Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006

rose to move, That the order laid before the House on 18 December 2006 be approved. The noble Lord said: My Lords, I shall speak to the three other instruments before us as well. They implement the EU’s markets in financial instruments directive. I hope that the House will tolerate my referring to it as MiFID for the rest of my speech. MiFID is a cornerstone of the EU’s financial services action plan. It regulates the buying and selling of shares, bond derivatives and other financial instruments. Through a mixture of competition between intermediaries and markets and core investor protection rules, MiFID seeks to increase the depth and liquidity of Europe’s financial markets. This is a directive on which much ink has been spilled. Under lurid headlines such as ““Day of the Triffids”” and ““EU’s Monster of Madness””, many articles suggested that the directive is an example of inflexible, overburdensome regulation—regulation that will erode London’s international competitiveness. I contend that that is not the case. I believe that MiFID demonstrates the value of engaging with Europe on financial services issues. Most of Europe’s major financial services firms have a presence in London, and many London-based firms do business across Europe. In these circumstances, it is vital to our interests to have an effective regime for cross-border business in Europe. MiFID replaces an existing directive—the investment services directive. The ISD does not provide an effective basis for investment services and activities in the European Community in the21st century. It subjects firms doing cross-border business to multiple regulatory regimes andallows member states to retain anti-competitive arrangements for share trading. The Commission was therefore right to seek to replace the ISD. MiFID simplifies the regulatory regimes applying to cross-border business. It opens up share trading in all member states to competition, and we are already seeing benefits from this change; new schemes are proposed such as Project Turquoise, a multilateral trading facility launched by investment banks that will be based in London. The controversy over the directive has in large part been focused on its investor protection provisions and its transparency regime for share trading. As Commissioner McCreevy has made clear, developments in these areas were essential to make progress on the passport and competition in securities trading. Member states wanted reassurance that market opening would be balanced by effective protection for investors. The Commission has sought to create an investor protection regime that is flexible and proportionate. In several areas, the directive’s investor protection rules are less extensive than those that they will replace in the UK. They also afford, as currently in the UK, different levels of protection to different categories of investor. The highest level of protection is reserved for retail investors. The directive also allows member states to retain additional protections where those can be justified against strict criteria. This process was backed by the UK and we will be notifying the Commission that we are retaining a small number of national rules. The transparency regime is in the first instance limited to the equity market and the Commission has said that it will be alert to any signs that the changes are having unintended consequences. A review has recently started to consider the extension of the requirements to other markets. The Commission has emphasised that the review is seeking evidence of market failures, and we will work closely with the FSA, firms and the Commission. There will be a cost in adjusting to the regulatory regime under the directive. The FSA has put this cost at between £750 million and £1 billion in the United Kingdom. It has also suggested that the directive might bring direct benefits of £200 million a year and indirect benefits of a further £240 million a year. I turn to the implementation of the directive in the United Kingdom. Responsibility is split between the Treasury and the Financial Services Authority. Given the structure of financial services regulation in the UK, the FSA will undertake the greater part of the implementation through changes to its handbook. Given the split of responsibilities, we have worked very closely with the FSA on implementation to ensure that the whole hangs together. In addition to formal public consultation, we and the FSA have, since 2005, had meetings with the main trade associations approximately every six weeks, in addition to a host of other meetings with trade associations and firms. Both we and the FSA have tried substantially to mirror the language in the directive to avoid overimplementation. The legislation that we are discussing can be split into two parts. The regulated activities order and the exemption amendment order deal with the scope of the implementation of the directive. The main implementing regulations and the Uncertificated Securities (Amendment) Regulations deal with other aspects of the implementation of the directive. In respect of the scope of UK regulation, we had extensive discussions on the best approach to revisions to the regulated activities order. The order implements the scope of several directives but largely using language developed domestically rather than taken from directives. We considered integrating language taken from the directive into the substantive articles of the order. However, much in the current regulatory regime, including fees, hangs off the order’s current structure. We therefore decided to opt for an approach that keeps the current structure largely intact to minimise the disruption for firms. Within this minimalist approach, the amendments to the order do three main things: they indicate more clearly where exclusions from UK regulation can be over-ridden by MiFID; they introduce a new activity of operating a multilateral trading facility, or MTF; and they expand the coverage of financial instruments caught by regulation. MTFs are already regulated in the UK by virtue of Article 25 of the regulated activities order, which covers arranging deals in investments. However, the activity was included in MiFID because of previous arguments between member states about whether this activity was caught by European regulation. We therefore felt, and industry largely agreed, that the clarity in MiFID should be copied across to domestic legislation. MiFID covers a slightly wider range of derivatives than are currently caught under UK regulation. In particular, it covers a wider range of options, principally physically settled options on commodities, and a wider range of credit derivatives. Changes are therefore needed to the scope of derivatives caught by the articles of the RAO dealing with options, futures and contracts for difference. Some concern has been expressed that the implementation of the directive might bring foreign exchange forwards into the scope of the RAO. We have been in contact with the Foreign Exchange Joint Standing Committee. Our view is that MiFID does not alter the current test for determining whether such instruments are inside or outside the regulated activities order. The main implementing regulations cover a wide variety of issues in just over 30 pages of legislation, but, despite the length, they do not fundamentally remake the UK’s regulatory regime under FSMA. They essentially amplify existing requirements. The issues that I have highlighted in this contribution illustrate two broad points: the efforts that we are making to implement this in a practical and proportionate manner; and the fact that the directive is more liberalising and flexible than it is often given credit for in the UK. Creating a truly integrated market for financial services in Europe depends on more than legislation, but legislation is necessary to provide a framework to facilitate integration by breaking down national barriers. MiFID breaks down barriers and promotes competition. Accordingly, I commend the order to the House. I beg to move. Moved, That the order laid before the House on 18 December 2006 be approved. Fifth Report from the Statutory Instruments Committee and Sixth Report from the Merits Committee.—(Lord Davies of Oldham.)