WRITTEN QUESTION E-1474/02

by Cristiana Muscardini (UEN) to the Commission

(27 May 2002)

Subject: Amendment of the directive on investment services

The principal objectives of the proposed amendment of the directive on investment services (No 93/22/EEC)(1) appear to be to transfer responsibility for investment consultancy activities to the credit institutions and the securities houses, and to introduce high capitalisation requirements. In this case, financial consultancy, which has hitherto been considered an additional service, would fall under the control of powerful groups; as a result, many independent companies would be obliged to close down. This would reduce freedom of choice and decision for millions of investors who would be forced to deal mainly with banks and financial promoters and to make unofficial use of the managed fund industry (which has not performed outstandingly in recent years). It is obvious that, if consumers' interests ate to be protected, the activity of small companies must be governed by rigorous standards and by parameters which can be easily established by the monitoring authorities.

If these objectives are confirmed by the Commission following the two consultation processes under way:

1. Should the Commission not oppose such a de facto constraint on the market in financial services?

2. Why is the Commission not taking due account of the valuable role played by independent consultancy companies in the interests of free investor choice, and why is it not therefore introducing suitable rules which would improve investor protection and would avoid discrimination against small independent companies?

3. Does the Commission not believe that the experience of recent years has shown that the big financial institutions tend to recommend shares in concerns owned by themselves or by their partners and clients, thus helping to create an obvious conflict of interests? (are there no lessons to be learned from the Enron affair?)

4. Does the Commission not consider it necessary, rather, to introduce rules outlawing conflicts of interests which would make it impossible for a tentacular holding company to control the banking and financial system, thus exclusively promoting the interests of the big groups by constraining the consulting activities of the small consultancy companies?

5. Does the Commission not believe that protection measures must be proposed for investors, to guarantee that they can benefit from a wide spectrum of services, rather than offering them a de facto scaled-down market choice?

(1) OJ L 141, 11.6.1993, p. 27.

Answer given by Mr Bolkestein on behalf of the Commission

(8 July 2002)

1. In order to provide a sound regulatory framework to support investor confidence and the development of this activity on a pan-European basis, the Commission has considered it opportune to raise the issue of whether investment advice should be included as a core service under the Investment Services Directive (ISD). Inclusion as an ISD service would also recognise investment advice, undertaken separately from banking and brokerage, as an autonomous and increasingly important financial business.

The principal implications of inclusion in ISD would be that:

- entities (including natural persons) providing investment advice as their principal/exclusive activity, would be required to be licensed as an investment firm within the meaning of the ISD as opposed to being subject to specialised national regimes, as at present;

- firms providing investment advice on a stand-alone basis would then be able to conduct business, on a cross-border/remote basis, with clients throughout the Union under the sole control of their home country authority. At present, the benefit of an ISD passport for advice is reserved to banks and investment firms providing existing core services;

- investment advisors would be subject to initial authorisation and ongoing obligations established by the ISD. Proportionate and appropriate supervisory disciplines are warranted to deal with the risk to investors of unsuitable advice or unprofessional/unethical conduct by advisors. Inclusion in ISD would, in particular, offer basic conduct of business protections to investors when dealing with advisors authorised or located in another Member State (via remote communication technologies).

- the inclusion of advice as an ISD service could result in specialised advisors being brought within the scope of Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and credit institutions(1). The Commission is aware that this is a source of concern to cash-poor specialised advisors who may have to establish capital reserves for the first time. It is not at present possible to establish the scale of possible charges which could arise(2). In its revised orientations, the Commission has recognised the need to secure appropriate capital treatment for advisors, which takes account of the (limited) range of investor-facing risks posed by investment advice, before their inclusion within the scope of ISD/Capital Adequacy Directive (CAD) can be contemplated. The impact of being subjected to CAD obligations on small/specialised investment firms will form an important element of future consultation and refinement in the context of the capital adequacy review.

Taking account of the above considerations, the consultative documents on ISD revision (published in March 2002) have mooted the possible inclusion of investment advice as a core ISD service. The Commission is giving in-depth consideration to all views which have been expressed in respect of this proposal before taking a carefully considered decision on this point.

2. The (possible) introduction of investment advice as a core ISD service is in recognition of the growing importance of investment advice as a support to European investors. This step should help to provide a regulatory framework which addresses the investor-facing risks specific to this business in a proportionate and flexible manner. The Commission agrees that this regulatory framework should not impose unjustified or over-onerous regulatory demands on investment advisors.

Proposed ISD rules will not discriminate against small independent advisors. On the contrary, ISD revision will impose more demanding adjustments on banks/securities houses which cumulate investment advice with other investment services. In particular, the revised ISD will require more stringent conflict of interest management and disclosure by such entities in order to ensure that the interests of the investor are paramount when advice is provided.

3. As indicated above, the revised ISD will reinforce provisions designed to ensure that any proprietary interest on the part of a multi-functional financial institution in the sale/conditions of sale of a financial instrument does not prejudice the suitability or objectivity of the personalised advice provided to clients. It has been proposed that such entities operate effective independence policies to manage such conflicts of interest. Where conflicts of interest cannot be contained in this way, a bank/investment firm which is combining the provision of advice with other activities in such a way as to give rise to possible conflicts of interest shall disclose these conflicts to the client/potential client at the outset of the client relationship. The orientation documents further propose that where disclosure and/or organisational arrangements are not sufficient to establish reasonable confidence that conflicts will not damage the clients' interest, the investment firm shall desist from undertaking business with the client/potential client.

4. The Commission does not consider that the net effect of its orientations will be to favour the provision of investment advice by large universal service providers to the detriment of small independent advisors.

In the light of the considerations set out in respect of the previous questions, the Commission believes that inclusion of advice as an ISD service, subject to tailored capital adequacy regime can:

- establish a coherent and effective European framework for regulating specific investor risks associated with personalised investment advice;

- enable specialised and small investment advisors to compete on a level regulatory playing field with universal service providers, and provide them with the benefit of a single passport when dealing with clients in other Member States;

- strengthen the disciplines applying to universal service providers so as to ensure that they perform advisory services with the same level of objectivity and impartiality as specialised advisors.

The end-result should be to facilitate an enhanced role for specialised advisors as an integral part of the business infrastructure which supports a thriving Community equity culture.

5. See points 1 to 4.

(1) OJ L 141, 11.6.1993.

(2) Some level of initial capital endowment. Ongoing capital adequacy charges related to banking/trading book exposures will not apply to specialised advisors not executing trades or holding client money/assets. A new operational risk charge could be introduced for all banks and investment firms under current capital review.