17 November 2000
Howard Davies
Chairman, Financial Services Authority

Alexandre Lamfalussy and his team deserve congratulations for having produced a penetrating and stimulating report in very short order. Securities regulation is very complex, perhaps even more complex than introducing a single currency, which was Alexandre’s last achievement.

In general, we share his analysis of the problems which are standing in the way of the full development of Europe’s financial markets, and we support the general lines of the conclusions, too. We agree, in particular, on the need for more speed and energy in the legislative process, which only a firm political commitment can deliver. And the four tiered cake which the Wise Men have baked seems to us to include many of the necessary ingredients. Nonetheless, we have a number of suggestions for further improvement, and a few reservations about what has been proposed so far.

At the top tier, we support the idea that securities regulation in Europe should hang off a number of framework directives which can be amplified and amended from time to time at a lower level. That is not dissimilar to the approach taken in the UK when the legislation setting up the FSA was put through Parliament recently. But the cornerstone of our legislation, which we would like to see replicated in some form at European level, is a set of statutory objectives which define what a regulator is there to do. In our case, we are told that our aims should be to maintain confidence in the UK’s financial markets, to protect consumers, bearing in mind consumers own responsibility for their decisions, to promote public understanding of the financial system and to work to reduce financial crime. Furthermore, we are given a set of principles of good regulation, which condition the way we go about our task. They include the need to be cost effective, for regulation to be proportionate, and for us to ensure that we do not unnecessarily impede competition or stand in the way of innovation. Another helpful principle, which would be valuable at European level too, is that regulators must pay attention to their impact on the international competitiveness of their markets. It would be an ‘own goal’ to set up a system of European regulation which drove mobile business offshore.

We think it important to establish some equivalent of these principles at European level. If not, there is a danger that regulation strays into unnecessary areas, which could constrain the development of Europe’s financial markets, rather than encouraging them. There are some echoes in the report of a view that regulation should spread further into OTC markets, for example. We are nervous about that, and would want to see a clear cost benefit analysis before accepting that more regulation of OTC markets is justifiable.

It will also be necessary, I think, to ensure an appropriate degree of accountability to the European Parliament in the articulation of framework directives. Without that, it will be difficult to provide the flexibility needed to update and amend the rules within those directives, as market changes dictate.

As for the institutions which should carry out the intentions in these directives, we agree that a network solution is the only realistic option at present. The report explained well why a single European securities regulator is not feasible, and will not be feasible without more extensive harmonisation of legal and judicial systems across the Union. There is little point in a single regulator which cannot enforce its rules. In our view, too, the network solution might well be the right one for the longer term, though we accept that its effectiveness should be reviewed from time to time. There are signs that the enforcement of European regulations is increasingly moving that way in other areas. That is true, for example, in the case of Telecommunications regulation. And the Commission has proposed that some competition regulation should be re-delegated to member states.

The principle of subsidiarity is a powerful one. And we should not forget that there is a positive value in some aspects of regulatory competition, as long as we are not talking about a regulatory "race to the bottom". Fortunately, that is unlikely, since there is no evidence that securities market activity gravitates to the least regulated centre. The key is to get the balance of safety and flexibility right, a balance which needs continuous attention.

So the legislative framework, and the institutional network proposed in the Wise Men’s report look broadly appropriate to us. But I do not – and I am sure the Wise Men do not – underestimate the difficulties of making this system work effectively. A lot more detail needs to be filled in, and the implementation task will be considerable.

In particular, it is crucial that we sort out quickly the membership of the proposed Securities and Regulators’ Committees. In the latter case, there is an absolute need for the members in different member states to have parallel competencies. At the moment, FESCO, on which the new Committee will in a sense be modelled, has worked reasonably well. But the new Committee would be far more effective with a proper legal underpinning, and if all the member regulators share similar powers and responsibilities.

It will be important, too, for the Commission to raise its game. It will need to work faster, and will need a broader range of skills in financial market issues than it currently has.

And comitology procedures will be tested in this new framework. If the directives themselves are couched in more general terms, then the scope of comitology will be broader than it typically now is. In other words comitology will extend to areas which are not purely technical. Again, imaginative forms of accountability to the European Parliament will be needed. The new approach to pre-legislative scrutiny adopted for the UK’s new regulation Act could be used in some form.

The Committee of Regulators will itself need to be given considerable impetus. The imposition of a review deadline in 2004 is bound to act as a helpful discipline. But if the Committee is to secure a pass mark in that examination, it will need strong commitment from its members, at a senior level. It will need a proper secretariat. And it will need underpinning by practical mechanisms of co-operation. We should not forget that one of the successes of FESCO has been FESCOPOL, a network through which we can share information on real cases, and deliver more effective enforcement. And there will be need for some mechanism to check that implementation and enforcement is happening in an even way across the Union. The Wise Men’s report suggests a peer review process. Here, I have to say I am sceptical, based on some past experience of peer review. I prefer to think of a quality assurance function at the centre, perhaps with Commission involvement. Without teeth, peer review is no more than spinning wheels.

And I would like to see more emphasis placed on creating a rôle for those in whose interests all this regulatory activity takes place. The report wisely recommends practitioner input to the regulatory process. That can work well, and indeed we now have a statutory Practitioner Panel to advice the FSA. But it is important to recall that financial markets do not exist for the benefit of intermediaries. Their end users are investors and companies and individuals who need to raise capital. So we have found it important to balance practitioner input to our deliberations with input from consumers of financial services themselves. I hope that, in their final report, the Wise Men can incorporate more of this user dimension into their thinking. And I hope that they can also, for the same reason, develop further the reference to the need for appropriate and user friendly mediation procedures in the event of disputes.

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