WRITTEN QUESTION E-1214/02

by Theresa Villiers (PPE-DE) to the Commission

(29 April 2002)

Subject: Investment Services Directive and execution-only services

1. Has the Commission discussed the introduction of a fact find with the Committee of European Securities Regulators, whereby, before investments are bought and sold, investors would have to provide information on the risks they are prepared to take, and the financial strategy they wish to pursue?

2. Is the Commission aware that the introduction of such a fact find would add significantly to the costs and bureaucracy of carrying out execution-only services?

3. Does the Commission agree with the Committee of European Securities Regulators that the introduction of a fact find is desirable?

4. Has the Commission considered any alternative versions of the rules which would allow for the continuance of execution-only business to continue? In particular, has the Commission considered allowing firms to continue to sell execution-only services without a fact find so long as clients are clearly informed that no investment advice is being given and that they should rely on their own judgment in deciding whether to make the trade?

Answer given by Mr Bolkestein on behalf of the Commission

(3 June 2002)

1. The Committee of European Securities Regulators (CESR) after having conducted extensive consultations with all interested parties has recently published its final proposals for the harmonisation of conduct of business rules under the existing article 11 of the Investment Services Directive (ISD).

The Commission welcomes the outcome of CESR's work.

CESR's standards cover, among other things, know your customer and the duty of care of investment firms towards their clients. These provisions represent detailed implementation of the existing ISD. Article 11 of the ISD provides that an investment firm, inter alia, seeks from its clients information regarding their financial situation, investment experience and objectives as regards the services requested. Furthermore, the same article states that investment firms have to act with due skill, care and diligence in the best interests of their clients. These principles apply to any provision of services to any customer, regardless of their nature.

2. Costs of regulation must be compared with benefits. The Commission is unaware of any compelling evidence that the CESR standards will add significantly to compliance costs. The fact that many investment firms, as a normal practice, already collect information from their clients on their financial knowledge, experience and investment objectives, suggests that the standard will not prevent or render such business commercially unattractive.

Furthermore, investor protection would be enhanced by the CESR standards, with a positive impact on consumer confidence, particularly for those services conducted on-line.

3. Article 11 of the ISD obliges investment firms to know their customers, with particular regard to their knowledge and experience in the investment field, investment objectives and financial situation. This principle applies to any investment service. It is a basic principle of securities regulation that intermediaries should be required to provide services in the best interests of their clients.

In addition to the general know your customer standard, CESR has adopted a specific rule on the duty of care that investment firms have to comply with when providing execution-only services. This proposal consists of a light-touch regime based on the definition of an appropriate service to the customer, including investment parameters on the basis of information collected from customers. Information to be required at the outset of the client relationship concerns notably knowledge and experience in the investment field, financial situation, investment objectives and risk profile, which are needed to estimate the investment parameters within which investors can trade. When transactions for customers fall within these parameters they do not require on-going duty of care by the investment firm. Suitability is conducted at the level of the service at the onset of the relationship, instead of being conducted for each and every transaction.

CESR's standards for know your customer and duty of care have been carefully considered as a basis for allowing execution-only brokers to meet obligations incumbent on them under the existing ISD, without calling into question their business model. These requirements have been broadly accepted by a large majority of brokers across the Union and correspond to existing commercial practice for many brokers.

4. The Commission has recently published the revised orientations on the upgrading of the ISD and has launched a second round of open consultation. By conducting the revision of the ISD on the basis of the Lamfalussy procedure, the Commission intends to introduce high-level principles of regulation in the revised directive (level 1) and detailed rules at level 2, adopted under the comitology procedure.

The Commission, at present, has not introduced any regulation of execution-only business. This might become subject to regulation under the revision of the ISD, particularly under level 2, with the adoption of detailed implementing measures. Before finalising its position, the Commission is waiting for the results of the public consultation, due to end on 31 May 2002.