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Brussels, 19th November 2002

Proposal for Directive on investment services and regulated markets - frequently asked questions

(see also IP/02/1706)

Why has the Commission proposed the revision of the Investment Services Directive (ISD)?

The existing Council Directive of 10 May 1993 on investment services in the securities field 93/22/EEC (ISD) is the cornerstone of the EU legislative framework for investment firms and "regulated markets". Adopted in 1993, it established the conditions under which authorised investment firms and banks could provide specified services in other Member States on the basis of home country authorisation (single passport). However, in recent years more investors have become active in the financial markets and are offered an even more complex and wide-ranging set of services and instruments. In view of these developments the legal framework of the Community should encompass the full range of investor oriented activities. To this end, it is necessary to harmonise regulation sufficiently to offer investors a high level of protection and to allow investment firms to provide services throughout the EU Internal Market on the basis of home country supervision.

It is also necessary to establish a comprehensive regulatory regime governing the execution of transactions on financial instruments irrespective of the trading methods used to conclude those transactions, so as to ensure a high quality of execution of investor transactions and to uphold the integrity and overall efficiency of the financial system. The Directive provides for a coherent and risk-sensitive framework for regulating the main types of order-execution arrangement in the European financial marketplace. It takes account of a new generation of organised trading systems that has emerged alongside regulated markets and which should be subjected to the same obligations.

What are the main changes introduced in this proposal in comparison with current Directive?

The main changes contained in the proposal are that it:

  • establishes a regulatory framework to promote an efficient, transparent and integrated financial trading infrastructure

  • strengthens provisions governing investment services, with a view to protecting investors and fostering market integrity

  • extends the scope of the Directive, in terms of both financial services and financial instruments covered by it

  • reinforces co-operation between competent authorities.

How will the new Directive improve the functioning of the European economy?

Recent analysis has highlighted the contribution that competitive and flexible market-based financing can make to growth, competitiveness and employment. The benefits of efficient capital markets will be optimised by pooling liquidity, and allowing supply and demand for financial instruments to interact on a Europe-wide basis. Recently published simulations undertaken for the Commission (see IP/02/1649) suggest that the benefits of establishing integrated, deep and liquid equity and corporate bond markets alone are likely to be significant involving a permanent reduction in the cost of equity capital by 0.5 %, triggering a one-off increase in investment, employment (0.5%) and GDP (1.1%).

The estimates measure only the static effect of financial market integration on trading spreads (implicit trading costs). The research does not consider potential reductions in explicit trading costs (brokerage commissions or exchange fees) that can be expected to accompany increased competition between intermediaries and exchanges and lead to further economic benefits for EU citizens and business.

Furthermore, it does not measure the full dynamic benefits of financial integration. Related research including a further study to be published shortly by the Commission suggests that the deepening of financial markets resulting from integration can permanently boost output growth in manufacturing industry.

These considerations explain why the Lisbon and Stockholm European Councils have placed integration of European financial markets at the heart of the European economic reform agenda.

Who would benefit from the proposal?

Once the proposal is adopted and implemented, all market participants would benefit:

  • Investors would be able to purchase a financial asset traded on a partner country market without additional impediment or delay when compared to a comparable domestic transaction. Furthermore, their trading costs would be reduced.

  • Intermediaries would be able to transact freely with clients in other Member States on the same terms and conditions as business transacted in their home country.

  • Issuers would be able to tap a deeper and more liquid market, in which spreads and transactions costs would be reduced, and the cost of capital would be reduced.

  • Infrastructure suppliers (trading systems, clearing and settlement) would be able to make their facilities available to market participants and users from throughout the EU.

  • Competent authorities would have adequate powers and resources in order to carry out their tasks. Enhanced collaboration between them would help them to face the challenges rising from a closer integration of financial markets.

Why is it necessary to follow up the framework rules in the proposal with technical provisions adopted by the Commission (comitology)?

The proposal has been drafted in conformity with the agreement between the EU institutions on the recommendations of the Lamfalussy committee on regulation of EU securities markets (see IP/02/195).

The proposal would establish high level principles plus, where appropriate, specify the principal matters to be harmonised through detailed implementing measures. Those measures would be adopted by the Commission through so-called 'comitology' procedures, after consultations with market participants and Member States, and taking into account advice from the Committee of European Securities Regulators (CESR).

The proposal seeks to limit the use of comitology to those operational provisions where detailed harmonisation would be essential for the uniform application of its provisions and the smooth development of the single financial market. The scale of the proposal and the introduction of important new disciplines at EU level (e.g. conduct of business rules, transparency rules, "best execution") call for extensive use of comitology powers to give effect to core provisions of the proposal. Some 19 of the 66 provisions foreseen in the proposal provide for some use of comitology.

How would the proposed Directive regulate investment advice?

Currently, investment advice is considered a non-core service by the existing ISD which means that entities providing exclusively investment advice are not authorised as investment firms and do not benefit from rights or obligations under the Directive. Under the new proposal, investment advisors (either entities or natural persons) would become subject to initial authorisation and ongoing obligations.

However, investment advice would be defined as an investment service under the new proposal in view of the exponential growth of this business, the fact that it is an activity giving rise to risks for investors and the potential for provision of these services on a cross-border basis. This will ensure that these entities are subject to harmonised authorisation requirements, thereby resulting in equivalent protection to clients of these services across the EU.

New and stringent conflict of interest provisions would also ensure that the interests of the investor were paramount when advice was provided by multi-functional investment firms that cumulate investment advice with other services.

To counteract some concerns the proposal would allow firms providing only investment advice to replace capital requirements arising from the Capital Adequacy Directive with professional indemnity insurance (following the approach of the Insurance Mediation Directive).

The proposal also provides that Member States could allow competent authorities to delegate the functions of authorisation and monitoring of these entities to duly constituted and resourced self-regulatory bodies in order to cope with the large number of investment advisors operating.

How would the proposed Directive regulate financial analysis?

Financial analysis and research has been included in the proposal as an ancillary investment service. The implication of this is that only those entities which combined research and analysis with other investment business in a way that could give rise to conflicts of interest would be subject to the new Directive. Specialised and independent research firms/analysts would remain outside its scope and subject to any national/supervisory regimes.

The underlying objective is to ensure that the provision to clients or the public at large of general investment recommendations in respect of transactions in financial instruments, in the form of financial analysis or research or other forms, is undertaken to high professional and ethical standards. A particular concern has been to ensure that conflicting interests within an integrated securities house do not adversely affect the interests of the parties to whom these recommendations are made.

In this respect special attention should be paid to the work of the Financial Analysts Forum Group set up by the European Commission at the request of the EU's Council of Finance Ministers.

The provision of general investment recommendations/financial analysis would also be without prejudice to the general obligations imposed by the Market Abuse Directive (see IP/02/1547).

Why have specialised dealers on commodity derivatives been excluded from the scope of the proposal?

There was widespread support for the inclusion of commodity derivatives within the scope of financial instruments so as to allow regulated markets to support organised trading in these instruments, and to allow investment firms and credit institutions to benefit from their ISD authorisation when dealing or providing other services in respect of these instruments.

However, concerns were expressed that conditions were not ripe to require specialised commodities dealers to be authorised as ISD investment firms. In particular, it was claimed that the prudential framework established by the proposal and by the Capital Adequacy Directive is not currently adapted to the specific situation of entities whose main business, when considered on a consolidated basis, consists of dealing on their own account in commodity derivatives. In the light of these concerns, the Commission has decided to exclude them from the scope of the proposal until further consideration has been given as to the nature of an appropriate regulatory regime such entities. The Commission would report on these matters, and table related proposals, no later than two years after the entry into force of the new Directive.

The exclusion of specialised commodities dealers is in addition to the existing exclusion of entities undertaking transactions in commodities derivatives as a corollary of their business in the underlying commodity market.

These entities will continue to conduct business at domestic level under the national rules governing their activities, but without benefiting from the EU "single passport".

Why does the proposal not include the "concentration rule" option?

The current Directive allows Member States to require that all retail investor transactions be executed on a regulated market (the so-called "concentration rule"). However, the Commission considers that there must be convergence towards a single consensus view of marketplace regulation in order to create a single financial market in which supply and demand for a given financial instrument can interact across an integrated and efficient trading infrastructure.

The proposal has sought to build this consensus around a regulatory framework which does not require investor transactions to be executed on-exchange, but which imposes strict conditions on banks when they execute client orders off-exchange and particularly when they execute client orders in-house.

The "concentration rule" no longer seems a necessary or justifiable restriction for the following reasons:

  • now that exchanges are predominantly commercial entities (no longer utilities), it is difficult on competition grounds to justify regulatory provisions which create a captive market for them at the expense of alternative forms of order-execution;

  • the presumption that exchange execution is better for market investors does not stand up to scrutiny:

      requiring execution of investor orders on exchanges does not necessarily add to market efficiency or result in better prices for investors. A comparative analysis of the cost of transactions on different EU exchanges does not reveal that exchanges which are protected by a "concentration rule" are more efficient (have narrower spreads) than those which are not protected by a "concentration rule". Thus even smaller exchanges which are forced to operate in an environment where many transactions are executed by banks, are as efficient as larger exchanges. Any slight advantage in terms of spreads is offset by the lack of competition between brokers and intermediaries and higher exchange fees charged by the protected exchange.

      in terms the prices available to retail investors, off-exchange execution of client retail orders may work to advantage of clients. Therefore, the argument that concentration rule enhances market efficiency and leads to better prices for investors does not stand up to scrutiny.

  • the public interest arguments which have traditionally been invoked to justify the "concentration rule" can be achieved through more proportionate and targeted regulatory interventions

  • it may have unintended consequences on market liquidity: different investors have different requirements and a diversity of share trading methods should be allowed to support different trading strategies. This will facilitate trading and bring liquidity to the market

  • the integration of national financial markets is bringing exchanges into competition with other exchanges. This holds out the prospect of important economic benefits, and it is one of the desired and intended consequences of initiatives such as the single currency. One implication of this is that fragmentation of liquidity is a challenge that has to be confronted anyway. In dealing with those regulatory challenges, the proposal provides a modern and comprehensive regulatory framework which clarifies the conditions under which investor orders can be executed either on or off-exchange.

Why does the proposal impose different regimes for different types of trading venues (exchanges/investment firms)? Is there a level playing field between them?

The proposal aims to:

  • create the conditions for high quality, competitive, integrated, liquid, transparent, orderly and efficient markets in the EU, and

  • to allow the co-existence of different market venues in order to respond to the needs of their users and gain their confidence.

Competition between trade-execution arrangements should be promoted as it can deliver dynamic benefits for all the market place. But it should not be at the expense of market efficiency and investor protection. While competition for execution of orders is not new, the recent intensification of competition in trade-execution presents new challenges for the regulatory system in protecting investors and promoting orderly and efficient markets. The proposal addresses these concerns by creating a regulatory framework in which obligations are tailored to the specific risk-profile of different market participants, and which takes account of competitive and regulatory interactions between different trading formats so as to maintain overall market efficiency.

However, the proposal does not impose on banks the regulatory template applicable to exchanges for the simple reason that banks and exchanges do not provide the same or even competing functions. Consequently, they are organised in different ways and give rise to different types of risk or public policy concern:

  • exchanges are organised around open-order-books which facilitate the greatest visibility of trading interest so as to allow the most trades to be concluded between its participants

  • the trading business of banks is not organised around a (private) order book where clients can buy and sell securities from other clients or the bank.

There is therefore a limit to how far a "one size-fits all" regulatory approach can be imposed on exchanges and banks. The focus of regulation in the two contexts is slightly different: but the objectives remain the same protecting investors, promoting the efficiency of an integrated market.

As far as exchanges and multilateral trading facilities (MTFs) are concerned the proposal emphasises the organisation, transparency and fairness of the trading systems run by the market.

In the case of banks, the emphasis is placed on avoiding conflicts of interest, ensuring that banks meet all their obligations to clients, and that they make available as much information as feasible on the transactions that they have undertaken or that they are considering undertaking.

Why have pre-trade transparency requirements been imposed on investment firms?

In parallel with the obligations imposed on exchanges and MTFs, the proposal envisages the imposition of pre-trade transparency requirements on banks and investment firms in the form of the client limit order display rule (article 20(4)). This important rule provides that where a client communicates an order to a bank, specifying terms at which it will buy/sell a security, the bank shall display that order to other market participants if it is unable or unwilling to fill that order itself. It shall not "queue" the order in its systems and wait until the market moves in the direction of the specified price. This will prevent banks from unfairly or improperly withholding the trading information contained in client limit orders from the wider market.

Firms dealing on own account are also required to disclose some indication of the terms on which they stand ready to buy or sell a specified share (quote disclosure rule). This rule was introduced to reflect the basic presumption in favour of maximising the volume of trading information. The overall price formation process and the effective enforcement of "best execution" will be enhanced if (large) dealers and broker-dealers are required to advertise the terms at which they are willing to conclude transactions.

The proposed quote disclosure rule takes account of US experience which suggests that mandatory quote disclosure at least for customer-size transactions in highly liquid equities should not constitute a significant impediment to proprietary dealing by banks. A prudently designed quote disclosure rule should not therefore give rise to any trade-off with liquidity provision.

The proposed quote disclosure rule would also allow for small dealers, which are unlikely to be significant contributors to liquidity or price-formation for shares, to be exempted from the scope of the obligation. The definition of 'small dealers', and the specific transaction size above which pre-trade transparency would be required, will be determined by the implementing measures to be adopted by the Commission under the 'comitology' arrangements.

How would the proposed Directive differentiate between large and small investment firms?

In drafting the proposal, the Commission has avoided bias in favour or against any particular business model and avoided dictating any particular market structure. There are different examples that show the rules have been tailored to the individual service provider and in particular to take account of the specific characteristics of smaller, specialised and low-risk entities.

For example, the proposed quote disclosure rule would allow for small dealers, which are unlikely to be significant contributors to liquidity or price-formation for shares, to be exempted from the scope of the pre-trade transparency requirements. The definition of 'small dealers' will be determined by the implementing measures to be adopted by the Commission under the 'comitology' arrangements.

In the case of pure investment advisors (investment firms providing only investment advice) and firms receiving and transmitting client orders but which do not hold client money (including fund intermediaries), the proposal does not subject them to any capital requirements. As an alternative, such firms are required to hold professional indemnity insurance against legal claims so as to provide for compensation of clients, and to protect the viability of the firm. Allowing the use of professional indemnity insurance as an alternative to capital charges is in keeping with the Directive on Insurance Mediation (see IP/02/1390).

On the obligation of investment firms to execute the orders on terms most favourable to the client, the proposal provides that the procedures that investment firms must implement shall take into account their scale of operations. Small banks and investment firms will therefore not be expected to have access to all trading venues.

On the contrary, the full force of the proposal will apply to larger "multi-functional" firms. Larger firms undertaking many investment services under one roof will have to comply with new requirements, which will address the more important risk-profile that they represent.

These firms will be faced with a set of new regulatory requirements which are currently lacking from the EU regulatory regime including:

  • new rules for policing conflicts of interest (article 16)

  • much more demanding organisational requirements for large multi-functional firms (article 12) and for investment firms operating a Multilateral Trading Facility(article 13)

  • new client-order handling rules which will only apply, de facto, to firms internalising client orders including limit order display and the prior consent rule (art. 20)

  • a new "best execution" obligation where larger banks will be expected to meet more exacting requirements (article 19)

  • an obligation for large dealers and broker-dealers to make public firm bid and offer price for a specified transaction size in liquid shares ("quote disclosure" rule - (article 20(4)).

What would the proposal do to limit the risks posed by internalisation?

Internalisation is the practice of certain banks or investment firms that execute a client (buy) order against a countervailing client (sell) order or complete the client order by buying/selling their own stock. This practice is well-established in Member States which have not elected to use a concentration rule.

The concentration of banking and brokerage business has meant that a small number of banks now handle a large part of retail investor transactions. It has become feasible and commercially advantageous for banks to complete as many of these transactions in-house as possible. By saving fees and facilitating the settlement of transactions, this practice may also benefit investors in terms of price-improvement, speed or cheaper settlement.

The proposal takes into account the risks associated with internalisation, which can be summarised as follows:

  • internalisation gives rise to an inherent conflict of interest when a bank which is supposed to be acting on behalf of a client is also in a position to sell securities to that client

  • if large volumes of trading are performed away from the exchange, prices generated on-exchange will provide a less accurate indication of the value of a security. Exchange prices will then be less useful as a benchmark for assessing whether a bank obtained the best deal for a client. More generally, if exchanges no longer price financial instruments efficiently, they may no longer be able to play one of their key functions of allocating capital to its most efficient uses.

The Commission has sought to address these specific concerns directly, rather than by proscribing internalisation.

To protect investors, the proposal envisages a set of measures aiming at governing the way an investment firm should deal with its customers when executing their orders. There are rules on best execution, on conflict of interests and on order handling.

To ensure that internalisation does not compromise overall market efficiency, the proposal contains the following elements:

  • investment firms will be subject to an obligation to make immediately public to the wider market the price and volume of all off-exchange transactions (post-trade transparency)

  • investment firms will have to make public client limit orders which the investment firm itself is unable to execute on the terms specified by the client. Therefore, investment firms will not be able to withhold information on the potential trading interests from their market they will be forced to reveal these trading opportunities to other market participants

  • the best execution policy helps to ensure that liquidity flows to the most efficient and competitive trading arena.

What is the home country principle?

The home country principle means that authorised investment firms should be able to provide services to clients in other Member States on the basis of their home country authorisation and of ongoing supervision by their domestic competent authority.

This is possible as the proposal harmonises the initial authorisation and operating conditions for all investment firms established in the EU. The Directive will ensure a high level of protection for clients who rely on investment firms, wherever authorised in the EU, for advice, to intervene in the market on their behalf, or to manage their personal investment portfolios.

Only in the case of branch operations, the host authority will assume responsibility for enforcing requirements relating to keeping records of services provided and transactions with clients of the branch and for enforcing the conduct of business. The host authority is nearest to the branch and better placed to detect and intervene breaches of its obligations to clients. The management of firm-client business at branch level means that investment firms do not see any difficulty in co-operating with host authorities in this domain.

What are the key investor protection measures in the proposal?

In addition to the conditions for initial authorisation (including organisational requirements) and the general operating conditions (including conflict of interest identification and management) the proposal, taking full account of the standards for investor protection which have recently been adopted by Committee of European Securities Regulators (CESR), harmonises core conduct of business rules that investment firms must comply with when providing services to clients.

The proposed Directive would require that detailed implementing rules should differentiate the levels of protection according to the nature of the clients (retail, professional) and the nature of the service.

A key innovation is to establish a separate provision governing the "best execution" obligations of brokers/broker-dealers. It will ensure that investment firms consider trading conditions on a range of trading venues, and make use of "smart" order-routing techniques in order to seek out the best results for their clients. In doing so, it will allow competition between brokers to drive improvements in execution quality to the benefit of the investor. This will enable liquidity to respond quickly to price differentials. In this way, an effective "best execution" policy helps to ensure that liquidity flows to the most efficient and competitive trading venues and serves as a guarantor of overall market efficiency.

In order to enhance confidence in the impartiality and quality of execution services the proposal also provides for rules covering the way in which client orders are processed and executed.

The use of comitology in implementing these provisions is crucial to facilitate its uniform application and the smooth development of the single financial market.

Other measures designed to reinforce investor protection refer to requirements to uphold market efficiency and integrity and the obligations of investment firms when employing tied agents.

What would be the obligations of investment firms when providing services to clients?

The current Directive's provisions need to be updated in order to enhance investor protection. Investment firms would have to comply with conduct of business rules to ensure that their services to clients were provided in the clients' best interests. These rules would include duties to inform clients or potential client of elements necessary for them to understand the nature of the services or products offered to them and to be able to assess the risks involved in transactions; duties to collect information from clients in order to define those services or products which are suitable for them; duty to enter into a contract covering the rights and obligations of the firm and the client. These rules are drafted in accordance with the results of the work conducted by the CESR in its efforts to harmonise the conduct of business rules.

What would be the obligations of investment firms when executing orders?

Clients transmitting order to their brokers ask for execution of these orders at the most favourable conditions (best execution). The obligation of the investment firm to ensure such a result could be more difficult in a marketplace where liquidity is fragmented and the same transaction may be executed in different venues. Clients are interested in receiving the best possible results taking into consideration their interests and conditions available in the market(s). Price is one of the elements to be assessed by the investment firm when executing clients' orders, the others being speed and size of execution, or other different instructions from the client. Control on compliance with these obligations should be conducted by competent authorities at the level of procedures adopted by the investment firm; these procedures should be designed to ensure that each transaction is executed under the most favourable conditions for the client.

Why would the proposed Directive require the investor's consent before investment firms could execute trades off-exchange (default rule)?

The abolition of the "concentration rule" would lead to a competitive environment in which trades could be executed in different marketplaces. The rule proposed by the Commission aims at increasing investors' awareness of the fact that orders may be executed off-exchange. Internalisation by investment firms of clients' orders might give rise to internal conflicts of interest, which the customer should be aware of.

The default rule would allow client consent to be obtained in the form either of a general agreement or for individual transactions. If obtained in the form of a general agreement, it should be renewed annually.

By proposing that express consent to execute trades off-exchange would have to be renewed, the Commission intends to apply pressure on investment firms to serve their customers correctly and to give investors the possibility to monitor execution by their traders (and eventually the possibility to "punish" an inefficient trader by asking for orders to be executed elsewhere).

The proposed default rule would not impose any "a priori" limits on the different venues which an investment firm should consider when executing a client order. It would simply provide that the client should be given advance notice, and have the opportunity to intervene. The Commission considers that the measure is fully consistent with the "best execution" principle.

How would the proposed Directive address the eventual conflict of interest in investment firms providing multiple services?

The expanding range of activities that many investment firms and banks undertake under one roof by has increased potential for conflicts of interests between these different activities and those of clients.

The proposed Directive would therefore provide for an effective response to these matters, which are critical for the defence of clients.

The proposal would oblige investment firms to, first, identify conflicts of interest that arise in their business activities and which might prejudice the interests of their clients. Afterwards they would be required to either:

  • prevent those conflicts of interest from adversely affecting the interests of clients or

  • set up organisational and administrative arrangements which allow them to manage these conflicts of interest in a way that the interests of clients were not adversely affected.

Who or what are "professional investors"?

As explained above, the proposal, following the approach of the existing Directive, would require the development of detailed implementing rules setting out the conduct of business rules that investment firms would have to comply with when providing services to clients. Those conduct of business rules would, again as under the current Directive, differentiate the levels of protection according to the nature of the clients (retail, professional).

In the past, the lack of a common definition of professional investors implied that the same investor could be classified differently depending on the jurisdiction.

To fill this gap, the proposal includes a detailed definition, taking account of recent agreement in the CESR on this matter. The definition intends to cover those investors that are expected to be able to protect their own interests and that therefore need less external protection.

This does not mean that the provision of investment services to professional investors is not subject to conduct of business rules, but that the application of rules can be streamlined to avoid over-burdensome regulation.

Who or what are "eligible counterparties"?

Taking into account current market practices, the proposal clarifies that, in the event of a transaction involving an investment firm and an "eligible counterparty", the obligations that would be owed to a client under "conduct of business rules" and other provisions do not hold provided that the latter agrees to trade without the benefit of agency protection for one or more transactions.

This regime intends to cover trading between investment firms and other entities, which are not providers of investment services, but are market participants directly active in the financial market for proprietary trading. It is characterised by the absence of a "client relationship" (i.e. without any provision of service).

Investment firms are therefore authorised to trade with "eligible counterparties" without triggering the application of the conduct of business rules, best execution and client order handling rules. Investment firms should simply confirm with the counterparty that the latter accepts trading without agency protection for one or more transactions.

The definition of "eligible counterparty" included is derived from the corresponding definition agreed in CESR.

The fact that a entity falls within the category of "eligible counterparties" is without prejudice to its right to request the investment firm to treat it as a "client", with the appropriate conduct of business protection.

What would be the regime for tied agents?

The proposal would clarify the conditions under which investment firms could rely on the offices of tied agents, including for the free provision of services in other Member States. It would establish the basic premise that an investment firm would be responsible for the actions of tied agents when they were representing the firm or soliciting business on its behalf.

The authorities in the Member State where the tied agent was established and operated would be responsible for their authorisation and supervision of the latter, without prejudice to the possibility of delegation. The tied agent itself would not be eligible to undertake its activities in another Member State. In view of this, it was not considered necessary in this proposal to harmonise the detailed operating requirements for tied agents, which would be left to the discretion of Member States.

In order to ensure the identity of the investment firm which was responsible for the tied agents, they would only be entitled to work on behalf of one investment firm without prejudice to the right of the same tied agent to carry out the same activities in respect of other financial products (e.g. life insurance or unit-linked products). Thus, tied agents could also undertake comparable business under the recent Insurance Mediation Directive. This would also allow the tied agent to act for different arms of the same group undertaking.

Why would the proposal not require the designation of a single public authority by each Member State, as do the Market Abuse and Prospectus proposals?

Due to the wide-ranging duties imposed on competent authorities, the proposal would allow the involvement of different competent authorities in each Member State. Consistent with its general approach, the proposal would not dictate a specific structure for supervisory authorities.

However, in cases where there was more than one competent authority, the proposal would require them to co-operate closely.

The public nature of the competent authorities is necessary to ensure independence and avoid conflicts of interest. However, this should not prevent such authorities from delegating some functions to other bodies, under the condition that the ultimate responsibility for ensuring respect of market integrity rests with the competent authority.

How would the proposed Directive address the challenges posed by increasing cross-border activity?

The proposal would strengthen the duties of assistance and co-operation which competent authorities owe to each other. Due to increasing cross-border activity, there is a pressing need for co-operation. So, it would require competent authorities to provide each other with the relevant information for the exercise of their functions, so as to ensure effective enforcement including in situations where infringements or suspected infringements of Directives may be of concern to authorities in two or more Member States. Strict professional secrecy is needed to ensure the smooth functioning of the exchange of information and that particular rights of persons will be respected.

Furthermore, the proposal contains a list of powers that, at least, should be available for competent authorities so as to pave the way towards equivalent intensity of enforcement across the integrated financial market.

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