Within the EU, the approach to regulation of the markets is twofold. Member states each have their own regulatory body at national level, the role and purpose of which is to set policy, enforce applicable laws, license providers of financial services, work to prevent financial crime, and maintain confidence in the financial system. The more well-known regulatory bodies include the Financial Services Authority (United Kingdom), Autorité des Marchés Financiers (AMF) (France), Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) (Germany) and the Netherlands Authority for the Financial Markets.
There is no supranational regulatory body for the whole of the EU. Instead, markets around the EU are managed through the imposition of Directives, with which member states must comply. The European Commission launched its Financial Services Action Plan (FSAP) in 1999, which was the cornerstone of the EU’s aim to create a single market for financial services, and was intended to last for six years. The FSAP consisted of 42 articles aimed at harmonizing financial services markets within the EU. The most important Directive that emerged from this action plan is the Markets in Financial Instruments Directive (MiFID), which came into effect in 2007.
During the development of the FSAP, in 2001 the EU adopted what became known as the Lamfalussy process, named after Alexandre Lamfalussy, chair of the EU advisery committee that created it. The Lamfalussy process concentrates solely on the development of financial services industry regulations for EU member states, and it has four levels, each focusing on a specific stage of the implementation of legislation.
At level one, the European Parliament and the Council of the European Union work to draft a piece of legislation, establish the core values of this law, and develop guidelines for its implementation. At level two, sector-specific committees and regulators advise on technical details for the law, which is then voted on by member state representatives. At level three, national regulators work on coordinating the new regulations with other member states. Because of the diversity of member states, laws and Directives need to be flexible as to how they are adopted in each nation, while making use of the so-called passport approach (see Solvency II: Its Development and Aims) that ensures harmonization. Level four consists of compliance with, and enforcement of, the new rules and laws.
The adoption of MiFID has to date been the most significant piece of legislation introduced under the Lamfalussy process, which is intended to offer a number of benefits over the traditional legislative process, such as engendering a more consistent approach to interpretation, convergence of national supervisory practices, and an improved quality of financial services legislation.
Besides MiFID, there are three other Lamfalussy Directives—the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive.
The Prospectus Directive requires anybody offering shares to the public in the EU to issue a prospectus that complies with the detailed rules issued by EU countries under the Directive. A key plank of the Prospectus Directive allows companies to issue a prospectus in one EU country that would cover subsequent offers of securities to the public or admission to trading throughout Europe, with minimal translation obligations.
The Market Abuse Directive introduces a common approach for preventing and detecting market abuse, and ensuring a proper flow of information to the market. New measures include the following requirements:
issuers to keep “insider lists” of persons who have access to inside information;
trading firms to disclose: information on deals where involved staff have any personal interest in an issuer’s shares and any related derivatives; their research sources and methods, and any conflicts of interest that may impact on the impartiality of the research;
reporting of any suspicious transactions.
The Transparency Directive is designed to enhance transparency on EU capital markets, by establishing mechanisms and minimum requirements for periodic financial reporting and on the disclosure of major stockholdings for issuers whose securities are traded on any regulated market in the EU. It also establishes disclosure requirements on an ongoing basis about issuers who trade securities on a regulated market situated, or operated within, the EU, for investors who invest in these securities.