A.  INTRODUCTION

  1.  Following our oral evidence on 25 June, the FSA thought it might be useful for the Committee to receive a supplementary note on the role of the Lamfalussy Committees in developing Europe's system of financial services regulation.

  2.  The financial services industry is being reshaped by five global forces. These are:

—  more intense international competition,

—  advances in technology and communications,

—  growing sophistication of investment products,

—  demographic change, and

—  the breakdown of traditional, sectoral product and provider categories (bancassurance, end of Glass Steagall etc).

  3.  These forces are changing the risk profile of firms. Regulators worldwide have been adapting by increasing the levels of regulatory communication and co-operation and by enhancing the role of international standard setting regulatory organisations (such as the Basel Committee, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors).

  4.  The response to these forces has taken a further step in Europe because of the considerable level of integration in the wholesale market and because the Community's single market legislation implies and requires high levels of co-operation and co-ordination. (The ECB estimates that 46 systemically important institutions operating cross-border account for more than 65% of EU banking assets.) Within Europe the regulator of the group, the regulator of the subsidiary, of the branch, and the regulator in the country where the recipient of a service is based each has areas of exclusive responsibility and control, and areas where responsibilities overlap.

  5.  The result is that there are some areas where the home regulator delivers some important consumer protections for the host regulator, for example, in the areas of capital and depositor and investor compensation schemes, some areas where responsibility is shared, eg liquidity; and some where the responsibility is mainly the host's, for example disclosure. Enhanced regulatory co-operation is needed to ensure that regulators with their varying responsibilities are properly informed about relevant risks, that duplication of regulatory activities is avoided, and that the oversight of internationally active firms is improved.

  6.  Within the framework of Community legislation, there is no ideal institutional structure which can meet the requirements of providing efficiency and effectiveness for firms and consumers in a proportional manner, maintaining financial stability for Member States, whilst also delivering political accountability to the wider public interest at the national and EU levels.

  7.  There has been extensive debate across Europe as to whether a system of enhanced co-operation by national regulators should be replaced by some kind of single financial services regulator. The question was last rigorously analysed and debated in 2000 by the "Committee of Wise Men on the Regulation of European Securities Markets", chaired by Baron Lamfalussy.

  8.  The final report of that Committee appeared in February 2001. Its recommendations, which have been developed in the years since, are that the best outcome will be achieved not by some form of single European regulator but instead by creating an effective network of national regulators, who work collaboratively together. The Lamfalussy Committees are the key institutional means for achieving this.[5]

  9.  The Commission Decisions establishing the three Lamfalussy Committees (CEBS, CEIOPS and CESR) does not give them identical mandates. But in broad terms they have two main roles. They are:

—  To provide the Commission with advice on legislation to deadlines set by the Commission.

—  To promote standards of good practice, supervisory co-operation (including the establishment of colleges of supervisors) and convergence. (We take convergence to mean: a measured, proportionate and regulator-moderated process using non-legally binding guidance to achieve broadly congruent regulatory outcomes in terms of consumer/investor protection and/or financial stability where it is cost effective to seek these. It is not a maximum harmonising one size fits all approach.)

  10.  Since they were set up the three Lamfalussy Committees have been kept busy. The majority of their time has been focused on providing advice and guidance on new legislative measures (see the attached Annex for details). This work has tended to limit severely the time and resource for formulating guidance and promoting enhanced co-operation and supervisory convergence, and some criticism has been levelled at the Committees as a result.

  11.  In our view, the Level 3 Committees have made good progress in the time available to them in the area of supervisory convergence, and remain the best approach for the foreseeable future. As noted above, the major constraint on their work to date has been the requirement to provide large amounts of formal advice to the Commission on legislation. We believe that the basic Lamfalussy structure remains valid, though the ability of the committees to secure further tangible progress on supervisory convergence will depend to a large extent on the willingness of the membership to operate within the structures in the ways originally intended. It is, for example, imperative that member states are diligent in implementing directives, in terms of the spirit as well as the letter. We believe that a tough peer review within the context of the committees would help to ensure this but it will require honest scrutiny and a willingness to offer and accept criticism. Similarly, there should be an expectation that member states will, in general, implement the non-binding "Level 3" guidance unless there are compelling reasons not to do so. We believe that a "comply or explain" regime, in which non-implementing states are expected to provide reasons for non implementation would impart a valuable degree of discipline to this process.

  12.  It is worth noting, in passing, that the task facing financial services regulators is significantly different from that confronting most utilities regulators. The key difference is that vertical integration between the operator of the infrastructure, such as pipelines or cables, and the provider of gas or electricity can make it difficult to remove obstacles to effective competition. In the area of financial services, by contrast, there are fewer natural monopolies, clearing and settlement being one key exception. There is therefore greater scope for harnessing market forces, particularly in wholesale markets. Finally, the responsibilities of financial services regulators and the focus of their activities are on prudential and conduct of business issues, not on prices and economic rent. Indeed, we are not aware of any financial services regulators in the EU who might be described as economic regulators.