Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-13T03:52:27.284Z Has data issue: false hasContentIssue false
  • English
  • Français

The Regulation of Investment Services in the Single Market: The Emergence of a New Regulatory Landscape

Published online by Cambridge University Press:  17 February 2009

Niamh Moloney
Niamh Moloney
Affiliation:
Lecturer, School of Law, Queen's University Belfast. She is the author of EC Securities Regulation (Oxford University Press 2002).
Get access

Extract

EC investment services regulation is a regime in transition. Since the adoption of the Financial Services Action Plan (FSAP) in 1999, the harmonized EC investment-services regime has been undergoing a period of seismic change. This process of change has been accelerated by the presentation of the seminal Lamfalussy Report on the Regulation of European Securities Markets in February 2001. The shape of the regime which will emerge from this period is still opaque. It is likely, however, that this most recent developmental stage of EC investment-services regulation will conclude with the formation of a mature, fully-fledged system of EC investment-services market regulation. In particular, it appears that the new regime will regulate the single market in investment services considerably more aggressively than does the current regime. It is unlikely, therefore, to be characterized simply as a functional integration-device which facilitates the construction of the single market in investment services via a regulatory passport: this characterization does, however, describe the current regime, for the most part.

Type
Articles
Information
European Business Organization Law Review (EBOR) , Volume 3 , Issue 2 , June 2002 , pp. 293 - 336
Copyright
Copyright © T.M.C. Asser Press and the Authors 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

1 COM (1999) 232 (the FSAP).

2 This article is concerned with the regime applicable to the provision of investment services by investment firms. It will not address in detail the major FSAP-driven revisions under consideration with respect to: the trading systems on which investment firms operate which include regulated-market standards, market integrity and transparency proposals; the measures designed to apply to the securities and investment-services markets generally such as the Market Abuse Proposal; nor the issuer-directed measures such as the Prospectus Proposal (the latter two measures respectively, the Proposal for a Directive on insider dealing and market manipulation COM (2001) 281 (OJ [2002] C 240/265) and the Proposal for a Directive on the prospectus to be published when securities are offered to the public or admitted to trading COM (2001) 280 (OJ [2002] C 240/272)).

3 The volume of new regulatory proposals aside, a non-scientific review of the level of coverage of EC investment-services regulation matters by the Financial Times since 1999 reveals considerable levels of reportage and editorial comment on the regime's recent evolution.

4 Final Report of the Committee of Wise Men on the Regulation of European Securities Markets, February 2001 (the Lamfalussy Report).

5 Whether or not a detailed framework of harmonised rules should be adopted to regulate the single market is a controversial and multi-faceted question, a full examination of which is outside the scope of this discussion. In principle, harmonisation in the investment-services sphere is generally regarded as being appropriate where it is necessary to correct market failures which extend beyond national boundaries and cannot be remedied by individual Member State action. These include regulatory costs, market-access obstacles, and externalities (such as systemic risk or fraud). Where the market failure is less evident (as can be the case where EC rules move beyond the prudential or systemic-risk-management sphere) the argument for harmonisation can be less compelling, particularly given diverging local market conditions and regulatory cultures. For different perspectives on this question in the EC securities regulation context (there is a considerable US literature on harmonisation versus regulatory competition of which a seminal example is Romano, R., “Empowering Investors: A Market Approach to Securities Regulation”, 107 Yale Law Journal (1998) 2359CrossRefGoogle Scholar) see, for example: Ferrarini, G., “Securities Regulation and the Rise of Pan-European Equity Market: An Overview”, in: Ferrarini, G., Hopt, K. and Wymeersch, E. (eds.), Capital Markets in the Age of the Euro (Kluwer Law International 2002) 241–288Google Scholar; HM Treasury's 2000 Report on Completing a Dynamic Single European Financial Services Market: A Catalyst for Economic Prosperity for Citizens and Business Across the EU (the Treasury Report), para. 7; Hopt, K., “Company Law in the European Union: Harmonisation and/or Subsidiarity?” 1 International and Comparative Corporate Law Journal (1999) 41, 50–52Google Scholar; Davis, E., “Problems of Banking Regulation – An EC Perspective”, in: Goodhart, C. (ed.), The Emerging Framework of Financial Regulation (London: Central Banking Publication 1998) 533, 546–547Google Scholar; Bradley, C., “Competitive Deregulation of Financial Services Activity in Europe after 1992”, 11 Oxford Journal of Legal Studies (1991) 545, 545–547CrossRefGoogle Scholar; and Fitchew, G., “Towards a Complete Internal Market in Financial Services: The White Paper and Beyond”, in: Branco, M. Castello and Pelkmans, J. (eds.), The Internal Market for Financial Services (Maastricht 1987) 127.Google Scholar

6 See the discussion of the E-Commerce Directive's (Directive 2000/13 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market OJ [2000] L 178/1) Member State of establishment integration device and its ramifications in section 4.

7 See sections 4 and 5.

8 Overview of Proposed Adjustments to the Investment Services Directive. Working Document of Services of DG Internal Market. Document 1. July 2001 (the ISD Working Paper). See section 5. Note: Since this article went to press, the Commission has produced a second consultation document (Revision of Investment Services Directive (93/22/EEC). Second Consultation. Overview Paper. March 2002) which, particularly with respect to the treatment of securities-trading markets and alternative trading systems, revises the July 2001 document in the light of, inter alia, market responses. A formal proposal reforming the ISD is expected by the end of 2002. The discussion in this article concerns the July 2001 document. The Commission's orientations on the ISD conduct-of-business regime, which is the main focus of this article's discussion of the ISD Working Paper, have not, however, changed dramatically between the two documents. Conflict-of-interest management has, however, now been dealt with in greater detail (cumulation of orders, for example, is addressed) and categorised as a condition for taking up business.

9 Recommendation 77/534/EEC, OJ [1977] L 212/37 (the Code of Conduct).

10 The investment-services-specific standards include General Principle 6 which requires that financial intermediaries (defined as all persons professionally concerned in transactions in transferable securities) endeavour to avoid all conflicts-of-interests between themselves and their clients and between their clients and other third parties with whom they have a fiduciary relationship. If the conflict cannot be avoided, financial intermediaries are required not to seek to gain from the situation and to avoid any prejudice to clients or other persons with whom they are in a fiduciary relationship.

11 Directive 93/22/EEC on investment services in the securities field (OJ [1993] L 141/27) (the ISD) and Directive 93/6/EC on the capital adequacy of investment firms and credit institutions (OJ [1993] L 141/1) (the CAD), respectively.

12 Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (OJ [1985] L 375/3).

13 Directive 2001/34/EC on the admission of securities to official stock exchange listing and on information to be published on those securities (OJ [2001] L 184/1) and Directive 89/298/EEC coordinating the requirements for the drawing-up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public (OJ [1989] L 124/8).

14 Directive 97/9/EC on investor compensation schemes (OJ [1997] L 84/22) (the ICSD).

15 Directive 98/31 (OJ [1998] L 204/14).

16 Directive 95/26/EC amending Directives 77/780/EEC and 89/646/EEC in the field of credit institutions, Directives 73/239/EEC and 92/49/EEC in the field of non-life insurance, Directives 79/267/EEC and 92/96 in the field of life assurance, Directive 93/22 in the field of investment services and Directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (UCITS), with a view to reinforcing prudential supervision (OJ [1995] L 168/7) (the PSD).

17 COM (1998) 625 (the 1998 Communication).

18 2000 Commission Communication on Upgrading the Investment Services Directive (COM (2000) 729) (the ISD Communication).

19 Completing the Internal Market. COM (85) 310.

20 Supra n. 1,2.

21 Supra n. 4, 8.

22 Ibid., 7.

23 The exercise of supervision over the Commission in its exercise of delegated law-making powers is governed by Council Decision 99/468/EC Laying Down the Procedures for the Exercise of Implementing Powers Conferred on the Commission (OJ [1999] L 184/23) which sets out three supervisory models according to the degree of power available to the committee (or whether it is a regulatory, management or advisory committee).

24 Commission Decision 2001/528/EC establishing the European Securities Committee (OJ [2001] L 191/45) (the ESC Decision) and Commission Decision 2001/527/EC establishing the Committee of European Securities Regulators (OJ [2001] L 191/43) (the CESR Decision), respectively. The CESR is, in effect, FESCO reconstituted and brought within the EC institutional structure. FESCO (the Forum of European Securities Commissions) was founded in 1997 and has been a driving force in securing extra-EC agreement between Member State securities regulators on harmonized standards. In recent years it has produced important initiatives on harmonizing standards with respect to issuer disclosure, market abuse and conduct-of-business regulation, to name but three, which have had a major influence on proposal development by the Commission.

25 The Market Abuse Proposal and the Prospectus Proposal (supra n. 2). Both measures contain a level of detail surprising for measures which are designed as level 1 framework measures.

26 At an early stage of the Lamfalussy discussions Parliament sought a right of appeal against Commission level 2 decisions. The possibility of a Parliamentary veto over such decisions was rejected by the Lamfalussy Report, however, as not being envisaged in the Treaty. The Report attempted to address Parliament's concerns by pointing to the close contact which would be maintained by both committees with Parliament. It also emphasized that, under its proposals, Parliament would have time before the Commission made a proposal to the ESC and after the ESC vote to check that the proposal and the level 2 measure conformed with the scope of the implementing power given by the level 1 measure. Finally, the Report noted that if Parliament were to consider that the Commission's proposal did not conform with the scope of the level 1 implementing power, it could pass a resolution to that effect. The Commission would then be required to reconsider its proposal, taking the Parliament's position into account (supra n. 4, 34). The Report's conclusion was that "it is in everybody's interest that the European Parliament be given an adequate role in the procedure … [w]ere Parliament not to be satisfied, the consequences would be felt the next time co-decision legislation (Level 1) conferring implementing powers on the Securities Committee is proposed. This point would no doubt not be lost on the Commission or on the Securities Committee.” At 34.

27 Common position at OJ [2001 ] C 23/1.

28 Norman, P., “EU Bid to Shake Up Securities Markets Delayed”, Financial Times, 9 November 2001.Google Scholar

29 Although the Lamfalussy model emphasizes the importance of transparency and consultation at all stages of the new law-making process, the Commission's first foray into level 1 law-making has been less than auspicious in this regard. It was criticized by the marketplace on the presentation of its Market Abuse Proposal and Prospectus Proposal for not consulting sufficiently widely and, in effect, not meeting the transparency standards which underpin the Lamfalussy proposals. Boland, V., “Battle Looms over Brussels plan for capital markets regulation”, Financial Times, 11 June 2001Google Scholar. The Commission has also been strongly criticized by ECOSOC in its January 2002 opinions on the Market Abuse Proposal and the Prospectus Proposal for failing to consult the market fully prior to presenting the proposals (CES 35/2002 EN/o para. 3.2 and CES 34/2002 EN/o para. 2.1, respectively). Clearer evidence of a move towards greater transparency in law-making can be seen, however, in the detailed pre-proposal consultations launched by the Commission on market transparency (Towards an EU Regime on Transparency Obligations of Issuers whose Securities are Admitted to Trading on a Regulated Market. Consultation Document of the Services of the Internal Market Directorate General). Although greater transparency in the securities regulation sphere reflects the Lamfalussy model, it also forms part of a generalized move towards better involvement and more openness in Community law-making which forms a central element of the Commission's July 2001 White Paper on European Governance (COM (2001) 428 (the European Governance White Paper)).

30 P5-TAPROV(2002)0114 and P5-TAPROV(2002)0113, respectively.

31 The guidance in the Parliament's revisions to the Prospectus Proposal, for example, extends to twelve general principles (such as the need to ensure confidence in financial markets and the importance of reducing the cost of, and increasing access to, capital) as well as to the more specific guidelines applicable to specific delegated powers. These include, for example, the instruction that when adopting detailed disclosure requirements, the Commission is to adapt the requirements according to whether the issue refers to equity securities or another category of instrument and the requirement that the detailed disclosure rules distinguish between the disclosure required with respect to securities designed for a public offer only and those designed for a regulated market.

32 The point has been made that “harmonization – if conceived broadly as an instrument of European legal and economic policy – gets its legitimation less from results in integration than from the substantive content and effect of the Community law in which it results… it may also be that the hopes placed in Community laws are even higher precisely because the national lawmakers either in some or all Member States have not been able to find convincing solutions for certain problems”. Hopt, K. and Buxbaum, R., Legal Harmonisation and the Business Enterprise (de Gruyter 1988) 212Google Scholar. The ISD's minimum standards had, in certain Member States, the effect of imposing entirely new systems of regulation. See Kusserow, B., “Germany Implements ISD and CAD: The 6th Amendment to the German Banking Act”, Journal of International Banking Law (1996) 477Google Scholar who noted (at 493) that “investment service providers … for the first time in Germany, will be heavily regulated”.

33 Recital 1 of the Preamble to the CAD, for example, characterizes the “main objective” of the ISD as one of permitting investment firms to operate across the internal market on the basis of home-Member-State authorization.

34 In its comments on the Commission's Green Paper on Financial Services: Meeting Consumers' Expectations (COM (96) 209) (the Green Paper on Financial Services Consumers), Parliament noted the primacy of the single-market-construction objective in financial-services measures and observed that “consumer protection should be a fundamental political and legal priority for national and Community legislators; such protection cannot be left to the automatic operation of single market mechanisms”. OJ [1997] C 65/76, para. 3.4.1.

35 This unevenness in the regulatory regime was acknowledged by the Commission in its 1998 Communication in which it found that “[t]he EU framework of prudential controls provides a substantial first line of defence for consumer interests” but called for further “targeted action” to enhance protection and hence confidence in the marketplace, supra n. 17,11. It has also noted the soundness bias of the financial-services regime generally and its focus on financial strength, probity and reliability. Green Paper on Financial Services Consumers, supra n. 34, 3. More recently, the Commission's 2001 Communication on E-Commerce and Financial Services (COM (2001) 66) (the E-Commerce and Financial Services Communication) stated that “[t]he Union's financial services legislation is in large part geared toward providing financial institutions with access to Community markets on the basis of a European passport”. At 10.

36 Respectively: ISD, A3 and 4, CAD, A3; ISD, A8 (2), CAD, A4-6 and A8; ISD, A10; and ISD, A9.

37 This is despite the fact that there are numerous references to investor protection as an objective in the ISD Preamble. Recital 2 states the need to subject investment firms within its scope to authorisation requirements in terms of the concern “to protect investors and the stability of the financial system”. Recital 5 provides that investor protection requires that internal supervision be guaranteed, recital 29 raises investor protection as the justification for the asset-protection rules while recital 32 (in the context of the differentiated protection requirement) provides that “one of the objectives of this Directive is to protect investors”.

38 It covers basic principles as to: acting with honesty and fairness and with due skill, care and diligence in conducting business activities in the best interests of clients; employing the resources and procedures necessary for the proper performance of business activities; seeking information from clients regarding their financial situation, investment experience and objectives with respect to the services requested; adequate disclosure of relevant material information; avoidance of conflicts of interests and ensuring fair treatment where they are unavoidable; and compliance with applicable regulatory requirements to promote the best interests of clients.

39 A13 provides that the ISD does not prevent investment firms authorised in other Member States “from advertising their services through all available means of communication in their host Member States, subject to any rules governing the form and the content of such advertising adopted in the interest of the general good”.

40 See: Hertig, G., “Imperfect Mutual Recognition for EC Financial Services”, 14 International Review of Law and Economics (1994) 177, 182CrossRefGoogle Scholar; Farmery, P., “Looking Towards a European Internal Market in Financial Services: Some Paradoxes and Paradigms: A Survey of Current Issues and Problems”, 3 European Business Law Review (1992) 94, 97Google Scholar; N. Van, Crombugghe, “Consumer Protection and Free Movement of Financial Services”, in: Campbell, D. (ed.), Financial Services in the New Europe (Graham and Trotman 1992) 349, 350Google Scholar; and Bradley, C., “Competitive Deregulation of Financial Services Activity in Europe After 1992”, 11 Oxford Journal of Legal Studies (1991) 545, 547.CrossRefGoogle Scholar

41 To take a recent example, the central role of investor confidence in achieving market integration was acknowledged by the Initial Report of the Wise Men which linked the conditions for the attainment of the benefits of an integrated market to “the attainment of broad public confidence in European financial markets”. Initial Report of the Committee of Wise Men on the Regulation of European Securities Markets, November 2000 (the Initial Lamfalussy Report) 6.

42 The point has been made that “severe abuses will discourage the individual capital investor, but individual legal improvements will not induce him to invest because he will either not know about these improvements or, as a layman, not understand them”. Buxbaum and Hopt, supra n. 32,201. More generally, investor confidence is a nebulous concept. See Lee, R., What is an Exchange. The Automation, Management, and Regulation of Financial Markets (Oxford University Press 1995) 252Google Scholar. On the difficulties in examining market pyschology see, for example, Hill, A. “Tangled Link Between Stock Markets and Consumer Optimism”, Financial Times, 29 March 2001.Google Scholar

43 Case C-233/94 Germany v. Parliament and Council, [1997] ECR 1-2405, para. 15.

44 Case C-376/98 Germany v. Parliament and Council, [2000] ECR 1-8419.

45 The general internal market competence can only be relied on where A47 (2) EC is not applicable.

46 Essentially the Member State where the investment firm has its registered office or its head office.

47 For a discussion of the extent to which the prudential-supervision passport or mutual recognition is “perfect” insofar as the host State's role in prudential supervision is ousted completely (and cannot be reactivated by the Court of Justice's “general good” exception which allows Member States, in certain circumstances, to impose restrictive rules on entities exercising free-movement rights) or whether it only perfect where prudential rules are harmonized see Tison, M., “Unravelling the General Good Exception”, in: Andenas, M. and Roth, W.-H. (eds.), Services and Free Movement in EU Law (Oxford University Press) (forthcoming 2002).Google Scholar

48 Leading the Commission to note the ISD's “extensive dilution of the home country philosophy”, and state that “the failure to provide for effective mechanisms to smooth a transition to [the] home country principle or to circumscribe the scope of [the] host country principle is a shortcoming of the present Directive [the ISD]”. ISD Communication (supra n. 18, 8). The regulatory grip which continues to be exerted by the host Member State is not only due to the problem generated by the approach taken to conduct-of-business regulation (see below), but is also a function of the ability of Member States to impose free-movement-restrictive measures in the interests of the “general good” in accordance with the jurisprudence of the Court of Justice, which is explicitly adverted to in A13 with respect to marketing and, more generally, in A17 (4), Al 8 (2) andA19(6).

49 The Commission has found that considerable differences exist between Member States in relation to how best execution is achieved with respect to churning, allotment, conflicts of interests and documentation rules, as well as in relation to how conduct-of-business rules are applied to execution-only transactions involving retail investors. 2000 Commission Communication on the Application of Conduct of Business Rules under Article 11 of the Investment Services Directive, COM (2000) 722 (the Article 11 Communication), 9. For a discussion of how diverging conduct rules can raise compliance costs and cause conflicts between rules, see generally Avougleas, E., “The Harmonisation of Rules of Conduct in EU Financial Markets: Economic Analysis, Subsidiarity and Investor Protection”, 6 European Law Journal (2000) 72, 76–85.CrossRefGoogle Scholar

50 See infra n. 86 on differentiation.

51 supra n. 1,4.

52 Article 11 Communication, supra n. 49, 9.

53 Ibid., 5 and 3. The Lamfalussy Report also found that the Al 1 regime was a weakness in the ISD, supra n. 4, 12.

54 The most glaring example of this is the ISD which, despite numerous Preamble references to investor protection, does not offer a rationale for investor protection regulation. The ICSD, by contrast, relies on investor confidence as the underlying rationale for investor protection measures.

55 See, for example: Dale, R., “The Regulation of Investment Firms in the European Union”, in: Ferrarini, G. (ed.), The Prudential Regulation of Banks and Securities Firms: European and International Aspects (Kluwer 1995) 27, 28–30Google Scholar; Goodhart, C., Hartmann, P., Llewellyn, D., Rojas-Suarez, L. and Weisbrod, S., Financial Regulation – Why, How and Where Now (Routledge 1998) 12–13Google Scholar; and, with reference to the effects of the 1987 stock market crash, Benston, G., Regulating Financial Markets. A Critique and Some Proposals (London: Institute of Economic Affairs 1998) 29–30.Google Scholar

56 See, for example, Trachtman, J., “The Applicability of Law and Economics to Law and Development: The Case of Financial Law”, in: Norton, J. and Andenas, M. (eds.), Emerging Financial Markets and the Role of International Financial Organizations (Kluwer 1996) 26, 52Google Scholar, and Page, A. and Ferguson, R., Investor Protection (Hein 1992) 46.Google Scholar

57 The position of the UK Treasury is that EC (and Member State) legislation should, in relation to protective measures, effectively address market failures concerning informational asymmetries in order to strengthen competition in retail markets. Treasury Report, supra n. 5, para. 7.

58 “If we can identify the objective accurately, then perhaps the least cost remedy will become apparent.” Goodhart, C., “Some Regulatory Concerns”,Google Scholar in: Goodhart, supra n. 5, 215, 224.

59 Supra n.4, 22.

60 The signs are that notice is being taken of these principles. The March 2001 Stockholm European Council Resolution which adopted the Lamfalussy Report recommended that the new approach to law-making take full account of the principles. Presidency Conclusions, Stockholm European Council 23 and 24 March 2001. Annex 1, Resolution on More Effective Securities Market Regulation, para. 1. They are also referred to in the Commission's Explanatory Memoranda to the Proposed European Securities Committee Decision (COM (2001) 1493,3) and to the Proposed Committee of European Securities Regulators Decision (COM (2001) 1501,3) as well as in the new Charter of the CESR (A5.7).

61 See supra n. 31 on the principles which the Parliament has suggested the Commission follow when adopting level 2 measures under the Prospectus Proposal.

62 Gros, D. and Lannoo, K., The Euro Capital Market (Wiley 2000) 165.Google Scholar

63 ISD Communication, supra n. 18, 6.

64 Financial Services Authority (FSA), Best Execution, Discussion Paper (2001) 3 and 4.

65 ISD Communication, supra n. 18, 12 and 14.

66 OJ [2002] C 58/32. The Statement of the Council's Reasons in the common position refers to a “long and very difficult discussion” (Statement of Reasons, para. III) while the Commission noted that the common position “reflects a hard-won yet balanced compromise requiring many concessions from most of the Member States” (Communication from the Commission to the European Parliament concerning the common position: SEC (2002) 30 final, 10).

67 A2 (a) of the common position defines a distance contract as a contract concerning financial services which is concluded between a supplier and a consumer under an organised distance sales or service-provision scheme run by the supplier who, for the purposes of that contract, makes exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded. Distance communication under A2 (e) covers any means which, without the simultaneous physical presence of the supplier and the consumer, may be used for the distance marketing of a service between those parties.

68 A2 (b) of the common position defines financial services as any service of a banking, credit, insurance, personal pension, investment or payment nature.

69 Common position, A3. The detailed information which the consumer must be supplied with prior to the conclusion of the contract is set out in four categories: the supplier; the financial service; the distance contract; and redress. The relevant sectoral directives continue to apply under A4 (1) where they impose prior-information requirements additional to those set out in the new regime. This qualification is unlikely to apply to the ISD. The common position also applies a less onerous pre-contract information regime to “voice telephony” communications where the consumer expressly consents to the application of this regime (A3 (3) (b)).

70 A3 (2) (b) of the common position provides that notice must be given when the financial service is related to instruments involving special risks related to their specific features or the operations to be executed or whose price depends on fluctuations in the financial markets outside the supplier's controls and that historical performance does not indicate future performance.

71 Common position, A6. Consumers have a period of 14 calendar days (either from the day of the conclusion of the distance contract or from the day on which the consumer receives the required disclosure and the terms and conditions, if that is later than the date of the contract's conclusion) within which to withdraw from the contract without penalty and without giving any reason. Withdrawal rights are not available where the price of the financial service depends on fluctuations in the financial market outside the supplier's control which may occur during the withdrawal period.

72 A13 of the common position requires Member States to promote the setting-up or development of adequate and effective out-of-court redress procedures for the settlement of consumer disputes concerning financial services and to encourage the bodies responsible for out-of-court settlement to co-operate in the resolution of cross-border disputes.

73 Commission Recommendation 98/257 (OJ [1998] L 115/31) (the 1998 Commission Recommendation on Out-of-Court Settlement).

74 Commission Communication on Widening Consumer Access to Alternative Dispute Mechanisms (COM (2001) 161).

75 The Commission has noted that “[p]rivate sector savings in Europe amount to some 20% of GDP – a valuable asset, if efficiently used, to stimulate growth and job-creation”. Progress on Financial Services – Second Report May 2000 (COM (2000) 336), 3 (the Second Progress Report). The link between improving retail investor protection and greater market integration and efficiency was also highlighted in the Third Progress Report (Third Report on Financial Services Priorities and Progress November 2000 (COM (2000) 692)), 1.

76 ISD Communication, supra n. 18, 20.

77 Lamfalussy Report, supra n. 4, 12 and 22.

78 supra n. 35.

79 Proposal for a Directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12 of the European Parliament and the Council (COM (2001) 213, OJ [2001] C 213/227).

80 Directive 98/26/EC on settlement finality in payment and securities settlement systems OJ (1998) L 166/45 (the Settlement Finality Directive).

81 ISD Working Paper, supra n. 8, Annex 2, A12.

82 The first draft of the Basel II proposals to revise the 1989 Basel Capital Accord (Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards) was issued in June 1999 and was followed by a second draft in January 2001 which was further refined in November 2001. Adoption of the controversial proposals is not expected until 2006 at the earliest and may be delayed beyond that.

83 Supervision of Financial Conglomerates, papers prepared by the Joint Forum on Financial Conglomerates and jointly released by the Basel Committee on Banking Supervision, IOSCO and the International Association of Insurance Supervisors, February 1999.

84 Directive 7/2001/EC amending Directive 85/611/EEC on the Coordination of Laws, Regulation and Administrative Provisions Relating to Undertakings for Collective Investment in Transferable Securities with a view to Regulating Management Companies and Simplified Prospectuses OJ [2002] L 41/20.

85 The ISD is limited to investment firms which cover the range of services set out in Section A of the ISD Annex. Non-core services, which may only be provided where core Section A services are also provided, are set out in Section C. Section A covers: reception and transmission on behalf of investors of orders in relation to one or more of the instruments listed in Section B and execution of such orders other than for own account; dealing in any of the Section B instruments for own account; managing portfolios of investments in accordance with mandates given by investors on a discriminatory, client-by-client basis where such portfolios include one or more of the Section B instruments; and underwriting in respect of issues of Section B instruments and/or the placing of such issues. Non-core services cover: safekeeping and administration in relation to Section B instruments; safe custody services; granting credits or loans to an investor to allow that investor carry out a transaction in one or more of the Section B instruments where the firm granting the loan is involved in the transaction (margintrading services); advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; underwriting services; investment advice concerning Section B instruments; and foreign exchange services provided in connection with the supply of investment services. The ISD investment firm model has been described by the Commission as the traditional broker-dealer model. ISD Communication, supra n. 18,7.

86 Investment-services regulation traditionally seeks to balance the benefits and objectives of regulation against its costs in order to reach the appropriate minimum level of regulation. A common balancing device used in the area of protective, and particularly conduct-of-business, regulation is to distinguish between the investors protected by the regulation in question, typically using a classification based on professional and retail investors, and to tailor the burden imposed accordingly: “The expanding role of large institutional investors has been accompanied by demands for lessened regulation of these entities, because institutions are said to have the sophistication to protect themselves from fraud and overreaching. Regulators have been receptive to such demands … many institutional traders have been freed of the regulatory shackles imposed in markets where the proverbial widows and orphans invest. The result amounts to a virtual two-track regulatory system”. Markham, J., “Protecting the Institutional Investor – Jungle Predator or Shorn Lamb”, 12 Yale Journal on Regulation (1995) 345.Google Scholar Elements of a differentiated approach to regulation already exist in the EC regime in the rather blunt reference to professional investors (which is not defined) in the skeletal A11 conduct-of-business regime (see above) and in the ICSD which tailors the compensation regime by reference to the status of the investor by setting out categories according to which an investor can be excluded from the protections of the ICSD or subject to more limited protection.

87 Common position, A2(d). Early discussions on the Distance Marketing Proposal, which suggested that the Commission was minded to extend its protections to professional investors, were met by vocal opposition from the investment-services industry and heavy lobbying by trade associations. By the time the first proposal was formally presented to the Council, professional investors had been dropped from its coverage.

88 The Commission has stated that over-regulation of the wholesale market could stymie the development of an integrated, competitive, and liquid securities market as well as limit the development of innovative financial products by the wholesale market. Article 11 Communication supra n. 49,11. See also the FSAP, supra n. 1, at 3 which discusses the wholesale market in terms of stripping away the “present mass of legal and administrative barriers … lest… the benefits of access to EU-wide capital markets [be] denied” and at 8 where, conversely, the focus of the retail market discussion is on re-regulation and “the progressive harmonisation of marketing and information rules.”

89 A preference for non-interventionist disclosure-based controls in the conduct-of-business sphere can be inferred from the Commission's statement in its Article 11 Communication that “investors – or their advisors – have to make their own assessment as to the particular features of the proposed investment. Conduct of business rules only seek to ensure that investors are not induced to undertake unsuitable investments and to protect investors against abuse and misconduct. Legislation in the investment services/securities area is therefore heavily centred on the principles of disclosure of information to enable rational investors to reach informed decisions”, supra n. 49, 16.

90 supra n. 84.

91 One of the three pillars on which the Basel II revisions are based is market discipline via disclosure controls. Underlying the disclosure approach is the premise that enhanced transparency in financial-disclosure practices will enable market participants to assess an institution's risk profile and strengthen market discipline, thereby improving an institution's market strategy, its risk control, and its internal management and organisation. For one example of the type of disclosure envisaged see the Commission Services' Second Consultative Document on Review of Regulatory Capital for Credit Institutions and Investment Firms (the 2001 Regulatory Capital Review). MARKT/1000/01, 57.

92 Commission Recommendation 2000/408/EC (OJ [2000] L 154/36). The Recommendation is designed to “allow investors and market participants to take well-informed decisions, thus fostering market transparency and market discipline as a most valuable complement to supervision” (Preamble, recital 5), and contains recommendations for the disclosure to be made by financial institutions concerning their activities relating to “financial instruments” as defined by the Recommendation.

93 ISD Working Paper, supra n. 8, Annex 2, A12.

94 The Commission's thinking on how best to supervise conflict-of-interest management appears to be still evolving. The Working Paper has suggested that all organizational requirements, including conflict of interest management, should remain with the home Member State, notwithstanding the possibility currently available under A10 for the host Member State to have a role. However, conflict-of-interest management is also included in the group of rules which impact on investor-facing activities and which, the Commission suggested, could be subject to branch-Member-State control.

95 See, for example, the ISD Communication (supra n. 18) where the Commission noted that “[Removing regulatory obstacles to free circulation will not be sufficient. Regulatory action is also needed to correct market failure and to facilitate the effective interaction of supply and demand for capital”. At 5.

96 Supra n. 6.

97 In its 1998 pre-FSAP Communication, for example, the Commission called for more effective and efficient cooperation, particularly with respect to the detection of solvency problems, and for the designation of a supervisor with responsibility for managing solvency crises where the entity in question was structured on a cross-border basis. It also suggested that a “supervisors co-operation charter” be drawn up which would clearly assign responsibilities for supervising on a cross-border basis and set out mechanisms for addressing particular supervisory problems (supra n. 17,16). In the FSAP it returned to this theme and called for “careful consideration of structures for containing and supervising institutional and systemic risk” (supra n. 1,10). The Wise Men also addressed the adequacy of the prudential-supervision structure, warning that increased integration involves greater connection between intermediaries on a cross-border basis and increases their exposure to common shocks, and highlighted the urgent need to strengthen cooperation between supervisors. supra n. 4,17.

98 Although the Wise Men came out against a Euro-SEC given the state of integration and the underdeveloped rule structure, they also warned that if, by 2004, the Report's law-making proposals were shown not to have any prospect of success “it might be appropriate to consider a Treaty change, including the creation of a single EU regulatory authority for financial services generally in the Community”, supra n. 4,41. It might be suggested, however, that if the new rule-making model is a failure, the chances of agreement on a single regulatory authority are remote in the extreme, given the political and inter-institutional tensions which a breakdown in the basic Lamfalussy model would suggest.

99 Supra n. 49 and n. 35, respectively.

100 In its second report on progress on the FSAP (supra n. 75) the Commission reported that while EC investment firms were only recent entrants to the e-commerce marketplace, the number of online European trading accounts was expected to increase tenfold by 2004. At 7. Similarly, the Initial Report of the Wise Men (supra n. 41) noted the development of electronic brokerage which was driving down transaction costs and leading to a rapid increase in the number of online brokerage accounts. At 11.

101 The co-ordinated field is broadly defined in A2(i) and (h) as those rules governing the taking up of the activity of an information society service, such as authorisation and notification requirements, and the pursuit of such activity, such as requirements concerning the behaviour of the service provider and the quality or content of the service provided (including those applicable to advertising and contracts).

102 The Communication on E Commerce and Financial Services noted that control could be exercised more rapidly and more efficiently in the Member State in which the service provider was established and from which it operated its web-site, not least because other Member States could have difficulties in enforcing measures against service providers located outside their territory (supra n. 35, 7).

103 General disclosure and transparency principles, as well as unsolicited communications requirements, governing the supply of online services (which are not tailored to the specific risk-environment of the investment-services marketplace) are set out in A5, A6 and A7, while contract-formation principles are set out in A9, A10 and All. Redress, dispute resolution and sanctions are also covered (A17, A18 and A20).

104 The hazards of the Member-State-of-origin approach were highlighted during the Directive's passage. In its comments on the Commission's original proposal, ECOSOC expressed concern as to the risks which the Member-State-of-origin principle posed to consumers, OJ [1999] C 169/36, paras. 3.6.3-3.6.6.

105 Common position, Preamble recital 13. Under A4 (2), however, pending further harmonization, Member States may maintain or introduce more stringent provisions on prior-information requirements when the provisions are in conformity with Community law.

106 Supra n. 8.

107 Ibid., 18 and Annex 2, 12.

108 Standards and Rules for Harmonizing Core Conduct of Business Rules for Investor Protection. Consultative Paper (2001). FESCO/00-124b. FESCO's work was based, in part, on the premise that divergences in conduct-of-business regulation: “hinder … the provision of an adequate level of protection to European investors”. At 6.

109 Stated in terms of the obligation to “[p]rocess and execute a client's order in the best interests of the customer so as to obtain the best possible result with reference to the time, size and nature of customer orders. To this end, investment firms shall implement procedures and arrangements which together form a systematic, repeatable and demonstrable approach to ensure that investment firms are consistently seeking best execution for clients”. supra n. 8, Annex 2, 14.

110 The standards are set out in Annex 2 to the Working Paper, supra n. 8, 12-16. They are stated to be dependent on the ongoing work of FESCO (now the CESR) in this area. In October 2001, the CESR presented its revised Standards and Rules for Harmonizing Core Conduct of Business Rules for Investor Protection (CESR/01-014).

111 The Working Paper sets out a classification of the professional investor (based on the ICSD formula) which is designed to “establish a straightforward binary split between professionals and retail investors… [and] avoid the creation of intermediate categories whose ultimate treatment would be ascertained subject to additional checks or formalities”, supra n. 8, Annex 1,15. Professional investors would, as a result, include: (1) professional and institutional investors, including investment firms, credit institutions, collective investment undertakings and other professional and institutional investors authorised under national law; (2) supranational institutions, government bodies and, possibly, local and regional bodies; (3) firms in the same group as the firm providing the investment services; and (4) companies whose securities are offered to the public. Investors would be able to request that a categorization as professional or retail investor could be changed by an investment firm. Any such recategorization would be for the purposes of the application of conduct-of-business rules and would apply only to the private contract between the two parties. Annex 1,14-16.

112 The Working Paper has noted that dealers do not gain any additional protections via conduct-of-business regimes but rely instead on litigation or other defences based on contractual arrangements. Supra n. 8, Annex 2, 15.

113 Ibid., 11.

114 The tailored rules for the supply of investment advice would include the obligation to disclose soft dollar commissions.

115 It noted generally that “[h]armonisation to be achieved under this Directive and relating implementing measures will ensure the necessary ‘equivalence’ of national conduct of business rules to allow cross-border provision of investment services subject only to the investor protection rules of the home country of the firm” and, with respect to retail investors, that “[h]armoni-sation envisaged under the present proposals once supplemented by detailed implementing measures agreed under comitology, will be sufficient to allow cross-border provision of services to retail investors”. Working Paper, supra n. 8, Annex 2, 12-13.

116 Ibid., 16.

117 The Commission has also referred to the benefits of the direct access by supervisors to audit trails and records, their ability to monitor the firm/investor relationship, and the fact that supervisors are on-site. Article 11 Communication, supra n. 49, 19.

118 Case C-384/93 Alpine Investments v. Minister van Financiën, [1995] ECR 1-1141, Judgment of the Court, para. 48.

119 Tailored regimes would also apply, for example, to the provision of ATS-type services in the prudential-regulation sphere. Investment firms which operate facilities which allow for the matching of client orders would be subject to an additional prudential requirement under the revised A10 regime and would be required to have in place systems approved by the competent authority which ensure appropriate execution and finalisation of those transactions. Working Paper, supra n. 8, Annex 2, 9.

120 Ibid., Annex 1, 1. The revised March 2002 ISD Working Paper (supra n.8) takes a different approach to the ATS problem, including the introduction of a new ISD activity of operating an ATS.

121 A full discussion of the issues raised by the regulation of ATSs at EC level and the Commission's approach is outside the scope of this discussion. See the Working Paper, ibid., 6, 10-11 and FESCO's papers on The Regulation of Alternative Trading Systems in Europe, A Paper for the EU Commission (2000) (Fesco/00-064c) and Proposed Standards for Alternative Trading Systems (2001) (Fesco/01-035b).

122 supra n. 8, 10.

123 Working Paper, supra n. 8, 11.

124 The Commission has acknowledged that “[f]rom the perspective of specialised brokerage or dealing services in commodity derivatives, the principal drawback to their inclusion would be the imposition of the full weight of the investor protection requirements and capital adequacy regime on these firms”, but has noted that these concerns may be alleviated “by more effective differentiation between investor requirements to be met when dealing with professional and retail clients”. Ibid., 12.