| Latest EU Directives threaten to drive up costs, inefficiencies in broking, industry fears |
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| The Irish broking industry is concerned over possible impact of the Investment Services Directive, targeted as an objective by the irish Presidency, while the Prospectus Directives means big changes are ahead for the Irish Stock Exchange. |
OOne of the top priorities of the Irish presidency of the European Union, which began at the start of January, will be the transposition of the Investment Services Directive, which will enable the provision of cross-border investment services. While the Irish financial services industry broadly welcome the aim of the Directive, the application of it is causing much concern.
Back in October, the Directive was passed by a majority at the Ecofin Council, with both Ireland and the UK voting against, and it now sits with the European Parliament. The Directive will go to committee stage in February, and there will be a final vote on it in Parliament in March.
Latest
On January 8th the Parliament published its latest report on the Directive, authored by Theresa Villiers, the MEP for London, and the Conservative finance spokesperson. In the report Villiers hopes to show that MEPs ‘understand how difficult and sensitive this directive is for the members of the Ecofin Council’.
However, the debate on ‘pre-trade transparency requirement’ has angered at least one Dublin brokerage firm. Up to now, Villiers, has opposed pre-trade transparency because it would mean that internalisation - in-house share dealing - would cease. It would give exchanges a monopoly and cause liquidity of trading to dry up. Post-trade transparency would ensure enough openness in trading to protect consumers, Villiers had argued.
However, it appears that Villiers has given into pressure from France and Italy, as in the latest report, while Villiers argues that for in-house deals, post-trade transparency should be standard, when these are substantial, or the deals are large, she says that pre-trade transparency may be allowed.
Paula Downey, head of compliance with Davy Stockbrokers feels that this is a step in the wrong direction. She would hope that Level 2 measures would soften the approach.
Concerns
The industry’s concerns focus on the following three areas:
1) Internalisation - ie suspension of non-order book trading. Downey says that this move is diluting the skill of broking in Ireland, and is being driven by continental European concerns, where there isn’t an OTC culture. She says that in Ireland there is already a very robust regime in place, regulated by the ISE.
2) The blurring of the distinction between retail and professional clients. On this issue, Downey says that extending the duty of care to professional customers is unnecessary, as professional customers, many of whom are large institutional investors, don’t want or need the same level of protection as retail customers, and this would simply drive up inefficiencies and costs, with no obvious benefit.
3) Increasing compliance requirements. The Directive provides for a, ‘full suitability test to be applied
when a firm is providing investment advice, no suitability test for execution-only business instigated by the customer and a ‘light’ suitability test for circumstances in between’. This means that the Directive will not affect execution-only companies, such as Sharewatch. However, brokerage firms which offer both execution-only, and investment advice services will need to do ‘Know Your Client’, which will lead to increased information requirements, on execution-only business. What this will mean says Downey, is that having done their background check on a customer, if a client, who is normally risk averse, places a risky trade, then Davy will have a duty of care to advise them not to place the trade. For the large brokerage firms, this will make execution-only trading uneconomic, as it will increase the costs of compliance, which will need to be passed onto the customer. Moreover, Downey says that execution-only business is spasmodic, as a lot of customers receive share options through work, and simply want to conduct one transaction - sell the shares, so generating an investment profile for them is unnecessary.
Brian Healy, director of trading at the Irish Stock Exchange believes that in progressing a single capital market the EU has gone for a degree of over-regulation. While the overall goal of the Directive is desirable, the application of it is causing many difficulties says Healy.
The ISE says Healy, has been involved in a lot of discussion to date on the Directive, and have met with IFSRA, the Department of Finance, and CESR amongst others to discuss it. He says that the fast track approach, as recommended in the Lamfalussy report, is really happening and the days of Directives taking fifteen years to be transposed are gone. He is concerned that market participants are not as aware of this as they should be.
Prospectus Directive
Another Directive that is leading to big changes is the Prospectus Directive. The Directive, which was passed last July was written into the Official Journal on December 31st and will come into force in July 2005. It seeks to harmonize the requirements for drafting, approval and distribution of a prospectus in offerings and listings of securities within the EU.
Issuers who issue to the public or seek admission to trading on a regulated market must produce a prospectus subject to approval by the ‘competent authority’. To date the ISE would have been seen as the ‘competent authority’, but the Directive will see the ISE handing over the responsibility for companies/entities listing on the exchange to another ‘competent authority’. This authority will most likely be IFSRA, but it is likely that IFSRA will delegate the responsibility back to the exchange until after 2010, similar to the structure operated by the London Stock Exchange and the FSA.
While the ISE has built up its reputation as being quite stringent, particularly in relation to investment funds and specialist debt securities getting a listing on the exchange, and as such would not be concerned about the level of regulatory oversight required by IFSRA, there may be a clash between the two styles adopted. The exchange is a private company, which operates in quite a dynamic business, and from a commercial viewpoint, needs to be responsive to market demands. IFSRA on the other hand, would not have the same concerns, so any reduction in this responsiveness on the part of IFSRA could prove damaging to the Exchange. |
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| Article appeared in the January 2004 issue.
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