LAMFALUSSY. First Intérim Report of thé Inter-lnstitutional Honïtorïng Group for Securîties Markets. Position taken by thé French Banking Fédération

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1 Paris, July 7th 2003 LAMFALUSSY First Intérim Report of thé Inter-lnstitutional Honïtorïng Group for Securîties Markets Position taken by thé French Banking Fédération Thé French Banking Fédération (FBF) is thé professional body that represents thé interests of thé banking sector in France. It is thé united voice of ail banks operating in France, i.e. over 500 commercial, coopérative and mutual banks. Thé member banks of thé FBF represent a network of 25,500 branches in France, 500,000 employées in France and worldwide, and 48 million customers. Thé FBF supports thé new process proposed for regulating thé securities markets. It fully subscribes to its objectives, namely to enable thé faster and more flexible introduction of régulations that are better suited to thé reality and needs of thé financial markets, and to promote convergence of thé relevant national regulatory frameworks through thé joint and consistent implementation of thèse rules. Thé FBF is also in favour of extending thé Lamfalussy Process to banking régulation and supervision. Thé FBF participâtes actively in thé work carried out within thé framework of thé Lamfalussy Process. This process is vital for realising thé Financial Services Action Plan (FSAP). Thé FBF welcomes thé consultation launched by thé Inter-lnstitutional Monitoring Group for Securities Markets, which should facilitate thé adoption of a harmonised European regulatory framework. Thé first applications of thé Lamfalussy Process and thé resulting discussions hâve raised important questions, with respect to which thé FBF would like to make concrète proposais to improve thé procédures. 18 rue La Fayette, F Paris Cedex 09. France

2 A - Question 1: Are thé Group's assessment criteria sufficïently précise and complète? Thé report proposes four criteria: 1. Is thé Lamfalussy Process capable of speeding up thé législative process? Is this Process efficient both in terms of use of resources and in terms of flexibility? 2. Are thé consultation processes satisfactory? Are thé participants in thé consultation processes "représentative"? 3. Hâve bottlenecks or blockages appeared, with particular regard to timetables? 4. Has implementation lived up to thé expectations raised by thé new Process? Has thé Lamfalussy Process yielded better results than procédures applied previously?» Criterion 1 - Resources, flexibility Thé Process is still at thé trial stage and participants need time to adapt to and assimilate thé new procédures. Thé Committee of European Securities Regulators (CESR) is clearly lacking in material resources in view of thé number of mandates received. An increase in its 2003 budget, even of 33%, appears insufficient. Criterion 2 - Quality of thé consultation processes Thé process of consulting with market participants needs to be improved. During thé first mandate on thé Market Abuse Directive, only one consultation took place. Consequently, market participants did not receive detailed justification concerning proposais refused by thé CESR. In order to improve thé process, thé FBF would suggest two consultations. A first consultation by thé CESR should take place following thé publication of its working document. Following this consultation, a further CESR document that incorporâtes those comments it has retained should give rise to a second consultation with market participants. Thé first working document should contain a table comparing thé différent regulatory frameworks in Member States. This table would facilitate thé understanding of thé CESR's décisions and make it easier for market participants to interpret thé proposed régulations and issues. In addition, thé work carried by thé working group of experts should be subject to a report submitted to thé CESR, which should be published. Te! +33 (0) » Fax: +33 (0) »

3 On certain points, thé régulations proposed by thé CESR shouid be accompanied by a study of thé impact on thé European industry. «Criterion 3 - Deadlines Thé deadlines are too short for both thé CESR and market participants. Thé quality of thé documents and thé comments reflect this. It is vital to improve thé balance between quality and deadlines. «Criterion 4 - Results achieved by thé Process Certain légal concepts that are used in thé directive also remain général and imprécise in thé CESR document. There has been no improvement at this level. To facilitate a harmonised implementation of thé directives, thé CESR must clarify thé key légal concepts. Sub-questions on criterion 4 concerning thé results achieved by thé Process Measures at Levels 1, 2, 3 and 4. Thé report raises thé following questions concerning thèse différent Levels: 1. Which légal instruments should be used at Level 2 (régulations or directives) and how long should thé delays in transposing directives be? 2. Should thé différent deadlines for transposing measures at Levels 1 and 2 be thé same? 3. How should Level 3 be implemented? 4. How should Levé! 4 be actively enforced? Sub-question 1: choice of légal instrument used at Level 2 As regards Level 2, thé FBF would like a clear regulatory framework. Thé légal concepts cited above must be treated at Level 2 in order to be applied in a uniform manner without difficulty. While thé FBF is in favour of thé use of régulations at Level 1 or 2, this is only when thé various national practices are sufficiently cohérent. If this option is chosen, it is indispensable that a consultation with market participants takes place based on a finalised draft. Thé technical importance of Level 2 measures and thé concern for tailoring thé législation to thé needs of thé financial markets make it justifiable that market participants are not only consulted by thé CESR, which only submits a consultative opinion upstream of Level 2, but also by thé European Commission on thé draft implementation measures it has drawn up. Te! +33 (0) «Fax: +33 (0) »

4 «sf It aiso needs to be clearly asserted that market participants will be consulted at Level 3, in thé décision that set up thé CESR and in thé décision that will create thé Committee of Banking Regulators. Thé FBF aiso propose a criterion, which it believes essential, of splitting measures between Levels 2 and 3. Thé groundwork carried out by thé CESR on implementation measures related to thé Market Abuse Directive has sparked a debate on what must corne under Level 2 and what can be relegated to Level 3. Some organisations wish to see as many issues as possible relegated to Level 3, which would resuit in Level 2 measures being limited to only a few points. Thé aim is to minimise thé mass of formai régulations, which are often complex and difficult to implement and are aiso drafted without sufficient référence to current business needs. Other organisations, including thé FBF, hâve argued for Level 2 législation that is as complète as necessary, with a view to achieving across-the-board harmonisation, particularly given that thé attitudes of regulators and legislators vary between countries. However, there is aiso no question of drowning market participants and thé financial markets in a sea of excess régulation, which could be counterproductive. There seems to be a two-pronged solution hère. First, a criterion needs to be defined in order to détermine what cornes under each Level. This could take thé foliowing form: when a rule must clearly hâve binding force and be applicable in ail Member States, it must corne under Level 2. Second, with a view to avoiding a surfeit of régulation, thé European Commission should seek to guarantee that Level 2 measures are proportionate to thé intended objectives. Consequently, it should endeavour to take into account thé impact - notably économie - of thèse measures on thé market participants concerned. In any case, thé FBF is strongly opposed to thé System, as indicated in thé groundwork carried out by thé CESR, whereby ail thé items looked at in Level 2 are immediately relegated to Level 3, when there is no agreement between regulators within thé CESR, or between thé Member State représentatives on thé European Securities Committee (ESC), and when thé non-inclusion of thèse items in Level 2 is due to failure to reach an agreement. Apart from thèse cases, we must seek to avoid overloading Level 2, particularly when thé matter is subject to interprétation by thé national regulators. This is a reason why more effective harmonisation at Level 3 should be considered.

5 Sub-question 2: should thé transposition deadlines for measures at Levels 1 and 2 be thé same? Thé measures at Levels 1 and 2 should be implemented in parallel to ensure full légal security. Sub-questions 3 and 4: Levels 3 and 4 Thé innovation introduced by thé Lamfalussy Process is thé création of Level 3 and thé setting up of thé CESR to contribute, at this stage of thé process, to thé uniform implementation of Level 1 and 2 measures in thé Member States. However, Level 3 stands out because thé guidelines drafted by thé CESR to this end hâve no binding force. Paradoxically, it so happens that thé CESR's rôle may be very important at Level 3, particularly where Level 2 only deals with a few items and relegates to Level 3 ail additional législation, or when it concerns implementation measures. This may play into thé hands of certain Member States, insofar as they are not bound by thé work carried out by thé CESR, and so retain significant leeway when transposing and implementing Level 1 and 2 législation, in order to be either more flexible or, conversely, more strict. From this point of view, there can be no doubt that Level 3 is décisive in thé création of a single European market for financial services. Against this backdrop, thé FBF is pondering over thé obvious inadequacy of thé Level 3 mechanism, mainly owing to thé lack of any binding force. Thé FBF therefore thinks that Level 3 can only be promoted if thé following conditions are met: market participants must obviously be involved at this level beforehand and, as a matter of necessity, be consulted by thé CESR and thé other regulatory committees to be set up. Thé laws relating to thé création of thèse committees must explicitly provide for this obligation at Level 3; thé work carried out by thé CESR must at least hâve relative binding force with thé view to promoting effective convergence of thé applicable rules. This would involve creating thé conditions needed to ensure mutual discipline by allowing a national regulator to complain to thé CESR about thé practices carried on by one of its peers that may not be in keeping with thé standards and guidelines drawn up by thé CESR, or to approach thé CESR when national décisions, without contravening thé législation, obviously distort compétition; it would also be necessary to allow banks, investment companies and professional associations to lodge a complaint with thé CESR against thé practices of a national reguiator, where thé said practices create compétitive distortions.

6 6 Thé CESR would thus take on thé rôle of "ombudsman", responsible for handling complaints referred to it. To ensure thé effectiveness of this rôle, in thé event that thé regulator in question does not yield to thé CESR's findings or that thé CESR fails to reach a décision, one solution would be to allow for a request to be submitted to thé European Commission and to thé ESC at Level 2 to draft a law that standardises thé rules in question, which thèse bodies would obviously be free to accept or reject. Thé awarding of true coercive powers to thé CESR could eventually be considered. Other criteria Thé FBF proposes that thé CESR implements a criterion for assessing thé degree of harmonisation of thé régulations that fall within its compétence over time. B - Question 2: Are you aware of any obstacles obstructing or hamperïng thé swift and efficient adoption of securities markets législation at European Level? Thé FBF is in favour of a European législative framework that can be rapidly adapted to developments on thé markets. It is therefore necessary to hâve décisions at Levels 1 and 2 that define long-term principles. Level 1 should serve as a référence for around ten years, going by thé frequency at which directives are updated. Level 2, which is intended for thé drafting of implementation measures, should adopt thé same timeframe because of thé risk of penalising thé French industry in terms of thé cost of adjustments needed to bring it into line with European régulations. Level 2 décisions should therefore apply for thé same time period. Level 3 should converge over time according to thé process proposed by thé FBF, which will ensure that thé measures are suitably updated in thé light of any compétitive distortions that are identified. C Question 3: Is thé System of parallei working with provisional mandates granted to CESR efficient? Thé FBF is in favour of thé CESR being able to make progress with thé technical préparation of Level 2 measures before work on thé Level 1 measure is fully completed, but this possibility must not call into question thé necessary deadlines within which it must examine thé définitive Level 1 provisions.

7 7 It is indeed tricky to provide market participants with a position before thé directive has been effectively adopted and while they may still want to amend certain measures. Work was also carried out on spécifie issues, such as "stabilisation and allotment", which was not subsequently used within thé framework of thé consultation on thé implementation measures of thé Market Abuse Directive, without any explanation being provided. D - Question 4: Do thé Communïty institutions delegate sufficiently to Levels 2, 3 and 4? Thé Community institutions delegate sufficiently, since thé Level 1 measures should remain relatively précise and complète, given that they serve as thé référence for provisions at Levels 2, 3 and 4. Priority should be given to Level 2 measures since they are indispensable for achieving true harmonisation. For this reason, thé FBF is in favour of Level 2 measures and thé adoption of a Level 3 process, which would eventually enable a genuine harmonisation. E Question 5: What îegal instruments should be used at Level 2? Thé Stockholm European Council of March 23rd 2001 invited thé Commission "to consider resorting more frequently to thé use of régulations where this is legally possible and speed up thé législative process". Régulations are a useful instrument as they serve to standardise thé rules applicable in thé Member States by being directly incorporated into national législation. As part of its ongoing efforts to promote thé convergence of thé applicable rules, thé FBF supports thé use of régulations at both Levels 1 and 2, particularly when thé practices and products are sufficiently cohérent. Thé Commission has not yet decided what form Level 2 législation should take (directive or régulation). Thé FBF wants as much recourse as possible to Level 2 régulations, even in thé case of thé existence of a Level 1 directive. Thé dates for implementing Level 1 and 2 measures should coincide for ail scénarios.

8 8 F - Question 6: Are thé consultation processes satisfactory and efficient as regards thé number of rounds of consultation and deadlines set? Are consultative documents balanced in terms of depth and size? Thé FBF recommends two consultations (see response to Question 1 - Quality of thé consultation processes). Thé FBF considers that thé readability of thé documents supplied by thé CESR improved significantly between thé first and thé second mandate on Market Abuse. Thé FBF believes that if thé comments made concerning this question were taken into account, thé understanding of thèse documents would be improved. G - Question 7: Is there a further need to provide ex-post transparency? Is ït necessary to expiain why proposais from market participants were incfuded in securitses markets législation, or why they were omitted? This approach is necessary and thé CESR's ability to justify thé omission of proposais by providing solid arguments is vital for ensuring that thé market participants of Member States understand thé European regulatory framework that is put in place. H - Question 8: What are your vîews on thé Group's preliminary observations on possible bottlenecks? Thé report cites a number of difficulties:» thé approaching European Parliamentary élections; thé problem of thé légal basis of thé Lamfalussy Process (with thé possible amendment of Article 202); thé problem linked to thé resources of participants; «thé problem of thé increase in translation volumes in connection with thé Accession Treaties; «thé danger of thé Aérosol Clause, which commits thé Commission "to avoid going against prédominant views which might émerge within thé Council". Certain points raised are of temporary concern, while another (thé amendment of Article 202) can be resolved by thé convention. As regards human and materiai resources, thé authorities and market participants are in favour of finding a rapid solution to this problem, which does not présent a major obstacle. 18 rue La Fayette, F Paris Cedex 09. France

9 9 Thé définition by thé Commission of reasonable deadlines would also help contribute to thé proper functioning of thé process. Thé FBF considers that it would be useful, without increasing thé workload of thé CESR, for each authority to offer thé CESR a translation of thé documents submitted for consultation. This exercise is not simply linguistic. It would demonstrate that certain concepts or notions used exclusively in English do not hâve thé same meaning and would avoid nonharmonised transpositions, especially if there is a recourse to thé régulations. 1 - Question 9: Is thé current functioning of thé Institutions, market participants, and other parties ïnvolved in thé Lamfalussy Process conducive to making progress? Are ail thèse players equipped with sufficient resources? Thé deadlines will enable ail thé participants to be involved in thé drafting of a high-quality législative framework in thé most efficient way possible.