Lamfalussy: Joe Coffey reports on the progress of the action plan

In May 1999 the European Commission looked beyond the imminent arrival of the euro and adopted a plan that would form the next major step in the development of the European single market.

The Financial Services Action Plan sought to tackle three objectives: a single market for wholesale financial services; open and secure retail markets; and state-of-the-art prudential rules and supervision to enhance the stability of the EU’s financial markets. With estimated potential economic benefits from the action plan in the order of a 1.1 per cent increase in EU-wide real gross domestic product over a decade and a boost in employment of 0.5 per cent, an ambitious target date for implementation of 2005 was set by the European Council. A ’committee of wise men’, led by Baron Alexandre Lamfalussy, was set up to explore how it could be delivered.

This committee found that the existing legislative process was too slow and rigid, resulting in unduly detailed yet ambiguous legislation. It proposed a legislative process, known as the ’Lamfalussy Process’, consisting of four separate levels, with public consultation built in at each stage:

Level 1: legislation comprising framework principles only, with delegated powers to define implementing measures in specific areas.

Level 2: the Commission adopts technical implementing measures following advice from the Committee of European Securities Regulators (CESR) and with European Securities Committee (ESC) approval.

Level 3: national regulators cooperate in consistent implementation of the legislation at national level. The CESR may provide guidelines and non-binding common standards.

Level 4: the Commission checks and enforces members’ compliance with the legislation.

So, with the 2005 deadline for the completion of the remaining measures looming, how is the Lamfalussy Process coping?

Progress to date

By June 2003, 34 of the action plan’s 53 measures were reported as completed. Many consist of recommendations, communications and more action plans. However, a number of key pieces of harmonising legislation have already been adopted and will be in force from next year. These include two undertakings for collective investment in transferable securities (UCITS) directives, which extend the range of funds capable of being marketed cross-border and give fund managers the ability to manage overseas funds, and the Distance Marketing Directive, which should reduce the complexities of selling retail financial services over the phone, via the internet or by post into 15 (soon to be 25) countries.

Although the majority of measures completed so far have not been subject to the full Lamfalussy Process, four important measures are benefiting from the new process – the market abuse, prospectus, investment services and transparency directives. Key to reforming the existing European regime by modernising and extending its reach, these are also among the most politically sensitive of the proposals. Of these, only the market abuse and prospectus directives have reached the end of level one and so exist in their framework form. The process for fleshing out the detail needed before they can be implemented is still in progress. While the investment services and transparency directives appear broadly on track to pass the level one framework stage by April 2004 (before next year’s European Parliament elections and change of Commission bring the legislative process to a virtual halt), the implementation deadlines imposed are extremely tight.


It is the level two stage that appears to be the most likely to prevent the action plan from meeting its 2005 deadline.

The most developed directive, the Market Abuse Directive, was adopted in January 2003 for implementation in October 2004. In the meantime, the CESR has had to develop, consult on and finalise three sets of implementing measures for core matters, such as the definition of ’inside information’ and guidance on what constitutes market manipulation. The CESR estimated that this alone could take a year and so granted a ’provisional mandate’ for work to start on technical advice at level two before completion of level one, with a process known as ’parallel working’.

The Commission then redrafted the advice as legislative measures giving the ESC three months to adopt the result. Although intended for the end of 2003, the implementing measures are unlikely to be on the legislative books before next spring. Thanks to elections this could be pushed back until the summer. Even then, national regulators may have to wait for the CESR’s level three guidance. Small wonder that the Financial Services Authority has postponed publishing its own consultation paper from early 2004 to the third quarter, apparently abandoning all chance of meeting the October deadline.

To minimise similar delays on the prospectus directive, a strict 180-day deadline has been imposed for the adoption of the measures, raising concerns that quality could be sacrificed for the sake of meeting deadlines. Indeed, in this case the provisional mandate, which had not taken account of many of the wide-ranging amendments proposed at the European Parliament’s first reading of the directive, had to undergo several changes before its formal adoption in July 2003.


Many proposals’ development predated Lamfalussy, leading to market abuse and prospectus framework directives being adopted with little consultation until implementing measures were being developed, by which time the overall structure could not be amended.

Early consultation does not eliminate the potential for controversy. The initial proposal for the investment services directive appeared to prevent execution-only trading by requiring customers to be assessed for suitability and to receive advice. Although harmonising the rules of 15 jurisdictions is bound to result in changes that will not please everyone, killing off parts of the market is hardly progress. Early and thorough consultation is crucial to prevent unhelpful proposals from reaching a stage where they become unalterable. Fortunately, the ESC’s recent opinion suggests that lobbying on this element has been successful and execution-only trading should be safe.

In its own concession to the spirit of consultation, the Commission has issued each of its draft implementing measures for comments, although they have not been as helpful as they could be. The first was accompanied by a commentary but failed to indicate whether, after the CESR’s lengthy deliberations, departures from its advice were intentional or were due to misunderstandings. The most recent draft was issued without commentary or indication of the changes. If consultation is to achieve its aim of involving the market and raising the quality and practicability of legislation, the process must be improved.


A key advantage of Lamfalussy is the flexibility that it creates. One side-effect is that this has mitigated the lack of initial consultation on the Market Abuse Directive by pushing the detailed provisions to level two, where participants have lobbied the CESR and the Commission on unworkable proposals.

In the longer term, by keeping the detail at level two, it should be possible to update legislation more easily, in line with changes in market structures and practices, particularly as the appetite for further harmonisation grows. Whereas currently European legislation takes on average three years from drawing board to implementation, level two measures might be amended within a year.


The Lamfalussy process is still in its early stages, but with a full review due next year the focus is turning to whether it is delivering. Delays at the lower levels of the process are not preventing the big changes from being pushed through with unprecedented speed, albeit so far through the imposition of political deadlines rather than through efficiencies in the system. Lamfalussy therefore needs to be given more time to prove its ability to deliver a much-needed single financial services market, without the pressure of arbitrary deadlines, so that proper consultation can take place. Then the emphasis can return to the quality of results rather than their number.

Joe Coffey heads Taylor Wessing’s London financial services group. He was assisted on this article by associate Jonathan Overett Somnier