Opinion of the European Economic and Social Committee on the "Proposal for a Directive of the European Parliament and of the Council on investment services and regulated markets, and amending Council Directives 85/611/EEC and 93/6/EEC and European Parliament and Council Directive 2000/12/EC" (COM(2002) 625 final — 2002/0269 (COD))
Date: 2003-06-18
Institutions: European Economic and Social Committee
Subjects: approximation of laws, financial legislation, financial market, freedom to provide services, investment bank, investment company

16.9.2003

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Official Journal of the European Union

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II

(Preparatory Acts)

ECONOMIC AND SOCIAL COMMITTEE

400th PLENARY SESSION, 18 AND 19 JUNE 2003

Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the
European Parliament and of the Council on investment services and regulated markets, and
amending Council Directives 85/611/EEC and 93/6/EEC and European Parliament and Council
Directive 2000/12/EC’

(COM(2002) 625 final — 2002/0269 (COD))

(2003/C 220/01)

On 16 December 2002, the Council decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 4 June 2003. The rapporteur was Ms Boving.

At its 400th plenary session on 18 and 19 June 2003 (meeting of 18 June), the European Economic and
Social Committee adopted the following opinion, with 60 votes in favour, and one abstention.

1. Gist of the Commission paper

— The ISD provides for an optional approach to the

regulation of market structure.

1.1.
The Investment Services Directive (ISD), adopted in
1993, sought to establish the conditions in which authorised
investment firms and banks could provide specified services in
other Member States.

— There is no uniform basis for cross-border cooperation.

— The existing provisions under the ISD are inflexible and

outdated.

1.2.
The existing directive no longer provides an effective
framework for undertaking investment business on a cross-
border basis in the EU.

— The ISD does not provide sufficient harmonisation to
allow effective mutual recognition of investment firm
licences.

— The ISD contains outdated investor protection disciplines.

— The ISD does not span the full range of investor-oriented

services.

1.3.
The aims of the new directive are: (i) the protection of
investors and market integrity by establishing harmonised
requirements governing the activities of authorised intermedi-
aries and (ii) the promotion of fair, transparent, efficient and
integrated financial markets. The directive seeks to create a
regulatory framework in which obligations are tailored to the
specific risk-profile of different market participants. The revised
ISD is designed to facilitate the integration of secondary
instruments by harmonising rules for
markets in financial
dealing with or on behalf of clients or for own account and
promoting the transparent functioning of organised trading
systems. Key elements of this include:

— The ISD does not address the regulatory and competitive
issues that arise when exchanges start competing with
each other and with new order-execution platforms.

— rules harmonising the content and format of disclosure

of relevant information by issuers;

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— safeguarding market integrity, preventing market abuse;

— allowing collective investment schemes to exploit single

market freedoms;

— promoting efficient and competitive clearing and settle-

ment of cross-border trades.

2. Details of the proposal

2.1. An efficient, transparent and integrated financial trading

infrastructure

2.1.1. Where integrated broker-dealers are involved, clients
need to be particularly confident that the action taken is in
their best interests. For that reason, the draft provides for
special investor protection in the area of internalisation.

2.1.6.
To do that, a comprehensive set of rules is needed,
requiring transparency of trading information. These trans-
parency obligations aim to allow the effective, real-time, cross-
border interaction of trading interests. However, the degree of
transparency required will vary.

2.1.7.
The directive seeks to ensure that off-exchange
execution of client orders takes place only where it can be
demonstrated to be in the best interests of the client. Invest-
ment firms will be forced to undertake a regular assessment of
which execution venues offer the most favourable terms for
transactions.

The status and authorisation regime for regulated
2.1.8.
markets are preserved. The proposal seeks to establish a
common set of high-level principles for the authorisation,
regulation and supervision of regulated markets so as to:

— identify the competent authority and applicable law;

— introduce requirements relating to the operator of the

market;

2.1.2.
The aim is to define the rules of the game so that
order-execution is undertaken in a way which serves investor
interests and the overall efficiency of the financial system.

— establish comprehensive pre- and post-trade transparency

obligations.

2.1.3.
Risks to investor protection and market efficiency
must be eliminated. That requires the introduction of a package
of measures to ensure that the dispersal of trading across
multiple marketplaces and through diverse trading channels
does not fragment liquidity and prevent market participants
from identifying mutually advantageous potential trades. At
the heart of this package is an effective transparency regime
which seeks to ensure that appropriate information regarding
the terms of recent trades and current opportunities to trade
at all marketplaces, trading facilities and other trade-execution
points is made available to market participants on an EU wide-
basis.

2.1.9.
The proposal establishes principles under which a
‘regulated market’ can admit instruments to trading on its
systems, while allowing the detailed implementing measures
that are to give effect to these principles to be developed at
level 2. Each regulated market must implement admission
requirements, which have received prior public approval and
which aim to ensure the free negotiability and effective
settlement of instruments. These include:

— the introduction of a new core ISD service relating to the
operation of an MTF: this will allow entities operating
such systems to be authorised as an investment firm
subject to a customised regulatory regime;

2.1.4.
There should be as little restriction on competition
and innovation as possible. Differences in regulatory treatment
should not undermine the ability of institutions/exchanges
operating subject to a particular regulatory regime.

— organisational requirements for MTF;

— pre- and post-trade transparency obligations in respect of

equity transactions concluded on MTFs;

The directive seeks to establish a coherent and risk-
2.1.5.
sensitive framework for regulating the main types of order-
execution arrangement, including:

— waiver from agency obligations for transactions con-

cluded on MTFs.

— regulatory interventions to contend with the specific
investor protection and market efficiency risks; and

— competitive and regulatory interactions that arise when
different trading platforms and methods exist alongside
each other but are subject to different permutations of
the market and investor-facing regulation.

The proposal envisages a systematic obligation
2.1.10.
incumbent on investment firms when they execute trans-
actions outside the rules and systems of a regulated market or
MTF. It is proposed to:

— introduce a new self-standing provision on conflict of

interests;

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— reinforce ‘best execution’ obligations;

— establish client order-handling rules;

— All

investment firms acting on behalf of clients are
obliged to exercise due diligence to ensure that the order
is executed in the conditions that are most favourable to
the client.

— introduce post-trade transparency obligations, under
which investment firms concluding trades in equity
instruments are required to disclose publicly, as close to
real-time as possible, the price and volume of completed
trades;

— Investment firms must indicate that they have undertaken
reasonable endeavours to obtain ‘best execution’ on
behalf of their clients. The conditions are laid down under
which this obligation is deemed to be met.

— introduce pre-trade transparency obligations for invest-
ment firms in the form of a client limit order display rule
and a quote disclosure rule for retail-size orders in shares;

— Investment firms are obliged to regularly review the
procedures they operate so as to obtain ‘best execution’
on behalf of their clients.

— confine mandatory quote disclosure to retail-size trans-

actions in highly liquid equities.

— Client order handling rules provide that investors should
be fully aware of different channels through which their
order may be executed.

2.2.

Investor protection and the investment firm regime

2.2.1.
for investment firms are to be harmonised.

The initial authorisation and operating conditions

2.2.2.
The proposal envisages a far-reaching modernisation
and reinforcement of the obligations that investment firms
must comply with:

— Compliance with the prescribed and ongoing capital
requirements is a pre-condition for authorisation and
operation as an investment firm. Investment firms which
provide only the service of investment advice are exempt-
ed from obligation under the Capital Adequacy Directive.

— Investment firms are to be obliged to, first,

identify
conflicts of interest that arise in their business activities
and then to prevent those conflicts of interest from
adversely affecting the interests of clients, and to establish
organisational and administrative arrangements which
allow them to manage these conflicts of interest in such
a way that the interests of clients are not adversely
affected.

2.4.
The scope of the directive is to be expanded to integrate
some investor-facing activities or dealing activities that are
financial in character, that are widely offered to clients, and/or
that give rise to investor or market-facing risks. Investment
advice is to be recognised as an autonomous and increasingly
important financial business in its own right. It should not be
subject to unjustified or over-onerous regulatory demands.
Financial analysis must be subject to high professional and
ethical standards. Commodity derivatives are included in the
directive. The definition of commodity derivatives includes
certain futures contracts traded on regulated markets which
are physically settled where those contracts possess the
characteristics of financial instruments.

2.5. Other key features

The directive confines its treatment of clearing and settlement
to clarification of
the rights of the investment firm and
regulated market populations in terms of access to/choice of
clearing and settlement facilities located in other Member
States.

2.3. Conduct of business rules when providing services to clients

3. General comments

2.3.1.
Implementation of the present provisions has been
hampered by a lack of clarity as to interpretation of the main
operational concepts and ambiguity as regards the role of
home and host authorities in enforcing these obligations. The
directive provides for clear and legally binding guidance on
the implementation of the broad principles.

A key feature of the directive is to establish a separate
2.3.2.
provision governing the ‘best execution’ obligations of brokers/
broker-dealers.

3.1.
ISD revision is vital for the investment business. A new
directive is undoubtedly needed. In principle, therefore, the
draft directive is to be welcomed. The Committee is also
particularly pleased that the draft seeks to secure the protection
of investors and market integrity. However, necessary investor
protection must not lead to monopolisation, which in practice
puts an end to free and independent investment advice, and
the rules should not go beyond what is required to secure the
necessary degree of client protection and at the same time
maintain competitiveness.

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4. Specific comments

4.1.
The draft’s proposals on internalisation are moving in
the right direction. However, it must be borne in mind that
order internalisation withdraws liquidity from the regulated
markets (stock exchanges). Although internalisation systems
use the prices determined on a regulated market
(stock
exchange prices) and ‘import’ them as reference prices into
their own system (price-taking), they do not contribute to
subsequent price development as they do not place their
buying and selling orders on the regulated market. For that
reason, it makes sense to oblige systematic internalisers to act
as ‘market makers’ on the respective reference market and thus
pay a ‘liquidity contribution’. This liquidity contribution should
cover those securities that are part of
the internalisation
system.

The Committee welcomes the supervisory provisions
4.2.
in the draft directive for competition between
set out
exchanges, multilateral trading facilities and internalisation
systems. The Committee also endorses the basic imposition of
more stringent transparency obligations. The rules on pre-
trade transparency obligations should, however, be clarified
and fleshed out further, since, on such a key issue as this, a
final decision should, as far as possible, be reached at level 1.

4.3.
The Committee is pleased that the draft directive
includes investment advice as an investment service in its own
right. This underscores particularly clearly the distinction
between advice and non-advisory investment services. Accord-
ingly,
in the absence of any contractually agreed advisory
relationship, the obligations of the investment firm should
remain confined to providing all the relevant information
commensurate with the customer’s professional status. It is
desirable to have an explicit provision for ‘execution-only’
transactions so as to ensure that these well-established trans-
actions continue to be possible in the future too.

4.4.
In contrast to the proposal, most Member States do
not distinguish between professional and non-professional
customers. The classification should therefore also reflect, as
far as practicable, the customer’s personal knowledge and
experience of the investment business and his or her individual
needs. Across-the-board inventory protection is needed for
existing customer contacts.

4.6.
It would be desirable to tie the authorisation to issue
technical implementing measures for the conduct of business
rules [Article 18(9)] to the prior performance of a cost-benefit
analysis. Such an analysis was also called for by the European
Parliament.

The Committee welcomes in principle the proposals
4.7.
for
the best execution of client orders. The relevant
Article 19(1) of the draft directive should however merely be a
general provision laying down the basic meaning of ‘best
execution’. Article 19(2) would then set out the specific
obligations relating to conduct and organisation, requiring
each investment
firm to keep appropriate technical and
organisational arrangements in place to secure best execution.

4.8. With regard to best execution, a distinction should be
made between the different types of transaction. The rule
should only be applied where orders are not executed through
a regulated market. In that case, proof would be required that
off-exchange execution was under no circumstances being
conducted at a price less favourable than the exchange price.
Moreover,
firms must be
granted some degree of latitude, and the possibility of reaching
appropriate contractual agreements with the client in advance
regarding the method of execution normally to be used.

for best execution,

investment

the

the

Under

committee procedure,

4.9.
technical
implementing provisions should reflect the kind of service
provided, the type of financial instruments and the differing
business structures of the investment firms. The Committee
therefore proposes expanding Article 16(4)(a) so that, with
regard to the type of measures to be taken by the investment
firm, consideration must also be given to whether such a firm
is regularly involved in conflicts of
interest, or only in
individual cases.

The technical implementing measures must be based
4.10.
on the model of a farsighted, well-informed customer who is
in a position to take independent economic decisions on his
or her own authority.

4.11.
routed onto the regulated market.

The limit orders that cannot be executed should be

It must also be permitted to provide the relevant

4.5.
information required under Article 18 in standardised form.

Regulating the clearing and settlement systems is a
4.12.
live issue, and care should be taken not to pre-empt the
outcome of this discussion.

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4.13.
In order to avoid subjecting investment brokers,
particularly small and medium-sized enterprises, to unjustified,
excessive requirements, the Directive should not apply to firms
which merely receive and pass on orders for shares in collective

investment undertakings, without holding their customers’
money, and which therefore cannot at any time enter into a
debtor relationship vis-à-vis their customers.

Brussels, 18 June 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH

Opinion of the European Economic and Social Committee on the ‘Green Paper on a European
order for payment procedure and on measures to simplify and speed up small claims litigation’

(COM(2002) 746 final)

(2003/C 220/02)

On 20 December 2002, the Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the: ‘Green Paper
on a European order for payment procedure and on measures to simplify and speed up small claims
litigation’.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on this subject, adopted its opinion on 4 June 2003. The rapporteur was Mr von
Fürstenwerth.

At its 400th plenary session of 18 and 19 June 2003 (meeting of 18 June), the European Economic and
Social Committee adopted the following opinion by a unanimous vote.

1. Summary of the conclusions

The European Economic and Social Committee (EESC)
1.1.
welcomes the Commission’s Green Paper as a useful initiative
and a logical follow-up to the conclusions of the Tampere
European Council. The single market cannot be completed
without the establishment of a common legal framework (1).
With this aim in view, the introduction of a rapid, efficient and
fair order for payment procedure, which is accessible to the
public and to enterprises, is also a key component of the

( 1) The Committee has already highlighted this need on several
occasions, most recently in its opinion on the Proposal for a
Council Regulation creating a European Enforcement Order for
uncontested claims (COM(2002) 159 final — 2002/0090 (CNS)),
OJ C 85, 8.4.2003, p. 1.

public right of access to justice (2). In a single market, members
of the public and enterprises must be able to assert their rights
in both the Member States in which they are usually resident
and in other Member States and the cost risk must be both
transparent and reasonable.

In the light of the findings of the consultations, the
1.2.
EESC encourages and also urges the European Commission to
submit a legislative proposal for the introduction of a standard
European order for payment procedure.

(2) See the Committee opinion on the Green Paper on access of
consumers to justice and the settlement of consumer disputes in
the Single Market; OJ C 295, 22.10.1994, p. 1 et seq. and the
Committee opinion on the Proposal for a Council Regulation
(EC) on jurisdiction and the recognition and enforcement of
judgements in civil and commercial matters, OJ C 117, 26.4.2000,
p. 6.