Investment Services Directive Passed By European Parliament

by Ulrika Lomas, for LawAndTax-News.com, Brussels

02 April 2004

The European Parliament has approved an amended version of the Investment Services Directive (now renamed the Directive on Financial Market Instruments) it emerged this week.

One of the aims of the Directive is to allow banks to compete with stock exchanges for share trading business. Prior to the publication of the initial draft legislation, the EC put in place a regime obliging banks to publicly disclose bid and offer prices for shares before all trades, with the exception of large block trades.

This move was supported by European stock exchanges (and the majority of EU member states) who argued that without such disclosure, market fragmentation could mean that retail investors can no longer find the best deal. However, the banks themselves argued that full pre-trade price disclosure would be impractical, and prohibitively expensive.

Under the amendment proposed recently by the Economic and Monetary Affairs Committee, pre-trade transparency would be required only for trades up to a certain market size.

Speaking following parliamentary approval of the Directive, Internal Market commissioner, Frits Bolkestein announced that:

"I am very pleased that the Parliament has endorsed this important measure. This is a vital pillar of an integrated European capital market that we want completed by the 2005 deadline."

However, some were less enthusiastic, bemoaning the watered-down nature of the version of the directive approved by the European Parliament. Speaking this week, parliamentary rapporteur, Theresa Villiers observed that:

"On a number of key issues, I can't pretend this is anything other than a very disappointing result. The European Parliament second reading has been a damage limitation exercise."

She continued:

"There is no doubt that we have succeeded in limiting that damage significantly, but there are still very serious problems with this directive which could potentially damage financial markets and hence hit people's savings and investments."

The Directive now awaits the approval of EU finance ministers.

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