Directive where necessary, regulation where possible

Banking association sees danger of competitive disadvantages in European directive regulating the financial services industry

 

Harald Noack
Deputy General Manager of the Association of German Banks

Press conference to introduce the booklet Europäische Wertpapiermärkte - Konsolidierung des Rechtsrahmens (European securities markets – consolidation of the legal framework)

 

Ladies and gentlemen,

today we would like to introduce our new booklet entitled Europäische Wertpapiermärkte - Konsolidierung des Rechtsrahmens (European securities markets – consolidation of the legal framework).

As you know, the legal framework governing Europe’s financial markets in general and the securities markets in particular is currently undergoing a complete reorganisation. The main consequences are twofold. First, European law is becoming broader in scope. And second, we are seeing a radical reordering of existing rules and regulations. There is a danger, in our view, that the pursuit of harmonised framework conditions will be at the expense of competition if the groundwork is not properly laid.

The European Commission evidently wishes to regulate major aspects of the Directive on Markets in Financial Instruments (MiFID) at Level 2 of the legislative process in the form of a regulation. This would take direct effect in all member states. For the banks in Germany and in other countries, the result would be legal uncertainty and competitive disadvantages. We therefore advocate: a directive where necessary and a regulation where possible.

The Commission is expected to announce shortly its formal proposal for the directive’s technical implementing measures. It originally planned to publish its proposal last week. Publication has now been postponed until the end of this week at the earliest. We see this as a sign that the Commission is prepared to review certain points. We would warmly welcome it if our call for “a directive where necessary and a regulation where possible” were reflected in the Commission’s proposal.

 

I. MiFID: the new bible for Europe’s financial markets

Ladies and gentlemen, the MiFID is the centrepiece of the Financial Services Action Plan (FSAP). It will redefine the relationship between customer and bank in the investment services business. For this reason alone, the MiFID is the subject of wide-ranging and lively debate. This debate will not come to an end with publication of the proposal for Level 2 of the Lamfalussy procedure, as the four-phase fast-track legislative process is known. On the contrary: the rules and regulations contained in the upcoming Commission proposal are too important for it to be just one more item to tick off the to-do list after a brief perusal.

Unlike the Prospectus or Transparency Directives, the MiFID affects investors as well as banks. It has direct implications for the holders of security accounts. And these number more than 34 million in Germany alone.

The MiFID will have an impact on the banks’ general business conditions. It will change the way banks advertise their services to potential customers. It specifies how client orders are to be executed. In short: this directive lays down the rules governing how the banks interact with their customers.

Many aspects of the banks’ operations will be affected – distribution strategies and marketing, business with retail, corporate and institutional clients, asset management, IT, compliance, the legal department, record keeping and regulatory reporting.

Ladies and gentlemen, the MiFID will not only trigger the most radical transformation the financial services industry has undergone to date. It will be like a new bible for Europe’s financial markets. The aim must be to put together this document in such a way that, first, the rules are sufficiently clear and, second, it leaves enough scope for competition between products and services. Unfortunately, the currently envisaged implementation of the MiFID’s detailed rules fails to satisfy these criteria.

 

II. Directive where necessary, regulation where possible

As I mentioned earlier, the Commission evidently intends to issue the majority of the rules at Level 2 of the process in the form of a regulation. This would take direct effect in member states. At first glance, it would seem that the same rules would thus apply throughout the EU. But at second glance things unfortunately get more complicated. For technical, inherently clear-cut rules, a regulation is the correct choice. If, however, the European rules will operate in parallel with existing national law, clarification is required for all those involved.

The new European rules in the MiFID, for example, modify only supervisory law. National civil, commercial and company law rules will continue to exist. Germany, moreover, has a long list of civil court rulings which are based on this national legislation. Will they now become obsolete? Will established principles need to be revisited? There is considerable uncertainty in the market concerning these and similar questions.

It would therefore be both desirable and appropriate to enact technical rules in a regulation while dealing with rules with civil-law implications in a directive, which would then be transposed into national law. The transposition process would allow problem areas to be identified and defused. Member states’ individual legal traditions could be accommodated.

Ladies and gentlemen, the German banking association is not alone in its position. Warnings against enacting too many regulations have sounded in other countries, too, such as the UK. Our motto is therefore: directives where necessary, regulations where possible.

It is true that an EU regulation obviates the need for national transposition. It will not necessarily deliver greater legal certainty, however. This is because, although a regulation’s wording is the same in all member states, it is by no means always clearer than in a directive. The provisions of a regulation need to be interpreted, too. Uniformity does not in itself suffice; wording and terms are always understood against the backdrop of previous experience and working methods.

If we look at this situation in the context of sport, it quickly becomes clear that complications will inevitably arise in certain areas. “Football” does not mean the same thing at all to an Englishman as it does to an American! It is consequently not enough to use the same words; the words must also conjure up the same meaning.

It is therefore particularly important to fit European legislation into national law in a way which reflects the spirit of the new rules. This can be far better achieved with a directive. To ensure that the legislation is nevertheless implemented under a co-ordinated timetable, we recommend holding implementation workshops bringing together member states’ competent authorities and representatives of the Commission. This tried-and-tested mechanism is highly promising, in our view, though we would like to see more transparency for market participants at all levels of the Lamfalussy process. We also believe it is essential to involve the banking industry in the workshops direct.

 

III. Legal certainty and a level playing field instead of special rules

Ladies and gentlemen, you will doubtless have heard warning voices about the danger of directives being used by member states primarily to prescribe additional national requirements. I should therefore like to stress that directives should naturally also be implemented “as-is” – but in a way that guarantees that the same rules apply to everyone. What we need is legal certainty, not additional special rules. National lawmakers must resist the temptation to “goldplate” EU legislation with additional national measures.

The German, highly formalised rules on financial research are a good – or should I say bad – illustration of what I mean. In Germany, all the rules on financial research are triggered as soon as a bank gives a customer an internal document evaluating a financial instrument. The European Market Abuse Directive, on the other hand, envisages that the rules will apply only if the research is aimed at a broader target group. This special national requirement means that German banks have higher administrative costs and thus a competitive disadvantage. These consequences must be avoided when the MiFID is implemented.

This is exactly our intention in calling for certain rules to be enacted in a directive rather than a regulation. It is not a question of inflating European legislation with the help of directives or – as the Internal Market Commissioner Charlie McCreevy put it last week – of opening up a Pandora’s Box with the MiFID. Our objective is simply to have sufficiently clear rules and the necessary level of legal certainty for investors and financial service providers alike. We need a level playing field for all market participants. Only if we achieve this will the MiFID succeed in helping to establish a true European single market for financial services.

 

IV. Legal certainty for implementing the directives

It has emerged that member states’ discipline in transposing new European directives still has room for improvement. Take the Market Abuse Directive, for example. Many countries had not yet implemented this directive in national law six months or even a whole year after the deadline. This illustrates the importance of drawing up realistic timetables.

It is in the interests of the markets for the legal environment to be adjusted without delay. Too much pressure, however, does not give those involved enough time to get to grips with the subject-matter. In a best-case situation, pressure concentrates the mind on what is most important. In the worst case, unwieldy compromises merely paper over serious problems. In reality, the problems remain and will need to be solved at a later date and by taking further measures. This was the experience of banks, issuers and the BaFin (Federal Financial Supervisory Authority) with the Market Abuse Directive. Nine months elapsed before all open questions could be answered in guidelines for issuers.

We should learn from this experience when it comes to the MiFID. Speed alone is not enough. Quality is important, too. When the MiFID is implemented at national level it will often be crucial for the banks to have legal certainty at the planning stage – that is to say before the new rules take effect.

Implementing the MiFID will be extremely costly for the banks. Yet nowhere in Europe have the follow-up costs of the project been assessed. This oversight should not be repeated.

 

V. Conclusion

Ladies and gentlemen, the MiFID illustrates that European legislators and all those involved are on a learning curve. Baron Lamfalussy and the Group of Wise Men initiated the process, but it has not yet been completed. We are following developments and contributing constructive, but also critical, input. The Lamfalussy procedure is a first step down the right road; but transparency at all levels is of the utmost importance!

The key point with regard to the MiFID is that the Commission always selects the right legislative instrument. This applies to all the rules which are closely connected with national civil and commercial law. Otherwise, I believe there is a risk of legal uncertainty prevailing for an unnecessarily long period of time . Subsequently, in the national implementation phase, it will be important for all parties involved to agree on joint action.

The Commission has made a commitment to better regulation. The MiFID is the most significant piece of new European legislation in the securities sector. This new publication by the Association of German Banks seeks to offer some suggestions for better regulation in this area.

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