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Summary of IMPACT ASSESSMENT GUIDELINES for EU Lamfalussy Level 3 Committees

Introduction

In February 2008, the European Securities and Markets Authority (ESMA) published a feedback statement on the revised Impact Assessment (IA) Guidelines for the three Lamfalussy Level 3 Committees (CESR, CEBS, and CEIOPS). These guidelines were initially proposed in a joint consultation paper published on 24 May 2007. The goal of the guidelines is to assist the expert groups of the L3 Committees in conducting effective IA exercises as part of their policy analysis and recommendation processes.

The guidelines align with the European Institutions' commitment to better regulation, as outlined in the December 2003 agreement and the 2006 White Paper on Financial Services. The feedback statement outlines how the consultation responses were taken into account and highlights the lessons learned from pilot studies conducted by CESR and CEBS.

Core Content of the Guidelines

• Purpose: To provide a practical framework for conducting impact assessments in the context of financial services regulation.
• Key Elements:
  • Market Failure Analysis (MFA)
  • Regulatory Failure Analysis (RFA)
  • Stakeholder consultation
  • Ex-post review
  • Consideration of competitiveness and competition
  • Proportionality of IA exercises

Main Substantive Points from Consultation

Governance and Quality Control

• Concerns: Respondents emphasized the need for independent experts to conduct IA, with independent scrutiny and senior management sponsorship.
• Revisions: The guidelines now incorporate three elements to ensure accountability and quality:
  • Involvement of IA experts within the L3 Committees who are independent of policy-making groups.
  • Engagement of stakeholder panels during the policy-making process.
  • Public consultation as a mechanism for transparency.

Treatment of MFA

• Concerns: Some respondents felt that MFA definitions were unclear, particularly the concept of information asymmetry, and that the burden of proof for regulatory intervention was misplaced.
• Revisions: The guidelines now clarify that:
  • Regulatory intervention is justified only if there is a significant market failure.
  • No immediate market-based solution exists.
  • There is a reasonable expectation of net benefits.
  • The burden of proof remains on regulatory authorities.

Timing of Stakeholder Involvement

• Concerns: Some respondents felt the guidelines did not sufficiently emphasize the importance of ongoing stakeholder consultation throughout the IA process.
• Revisions: The L3 Committees have acknowledged the need for both formal and informal stakeholder engagement and have revised the guidelines to reflect this. Timelines and resource constraints are also considered in the design of IA exercises.

Competition and Competitiveness

• Concerns: Respondents were concerned that the guidelines did not adequately address the impact of policy proposals on competition and competitiveness.
• Revisions: The guidelines now include a provision to consider these impacts as part of the IA process.

Other Key Comments

• Justification of Non-IA-Based Decisions: Guidelines have been revised to ensure that decisions not based on IA must be justified.
• Costs and Consumers: The assumption that all costs are passed on to consumers was deemed too simplistic. The guidelines now consider the extent and speed of cost transmission.
• Quantitative Assessment: The guidelines include a commitment to use quantitative assessment in ex-post reviews, maintaining the same process as standard IA exercises.
• Tractability of IA Exercises: The L3 Committees acknowledge the practical challenges in conducting IA, especially with technical data gathering and quantitative analysis. They emphasize proportionality and flexibility in the process.
• Legal Implications: While the guidelines focus primarily on economic impacts, they recognize that legal implications may need to be considered in certain cases.

Questions Posed in the Consultation

Question 1: Do the guidelines cover all key aspects of an impact assessment?

• Response: Broadly, respondents agreed that the guidelines cover all key aspects. Several suggested amendments, which were incorporated into the revised version.

Question 2: Are MFA and RFA given due consideration?

• Response: Respondents supported the inclusion of MFA and RFA. Some concerns about clarity and potential misuse were addressed in the revisions.

Question 3: Does the consultation process cover all key aspects?

• Response: The consultation process was generally endorsed, with suggestions for clarification on timing and stakeholder involvement. These were incorporated into the guidelines.

Question 4: Are the guidelines sufficiently practical?

• Response: Most respondents found the guidelines practical, though some raised concerns about readability. Revisions were made to improve clarity and address specific issues.

Testing via Pilot Studies

• CESR Pilot: Conducted in Spring 2007 as part of the review of the Simplified Prospectus. It was considered a success, with policy makers finding the IA checklist helpful.
• CEBS Pilot: Conducted in January 2007, but less straightforward due to prior work. Nonetheless, the guidelines were found to be sound, and two consultation documents were published.
• CEIOPS Pilot: Ongoing as part of Solvency II policy work. It is not expected to delay the ratification of the IA guidelines.
• Lessons Learned:
  • IA exercises require proper guidance and training for policy makers.
  • The L3 Committees held a successful joint IA training session in October 2007.
  • IA has reinforced existing mechanisms for stakeholder engagement.

Stakeholders Involved in Consultation

• A wide range of industry associations and stakeholders participated, including:
  • Asociacion de Mercados Financieros
  • Association Francaise de la Gestion Financiere
  • Association of Foreign Banks (UK)
  • CNMV Advisory Committee
  • Danish Securities Dealers Association
  • European Banking Federation
  • European Fund and Asset Management Association
  • European Insurance & Reinsurance Federation (CEA)
  • Federation des Experts Comptables Europeens
  • Federation of European Securities Exchanges
  • Securities Industry and Financial Markets Association

Conclusion

The revised IA guidelines reflect the feedback from stakeholders and aim to provide a robust, flexible, and practical tool for conducting impact assessments. The L3 Committees are committed to using these guidelines to improve policy-making, ensure regulatory interventions are justified, and promote effective stakeholder engagement. Pilot studies have demonstrated the usefulness of the guidelines, though they also highlight the need for training and support for those involved in the IA process.