This response to CESR s April 2004 consultation paper on the Role of CESR at Level 3 under the Lamfalussy Process is divided into three sections:

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1 London Investment Banking Association International Primary Market Association International Securities Market Association c/o Timothy Baker, LIBA, 6 Frederick s Place, London EC2R 8BT Response by the London Investment Banking Association, International Primary Market Association, and International Securities Market Association to CESR s consultation on the Role of CESR at Level 3 This response to CESR s April 2004 consultation paper on the Role of CESR at Level 3 under the Lamfalussy Process is divided into three sections: A Key issues (page 1) B General comments (page 2) C Specific comments on CESR s Proposals and Questions (page 4) A KEY ISSUES The following key points arise from our detailed comments in Sections B and C below: (a) Best possible realisation of the potential of CESR s Level 3 role requires EU commitment to a clearly agreed statement of overarching principles of regulation. (b) CESR should stress the importance of mutual recognition as well as of regulatory and supervisory convergence. (c) Transparency, consultation, cost/benefit disciplines, and thorough analysis of existing national regulatory requirements and practices, are vital in all aspects of CESR s Level 3 role. (d) CESR should build in specific mechanisms or procedures to take account of the specific needs of wholesale markets, to ensure that its Level 3 activity is consistent with them and does not impose unsuitable and damaging retail standards on them. (e) CESR should take into account the importance of the interaction between EU regulation and the needs of global issuers and investors. (f) Strong support for CESR s proposed role in alerting the Commission of the need to adjust EU law. CESR should also have a role in alerting the Commission to national implementation failures. (g) CESR should not seek Commission endorsement of its Level 3 convergence, other than through Levels 2 or 4. Such endorsement risks undermining CESR s Level 3 role and flexibility. 1

2 B. GENERAL COMMENTS 1. Agreement on objectives of regulation. CESR s initiative in consulting on its use of Level 3 is exemplary. However, the precision with which CESR can analyse its role and functions at Level 3 is limited by the continuing absence of agreement at EU level on the overarching objectives that regulation serves. Without a clear political statement at the EU level of the overarching principles of regulation (as recommended by the Lamfalussy Report) CESR, its members, and the regulated community will not be able to specify and agree a clear set of objectives for Level 3, nor measure whether they have been achieved. The objectives should be capable of being linked to concrete measures of achievement (e.g. participation of third country issuers in EU markets). We recommend to the European authorities the set of principles set out in Section 2.3 of the May 2004 Securities Experts Group Report: Financial Services Action Plan: Progress and Prospects (set out in an Annex to this response) We also support the Securities Experts Group s call, in paragraph 70 of the Report, for national supervisors to adopt a modus operandi that ensures a true commitment to a single market dynamic, taking account of market participants needs resulting from market integration. 2. Procedures and mechanisms needed to do justice to wholesale markets. CESR s Level 3 procedures should include a specific, integral mechanism for checking that proposed convergence of implementation of EU law, regulation, and supervision takes into account the specific features of wholesale markets, and that measures designed to protect retail investors do not inadvertently constrain professionals. Such a mechanism is also needed to ensure that European wholesale market regulation maintains Europe s international competitiveness. Requirements in some Member States for regulatory proposals specifically to take account of the wholesale dimension provide a possible model. CESR could supplement such a formal requirement with a dedicated wholesale markets subcommittee whose role would be to assess CESR proposals from the wholesale markets point of view. Furthermore, CESR should also ensure that its judgement of the effect of any proposals on wholesale markets is soundly based on a sufficient understanding of the way in which wholesale markets operate in practice. Staff training, ensuring that relevant CESR experts have a prominent role in decision-making, and consultation with a wholesale market practitioners panel (see general comment 7 below) would all have a role. 3. Procedures need to take account of the global nature of financial markets. Particularly as regards wholesale markets, CESR should at all times bear in mind the importance of the interaction between the EU regulation and the needs of global issuers and investors (compare section 2.7 of the May 2004 Securities Experts Group Report). 4. Transparency etc vital in Level 3. Since Level 3 has such a crucial influence on how EU law is applied at national level, the usual disciplines of transparency, consultation, and cost/benefit analysis are as essential at Level 3 as they are at Levels 1 and

3 Transparency etc at national level is also vital. It is equally essential that CESR s activity in coordinating implementation of EU law and regulatory convergence is not allowed to undermine the usual disciplines of transparency, consultation, and cost/benefit analysis at national level. For example, it is particularly important that Level 3 does not undermine national obligations on rule-making and the principles of good regulation in those financial centres in Europe in which the international wholesale market is concentrated, where different priorities may apply from the more retail-oriented focus of CESR s Level 3 work. Furthermore, CESR should take a leading role in ensuring that national regulators apply good consultation practices when implementing EU legislation or CESR recommendations. 6. Mutual recognition is important. CESR s consultation concentrates mainly on convergence of regulatory practice and regulatory decisions. Particularly as regards the wholesale market, and innovative specialist services developed within particular national markets, CESR should give equal weight to the importance of mutual recognition and sensible allocation of regulatory responsibilities for cross-border groups. 7. Market participants must have a voice. CESR s Level 3 procedures should also contain a mechanism for market participants to raise concerns, and have them answered, for example if they consider that convergence is going in a damaging direction. CESR could supplement an administrative mechanism for receiving and answering concerns with a formal wholesale market practitioners panel. 8. CESR should analyse existing national regulatory requirements. Particularly when considering convergence, CESR s starting point must be an analysis of the existing regulatory and supervisory requirements across Member States. CESR should undertake and publish such analyses as a matter of course. The analyses would fulfil the evidence-based policy-making recommendation in section 2.4 of the May 2004 Securities Experts Group report. They would provide helpful reference material for market participants on differences in regulatory approach, and super-equivalence where it exists. They could also be used to assess progress towards the objectives recommended in general comment 1 above. 9. CESR should not seek a role where existing arrangements function adequately. CESR s Level 3 role should focus on where improvements are needed. It should not disturb existing cooperation arrangements (e.g. joint supervisory visits) which function effectively and are more appropriately dealt with through bilateral arrangements between national regulators. Some of the issues and questions on which CESR is consulting overlap: e.g. Q4 on the regulation of innovation and CESR s proposed urgent issue groups. 3

4 C. SPECIFIC COMMENTS ON CESR S PROPOSALS AND QUESTIONS. 1. Coordinated implementation of EU law This part of CESR s proposals covers transposing directives and applying EU law on a daily basis. CESR states that coordinated application is particularly relevant where there is no transposition, as when the Commission uses Regulations as the implementing instrument. CESR cites as examples of current Level 3 activity in this area: its ad hoc sessions on coordinating detailed measures under MAD, parallelling the Commission s package meetings and transposition guidelines ; the Review Panel s correspondence tables and peer reviews on CESR standards under the 1993 ISD. (a) CESR proposes that the Level 1/Level 2 distinction should correspond to the distinction between what is transposed in national laws and in rules of national regulators: to facilitate flexibility and adaptability. We agree with CESR s wish to ensure that Level 2 flexibility is preserved by ensuring that changes to implementing measures can be reflected rapidly at national level. However, where appropriate, there is no reason why Level 1 provisions should not also be transposed in the rules of national regulators. (b) CESR proposes to retain the CESR Expert groups on particular directives in a permanent advisory role. This could be a particularly useful way in which to advise the Commission where Level 1 or 2 legislation needs to be amended in the light of practical experience. It will be essential for the Expert groups to be transparent in this role. Transparency is particularly important because practitioners are not represented on the CESR Expert Groups. The continuation of CESR Expert Groups should if possible be supplemented by a continuing role for the Market Practitioners Experts Groups. (c) CESR recommends its members be given similar rule-making powers. We support the principle that all regulators should have equally effective rulemaking powers. It is however vital that all such rule-making powers are always accompanied by rigorous transparency and consultation. Competent authorities must have the power under national law to fulfil their rule-making obligations under the directives. Some directives state that competent authorities must be given these powers. Competent authorities should also have the legal power to participate in associated activities which they consider helpful in implementing directives. However, provided that the powers are effective, their legal nature (e.g. statute, royal decree, administrative procedure) is best left to national law. CESR questions: Q1 Do you agree with the described role of CESR with respect to the coordinated transposition and application of EU law? See comments on points (a), (b), and (c) directly above. 4

5 Q2 Do you see an additional role for CESR under Level 3 where CESR could contribute to the coordinated implementation of EU law? If so, please explain what CESR should do to establish the role proposed. We strongly support the statement in paragraph 59 of the Securities Experts Group Report that Level 3 should be used as a tool to achieve operational convergence in day to day supervisory practice, rather than standardisation of national legislation. See paragraphs 2 and 7 in the general comments above on the need for CESR to establish specific arrangements to take account of the impact of coordinated implementation on wholesale markets, and to give market participants a voice. CESR should also ensure that there are mechanisms for close contacts with other Level 3 committees, in particular CEBS, on issues with cross-sectoral importance. 2. Regulatory convergence This part of CESR s proposals covers common approaches and rules to facilitate harmonised implementation. CESR cites as examples of current Level 3 activity in this area: the creation of common jurisprudence via MAD and PD guidelines; CESR s intervention in areas not covered by EU law, such as the ECB/CESR work on clearing and settlement. (a) CESR proposes to continue creating common jurisprudence by national supervisors, by: national regulators taking converging decisions; CESR transforming such decisions into indicative guidance, regulatory recommendations providing a benchmark, or standards that carry CESR member commitment. To be able to assess CESR s proposals, it is necessary to know what would be the legal form and effect of CESR s jurisprudence. At the 11 th May.2004 hearing, CESR stated that the common jurisprudence would have no legal effect, and could have only an evidentiary or persuasive effect. It is clear that only the ECJ or national courts can act as the legal arbiter, including on matters of evidentiary or persuasive effect. CESR should restrict its role in this area to the provision to CESR members of information about national regulators decisions. (b) CESR suggests that the Commission could take the initiative to endorse these common approaches as a proper manner of applying EU law to give more authority to CESR s decisions. As a matter of general principle we oppose active Commission endorsement of CESR s common approaches, which would diminish CESR s Level 3 role and the authority of national regulators, and could limit the flexibility and adaptability of regulation. In general the Commission s active role should be limited to legislation and enforcement, which are the appropriate routes for dealing with problems. It is particularly important to ensure that any Commission endorsement of regulatory coordination at Level 3 does not become a means to circumvent national procedures for implementing EU law. Under the Lamfalussy process the Commission s role does not extend into Level 3. Level 3 measures were intended to implement the policy of the Directives in a flexible manner adapted to national conditions. Enabling the Commission or CESR to veto 5

6 national implementation measures through an endorsement mechanism outside the normal constitutional processes would not be appropriate. Furthermore, there is an important need for maximum flexibility, given that Level 3 will tend to be more easily adaptable than Level 2 in urgent circumstances (compare CESR s proposals for urgent issues groups ). While Level 2 improves on pre-lamfalussy processes, its ability to react swiftly is untried, and it still relies on CESR persuading the Commission to take action at Level 2. The ability to use Level 3 as an urgent reaction mechanism would be restricted by the suggested Commission endorsement mechanism. It is also the case that only the ECJ can determine definitively what EU legislation requires. (c) CESR proposes that it should have a role in alerting the Commission to the need to update Level 2 or Level 1 texts. We strongly support this role, even if it is not a mandated role for CESR. CESR s advice and alerts should include situations where existing law should be deleted, as well as modified or new law added. CESR has a role in ensuring that EU law remains practical and appropriate. However, CESR s role should not prevent individual regulators from approaching the Commission directly without the intervention of CESR.. CESR questions: Q3 Do you see any other aspect of regulatory convergence where CESR could play a role? CESR should also alert the Commission when its analysis of Member States practices shows gaps or inadequacies in Member States implementation of EU law. This would provide a cross-check on reports of implementation failure by market participants. Where both market participants and CESR expressed concern, it would also provide the Commission with a measure of the importance of any implementation failure. Such a role for CESR should not, of course, be a substitute for the Commission s allocating sufficient resources to its enforcement responsibilities. Q4 Do you think that CESR could play a role in providing coordinated opinion on new services or products with pan-european scope? We agree with the approach set out in section 2.6 of the May 2004 Securities Experts Group Report, in particular that innovation is an essential part of a vibrant financial services market and regulatory measures must not impede the innovative process. Any role for CESR in providing coordinated opinion on new services or products must therefore focus on mutual recognition and the removal of barriers to crossborder service provision, not the imposition of new restrictions on innovative service provision. It must also not go beyond services or products with a specific pan- European scope. It will also be necessary to bear in mind the rules that will in any case apply to services or products which are within the scope of the Markets in Financial Instruments Directive. Similarly, the Prospectus Directive fully harmonizes the primary market and establishes a very clear passport, with no loopholes. Any product that benefits from the passport should not need to have any further vetting to be sold in other Member States, and therefore should not need any further review by CESR or another CESR member to determine its fitness for circulation within the EU. This also applies to new products, which do not have to fit into a given disclosure schedule in order to be approved; the authorizing body will simply work with the 6

7 issuer to determine the necessary adjustment to existing schedules. It would undermine the Directive to tinker with this mechanism. It is vital that CESR activity does not restrict European innovation in international wholesale markets. A precedent for what CESR s approach should be is its advice on acceptable market practices under the Market Abuse Directive, under which new practices are not by definition presumed to be unacceptable. There may, however, be an active role for CESR at Level 3 in eliminating barriers to the development of a European single market (e.g. emissions trading). Q5 Would you consider endorsement by the Commission of the common guidance established by CESR as a helpful tool to ensure consistent application of EU directives/regulations? As noted in our comments on 2(b) above, as a matter of general principle we oppose active Commission endorsement of CESR s common approaches, which would diminish CESR s Level 3 role and the authority of national regulators, and could limit the flexibility and adaptability of regulation. In general the Commission s active role should be limited to legislation and enforcement, which are the appropriate routes for dealing with problems. However, Level 2 should not be used as a means to add ever more regulatory requirements to EU legislation, thereby leaving CESR less and less discretion at Level 3. The feedback loop described in section 2(c) above on regulatory convergence is the appropriate mechanism for giving legislative backing at Level 2 to any necessary changes that are revealed by regulatory cooperation at Level 3. The alert mechanism described in our response to Q3 above is the appropriate mechanism for CESR to provide input to the Commission s Level 4 enforcement responsibility. It is particularly important to ensure that any Commission endorsement of regulatory coordination at Level 3 does not become a means to circumvent national procedures for implementing EU law. 3. Supervisory convergence This part of CESR s proposals covers cooperation in performance of supervisory tasks and obligations under Directives/Regulations. CESR cites as examples of current Level 3 activity in this area: CESRFIN coordination of enforcement practices in the accounting area; CESRPOL s sharing of information, cooperation and coordination of surveillance and enforcement; CESR s survey of internet surveillance and automated detection tools; its proposed best practice guidelines on joint enforcement; and its proposed exchange of experience on market abuse investigation and riskbased approach to supervision. Differences of views on, e.g., risk-based approach to supervision mean that agreeing common approaches would be a substantial task. In addition to questions 6, 7, and 8, CESR raises other important questions which call for comment: CESR proposes as a target similar treatment of similar cases, sharing of national decisions and the creation of EU jurisprudence. It will be necessary to understand what CESR means by EU jurisprudence. As set out under 2(a) above, it is clear that only the ECJ or national courts can act as the legal arbiter, including on matters of evidentiary or persuasive 7

8 effect. CESR should restrict its role in this area to the provision of a mechanism for CESR members to exchange information about national regulatory decisions CESR asks for comments on the catalogue of mutual recognition and cooperation obligations under FSAP directives. See our answer to Q8 below. CESR proposes a Level 3 role for advisory mediation of disputes between CESR members without reference to the Commission (compare the specific mediation role for CESR under MAD). See our answer to Q7 below. CESR proposes joint supervisory visits. This should not be a role for CESR at Level 3. Joint supervisory visits are an entirely sensible regulatory tool where appropriate. However, they are more appropriately dealt with as a matter for bilateral agreement between the relevant regulators. CESR involvement would be particularly inappropriate if a difference in the expertise of the supervisors on particular markets, products, or services, meant that CESR-initiated joint supervisory activity resulted in the overriding of the expert regulator s judgement. CESR proposes urgent issue groups to agree a proposed approach with other CESR members. Such a mechanism could be sensible, but its development needs care. It will be important not to allow haste to undermine the quality of decision-making, or to lead to failures to consult, as for example happened at the legislative level in the US with the Sarbanes Oxley Act. CESR proposes training for its members operational staff in a Europe-wide context. Such training should be expanded to include practical experience of the markets which CESR members regulate, for example by structured short-term fact-finding secondments to regulated entities. CESR proposes the exchange of personnel between national regulators. We support this proposal. CESR questions: Q6 Do you see any other aspect of supervisory convergence where CESR could play a role? If so, how and why? No. Q7 What kind of mediation role do you consider would be appropriate for CESR? Appropriate expert advice and mediation could advance the cause of the single market where different regulators make inconsistent judgements. CESR s mediation decision would need to be advisory and cannot be binding on regulated entities, which must retain the right to take the case to the Commission or ECJ. CESR s role should be to invite parties to use its facilities should they feel mediation is appropriate to resolve 8

9 their dispute. It would also be essential to ensure that the mediator was expert in the market, product, or service that was the subject of dispute, in particular as regards specialised wholesale markets. Similarly, where two regulators have given inconsistent rulings on essentially the same issue, in circumstances where one of them has clearly made an incorrect decision, it would be important to bring specialist expertise to bear in resolving the discrepancy. Q8 Do you have any comments on the catalogue of all mutual recognition and cooperation obligations under the Directives where CESR is active? CESR should undertake legal analysis on two issues: (a) The obligations to exchange information are numerous and often use different language. It will be important to analyse whether the differences are intentional, and what their legal effects are. (b) How it is intended that exchange of information provisions and obligations interact with national and EU law in areas such as banking secrecy, defamation, admissibility of evidence, in particular as regards investors and issuers from third countries. CESR should not seek to establish arrangements for the exchange of information about particular cases outside the mechanisms established under EU law or via memoranda of understanding. London Investment Banking Association International Primary Market Association International Securities Market Association 28 th May

10 ANNEX Principles of securities markets regulation that should form the explicit basis for European securities legislation and regulation: Principles of securities markets regulation set out in the Lamfalussy Report: Maintain confidence in European securities markets Maintain high levels of prudential supervision Contribute to the efforts of macro and micro prudential supervisors to ensure systemic stability Ensure appropriate levels of consumer protection proportionate to the different degrees of risk involved Respect the subsidiarity and proportionality principles of the Treaty Promote competition and ensure that the Community competition rules are fully respected Ensure that regulation is efficient as well as encouraging, not discouraging, innovation Take account of the European, as well as the wider international dimension of securities markets Additional principles of securities markets regulation proposed in the May 2004 Securities Experts Group Report: Promote a reduction in the cost of capital for issuers and /or increased real returns for investors Legislation to be evidence-based and subject to regulatory impact analysis Non-legislative solutions to be encouraged Promote the development of financial markets by taking into account international competitiveness as a fundamental consideration 10