussy group is due to be published in February and from then through to March 2001 is the critical phase for consultation period.
Through the consultation the Commission will encourage national authorities and securities supervisors, market practitioners and interested parties to give their views on the future upgrading of ISD via a dedicated electronic mailbox MARKT-ISD@ec.europa.eu. The Commission's proposals will be based on the results of this consultation. But, depending on the range and content of the responses, the Commission may wish to report formally to the Council and Parliament before drafting the proposals.
How does the Commission envisage the parallel process on clearing and settlement?
In recent months, clearing and settlement has been targeted as the principal cost-centre in European securities business and pressure is building for greater consolidation as a stepping-stone to greater efficiency. The debate as to the optimal configuration of clearing and settlement turns on whether upgraded links between national settlement systems will be enough, whether consolidation should be grouped around existing exchanges and trading platforms (vertical model) or should instead involve consolidation of entities at the different levels of the trading, clearing and settlement functions (horizontal model).
It is not for EU legislation to steer market forces towards a particular outcome. But adjustments to EU rules may be needed to ensure that the potential of these developments is effectively harnessed notably by reinforcing and removing legal barriers to cross-border settlement.
If clearing and settlement become concentrated in a small number of centres, there may also be a need for clarity as regards designation of lead supervisors and/or sharing of supervisory responsibilities.
Such issues cannot be addressed within the scope of the existing ISD and the Commission will be looking to the consultation process to help determine its future approach in this area.
When can new proposals be expected? How long will it take before these become effective?
Everything will depend heavily on the results of the consultation. But some potential lines of argument are already clear.
Some market participants are likely to press for fast, small-scale practical improvements in the operation of the single passport. They will argue that tangible improvement should not be held hostage to "blue-sky" debates about the overall regulation of market infrastructures.
Others will argue that since the basic premises on which the original ISD was drafted are no longer pertinent - there is no point wasting time tinkering with details and that there is no alternative to a wholesale remodelling of the ISD on more functional lines.
It may be possible to reconcile these two viewpoints by separating the provisions relating to investment firms (single passport/investor protection requirements) from a new set of provisions designed to uphold orderly and efficient trading on regulated markets.
The Commission will consider the results of the consultation before drafting any new proposals but it should be possible to produce formal proposals in the area of single passport/investor protection in the second half of 2001. Any proposals in the area of market infrastructure are likely to take longer given the fluidity of market structures and the need to build consensus on appropriate provisions and mechanisms for their implementation.
On past experience, it can take 2-3 years to conclude the co-decision process for formal adoption of legislative proposals, followed by 1-2 year period for national transposition. If the Lamfalussy group helps to forge consensus on ways (within the existing Treaty framework) of "fast-tracking" EU securities legislation, it may be possible to speed the process of negotiating and approving legislation but at this stage this is impossible to anticipate.