UK Weighs in on Reform of Lamfalussy Process

As the European Commission conducts a review of the Lamfalussy arrangements for adopting EU financial regulations, UK authorities provided significant input designed to enhance the process. The Lamfalussy process has been used to implement the Financial Services Action plan in the EU, most recently the MiFID Directive.

The Lamfalussy process consists of four levels. Level One consists of framework Directives, while Level Two involves Implementing Directives. Level Three, where much of the reform is expected to take place, involves committees of national supervisors, such as CESR, which advise the Commission on implementing measures and work to ensure more consistent implementation. Level Four focuses on strengthening enforcement.

Generally, the Commission is not proposing major institutional changes to the current process. Rather, the EC has proposed some practical improvements for all levels of the Lamfalussy structure as part of an effort to ensure greater consistency and convergence in national implementation and enforcement and enhance cooperation between national regulators. In the view of Commissioner for the Internal Market Charlie McCreevy, Level Three deserves particular attention. The most significant innovations will be introduced at Level Three, he recently said, with the creation of committees of regulators responsible for ensuring greater regulatory convergence across the EU.

Overall, UK authorities believe that the Lamfalussy arrangements are structurally sound, and have made a major contribution to the regulation of financial markets. Nevertheless, the UK authorities set forth practical and ambitious proposals that they believe will deliver further tangible benefits in terms of the efficiency of the regulatory process and the effectiveness in the way the Lamfalussy committees conduct their day-to-day business.

The proposals, embodied in a joint Treasury-FSA report, follow two principles. First, that regulation should not be an end in itself, but should aim to improve markets and deliver economic benefits. To do that, regulations should be proportionate; support innovation, competition and efficiency; and promote financial stability. Second, that regulation should recognize the need for regulators to be accountable to national governments.

At the same time, Economic Secretary and City Minister Kitty Ussher rejected a pan-European regulator for financial services, saying that it would not have the flexibility needed to allow EU markets to prosper. She said that to legislate for a common method of regulation would create a massive and dislocating economic distortion rather than increased prosperity.

More specifically, the UK authorities want to see greater economic evidence used by the national regulators, and by CESR and other Level Three committees, when preparing advice to the Commission on EU directives. In addition, they want consistent implementation to facilitate cross-border competition.

In that regard, member states should limit their use of discretion to the minimum extent necessary. The Level Three committees were also urged to introduce a comply or explain regime for regulators departing from the majority view, coupled with a system of peer review to ensure legislation is being properly implemented in all jurisdictions.

Further, there is room to improve the regulation of groups that operate across borders, making it more efficient both for them and for regulators. That means more co-operation and trust between regulators. In order to support that, the Level Three committees were urged to put in place guidance setting out the different roles of home and host regulators. Similarly, there is a need to increase co-operation in cross-border crisis management.