Memorandum submitted by the Association
of Private Client Investment Managers and Stockbrokers (APCIMS)
The Association of Private Client Investment
Managers and Stockbrokers (APCIMS) is the organisation that represents
those firms who act for the private investor and who offer them
services that range from no advice or "execution only"
trading through to portfolio management for the high net worth
individual. Our 217 member firms operate on more than 500 sites
in the UK, Ireland, Isle of Man and Channel Islands and following
the merger of the European Association of Securities Dealers into
APCIMS, increasingly in other European countries as well. APCIMS
members have under management £24 Billion for the private
investor and undertake some 13 million trades for them annually.
We are attaching a series of comments designed
to be helpful to the Treasury Committee as part of this enquiry.
We have ordered our comments under the following headings as indicated
in the invitation for evidence.
(a) Developments in respect of existing and
proposed EU legislation.
(b) Progress of the Financial Services Action
(c) Ideas for future action identified in
the May 2004 report from the EU Financial Services Committee on
(d) Observations on the way in which relevant
EU Directives are implemented in the UK.
However, we would also like to bring to the
Committee's attention our concern about the considerable burden
on the financial services industry as a result of regulatory changes.
The nature and scale of change caused by the establishment of
the UK single regulator, the Financial Services Authority ("the
FSA"), resulted in both new and amended rules from over 250
consultations by the FSA. This has been unprecedented and whilst
understanding the complexity of creating a single regulator and
the need for change, the industry is now faced with further large-scale
change resulting from the European Commission's Financial Services
Action Plan and the drive forward towards a single market in financial
Although we support the objectives of a single
market, the reality is that for the greatest number of firms who
are affected by European change, there will be early costs while
the benefits may be as long as 10 years away. With this in mind
we would ask that both Government and the FSA work closely with
the industry to ensure that changes are introduced in such a manner
as to minimise the burden wherever possible. All change involves
cost to the industry, and in many instances, the impact of the
required changes can be lessened by real cooperation with market
practitioners over implementation options and timescales.
Also we urgently request that the UK goes neither
further nor faster than other European countries as to do so will
result in greater impact on the UK industry and therefore a reduction
in its competitive position compared with other European countries.
We trust that these comments are helpful to
the enquiry and stand ready to assist in any further way.
ITS EU AND
(a) Developments in respect of existing
and proposed EU legislation
APCIMS has three particular examples where EU
legislation has been implemented in the UK in a manner that is
considerably more onerous than in any other EU member state. The
three Directives of which we have knowledge are the Distance Marketing
Directive (the DMD), the second Money Laundering Directive, and
the EU Savings Tax Directive.
(i) The Distance Marketing Directivethis
was introduced by the European Commission to provide safeguards,
such as cooling-off periods, for people buying goods and services
by means that is not face to face. If the price of the goods was
volatile, it was exempted from the DMD requirements. But despite
this exemption, the UK applied the DMD to the financial services
industry in a way that has required rule changes involving industry
cost, and the UK is the only country to have done this.
(ii) Money Laundering Legislationour
members strongly support a robust regime which is as effective
as possible in countering terrorist and criminal activity. But
the UK appears to be the only European country that does not apply
a de minimis amount to its anti money laundering requirements.
In practical terms, this means that the UK requires exactly the
same checking to be done on £1 as on £10,000 when other
countries do not. There is shortly to be a third anti money laundering
Directive and the opportunity needs to be taken to bring pragmatism
into the UK requirements.
(iii) The Savings Tax Directivethis
requires information exchange on interest earned by individuals.
The guidance produced by the Inland Revenue is clear and comprehensive,
and how firms apply the guidance will be subject to scrutiny in
the annual audit. The cost of this is substantial with even a
small firm reporting that the ongoing audit check is in excess
of £15,000 per annum. Elsewhere in Europe, firms are being
left to decide how to apply requirements and the audit check appears
to be at the very least, far from a stringent test.
The UK authorities may claim that these are
examples of the UK implementing correctly, but for UK industry
it means that they have more and heavier regulations than their
counterparts and competitors elsewhere in the European Union.
Although we, and no doubt others, have made
representations on many occasions to the relevant authorities
with respect to these three directives, there has been little
desire to make either appropriate changes nor to rethink the UK
regime. We are particularly concerned therefore that when work
on implementing the Financial Services Action Plan commences in
the UK these faults are not repeated.
(b) Progress of the Financial Services
Action Plan (FSAP)
It is well documented that some 39 of the 42
measures of the FSAP concluded the legislative processes and achieved
the target timetable of 2004 for completion. But it is only now
that the real work on implementation must be carried out. Disappointingly,
there is already real evidence that the measures will be implemented
differently across member states and there is likely to be a missed
opportunity for making real progress towards a single market.
The reason for this lies in insufficient preparatory work being
done with industry by the European Commission and by national
regulators to understand how the existing regimes work at present.
And it is only by understanding how different laws and indeed
market practices have evolved that true harmonisation can result
from new legislation and regulations.
There are a number of specific points with respect
to progress of the FSAP that we wish to make
(i) Debate in the European Commission has
now centred around the comments that the Financial Services Action
Plan is almost complete. From the perspective of the financial
industry across Europe, it has hardly started! While recognising
that Commission interest will inevitably be in creating new legislation,
we would urge that further work is only considered once the Financial
Services Action Plan has been implemented and that Commission
focus should be on equal, clear and cost-effective implementation.
(ii) We are concerned at the short timetable.
Although consultation and consultative arrangements have improved,
the requirement for the Committee of European Securities Regulators
("CESR") to make its technical measures within a twelve
month period means that they have insufficient time to absorb
the points that are being made to them by practitioners in all
countries and make changes accordingly. CESR comments that they
are constrained by the timetable placed upon them by the European
Commission. In turn, the Commission states that the timetable
has been decided by the politicians. Irrespective of whether it
is one, some or all of these entities who have an involvement
in this area, unless sufficient time is given for the true consultative
process to take place, inevitably there will be decisions taken
that are inappropriate, misinformed and costly.
(iii) Although conventionally we tend to
refer to each country as having a financial regulator or regulators,
at present the reality is that the only financial regulator in
Europe is the FSA. Other authorities have supervisory powers and
few regulatory powers. This means that although they can apply
whatever the agreed regulatory requirements are, they cannot in
fact make either additional rules or regulatory clarifications
where gaps or lack of clarity exists. It is therefore easy to
see that without equivalent powers, implementation by the various
supervisory authorities will inevitably vary.
(iv) The intention of the Financial Services
Action Plan was to have a series of high-level directives with
technical measures being decided by CESR. However, we have now
arrived at a situation whereby directives are noticeably detailed,
for example the new Investment Services Directive (now known as
MiFID) contains more than 70 Articles and is some 60 pages long,
and the technical measures being decided by CESR once inserted
into MiFID will have the effect of quadrupling it in length. 240
pages of detailed requirements is clearly bringing extensive changes
and this is only one of the 42 measures of the FSAP.
(v) Within MiFID there are extensive changes
both for firms who operate in the wholesale market right down
to the conduct of business rule requirements that govern the relationship
and the actions between a firm and an individual investor. How
these changes are interpreted and implemented and implemented
will be key.
One likely change for example will be the addition
of new requirements for clients who do not want financial advice,
but simply require a share transaction to be carried out on an
"execution-only" basis. The new requirements will be
for some form of check to ensure that the client truly understands
that he is not receiving advice and therefore that the execution-only
service is "suitable". We also know that derivatives
are expressly excluded from being execution-only business. However,
Italy has decided that clients will be able to deposit a sum of
money with the brokers and carry out transactions to a specific
limit irrespective of whether it is in derivatives or in shares.
By putting in such a limit, from an Italian perspective, this
means that the service is not "execution-only" but there
will be no suitability check required either. In simple terms
this means that it will be easier to do execution-only business
across a wider range of investments in Italy than it will be in
the UK and, secondly, that it will be possible to trade derivatives
in Italy on a no advice basis.
While we support sensible consumer protection
measures, we do feel that applying additional checks for "suitability"
will simply make execution-only services less economic for firms
to provide in the UK which will be to the ultimate disadvantage
of UK clients. In addition, should the FSAP result in there truly
being a single market in financial services, then clearly UK execution-only
firms will be at a competitive disadvantage to their counterparts
quartered elsewhere in the EU.
(vi) It is also important to note at this
point that financial advice is regulated in the UK and that advisers
are required to be professionally qualified. Elsewhere, advice
is not normally regulated and professional qualifications are
only starting to be introduced. This demonstrates that however
well the FSAP progresses from now on, the starting points of the
EU countries are different and so inevitably the end result will
There are other examples as well should the
Committee wish us to provide them.
(c) Ideas for future action identified
in the May 2004 report from the EU Financial Services Committee
on Financial Integration
One of the recommendations of the May 2004 report
was for the UK to agree upon a strategy for implementing the measures
of the FSAP. The UK authorities are to be congratulated for their
efforts in setting out this strategy in their documents "Delivering
the FSAP", and "After the FSAP: A new strategic
approach". We took the opportunity of commenting on these
documents and our major observation was that there continues to
be much work to be done to ensure that the UK authorities really
understand how the industry works, and so can avoid placing an
unnecessary burden on industry through cumbersome implementation.
It remains our view that there are serious gaps in the practical
knowledge of regulators about how firms carry out change.
For example, one of the undertakings in "Delivering
the FSAP" was that a minimum period of three months would
be given for firms to implement rule changes after final publication
of new rules. But the changes from the MiFID will be extensive
and this is only one measure in the FSAP. Firms will be required
to send out new Terms and Conditions to clients. An average APCIMS
firm has 15,000 clients so new terms and conditions will cost
an estimated £45,000. If this is extended to the entire APCIMS
community then the cost of this one requirement will run to several
million pounds. Firms will also have to make alterations to their
execution policy and to the "best execution requirements".
To do this, firms will have to tell their clients whether they
carry out a transaction on the Stock Exchange or some alternative
trading platforma process which is common in the UK in
our open markets but not in continental Europe where so-called
concentration rules have until now required all trades to be done
on the relevant exchange. Again this is a change that will cost
and, as with the change to terms and conditions, it will take
a substantial period in time and one in excess of 3 months from
final publication rules, to bring about.
We therefore recommend that three steps be put
into the proceedings from now on:
(i) An All Party Committee of House of Commons
and House of Lords be set up to scrutinise the EU directives once
they have been drafted for inclusion in UK law. This Committee
should have the power to call for evidence from the industry and
to determine whether the UK proposals implement the directive
to give the intention that was required or whether there are additions
and changes which will have an adverse impact on the industry.
Such a Committee will need to have relevant powers to recommend
changes to the proposed UK draft of the legislation.
(ii) Although there are already a number
of panels and forums for industry practitioners with representatives
from HM Treasury and the FSA, we believe that a new panel needs
to be set up specifically to monitor the development of the FSAP
and to take evidence from industry on problems and issues over
implementation, including rule changes and with the powers to
recommend alteration and adjustments as necessary. This panel
would be able to take evidence from industry on problems and issues
and to come up with sensible and pragmatic solutions.
(iii) Our third recommendation is that the
FSA sets in place an information group specifically designed to
discover, discuss and determine how other countries are proposing
to implement the various FSAP requirements and how this will impact
on their existing industry practices. This information gathering
unit also needs to look at the timing of implementation in the
various states. Such information then needs to be widely disseminated
with the intention of ensuring that the UK does not go ahead of
other member states.
(d) Observations on the way in which
relevant EU Directives are implemented in the UK
We have already commented on the implementation
of three directives under section (a) above and highlighted the
ways in which the UK implementation is different to other EU countries.
(i) There is another directive, namely the
Capital Adequacy Directive, that we would also like to highlight
and especially to comment on the way in which the FSA has sought
to bring about changes to the capital regime in the UK. The debate
over capital requirements has been driven by the banking sector,
and in particular by the Basel Committee. There have been lengthy
debates about how best to change to a regime whereby banks and
investment firms put aside capital to cover the financial and
operational risks that they run. The new Basel Accord for the
banking industry was finally adopted earlier this year after successive
delays and having been under discussion for some five years, and
Directives quickly followed from the European Commission to be
implemented by both the banking and investment firm sectors of
industry. Most member states are now beginning a debate with their
industries over how to change their capital rules to reflect the
new risk based regime.
In the UK however, not only did the debate begin
some five years ago, but there have been successive consultations
on new prudential rules which have involved seven formal Consultation
Papers from the FSA and one from HM Treasury. We welcome the opportunity
to comment on FSA proposals and we do consider that it is better
to be prepared early as that allows good deliberation and discussion
and provides the industry with the sort of timetable which it
seeks to plan its changes. However, in this instance, the FSA
desire to bring about an early introduction of new prudential
rules and in advance of the outcome from Basel, has meant that
both the FSA and the industry has been excessively involved in
commenting on proposed changes that in themselves kept changing.
This has been a costly exercise and a worrying one. We have now
been told that despite all this work the new rules will be implemented
on short timescales even though we still await the final outcome
from the deliberations over the directive. This has been a muddled
process and one which does need to be avoided when considering
further directives. There is a clear balance between addressing
issues too early and before sufficient questions have been answered
and considering them too late when there is insufficient time
for useful contributions to be made.
Our last point again highlights differentials
between the UK and elsewhere. The UK has always believed that
not only is it necessary to implement directives fully but put
in place a strong enforcement regime behind the rules. Neither
have been priorities elsewhere and whilst there is undoubtedly
a movement in the EU states towards more rigorous regulation post-FSAP
than has been the case to date, nevertheless we see little sign
of any desire to implement an enforcement regime. We emphasise
that we are not asking for there to be no enforcement, rather
that again we highlight this point as an example of the difference
between implementation of EU directives in the UK and elsewhere.
(ii) In general, the UK drafting of EU requirements
into law covers every eventuality and seeks to protect the client
(the UK Government) from challenge. We contend that this should
not be the case and that legal drafting should:
go no further than the Directive
unless there are specific reasons to do so agreed widely with
should implement only the intent
of the Directive;
should specifically minimise
cost burdens on the industry; and
should not carry an enforcement
regime greater than that of other EU countries.
The same principles should apply to the regulations
where the requirements are being implemented through the FSA.