FEASIBILITY STUDY FOR THE FESE OMBUDSMAN.
Table of Contents.
Executive summary
p.1
Section 1. The Problems and the Proposal.
p.3
Section 2. Other Alternative Dispute Resolution Procedures.
p.4
Section 3. The Place of the Proposed Ombudsman.
p. 7
Section 4. Status, Powers and Relationship of the Ombudsman
p.9
Section 5. The Structure of the Ombudsman Service.
p.12
1
Executive Summary.
FESE has proposed the establishment of a European Ombudsman to seek to handle crossborder disputes between businesses and national regulators’ such as passporting issues.
These issues may arise in the areas of securities markets, investment banking and fund
management. Once the Lamfalussy process is fully applied to banking, insurance and so
on, the Ombudsman should serve in these areas as well. Hence it is important to establish
the role well in advance of such extensions of the process.
Such problems cannot be handled by existing cross-border dispute resolution services,
such as FIN-NET and SOLVIT, since the former applies only to retail customers and the
latter lacks the necessary independence and expertise to handle the complex issues in the
financial services industry.
It is proposed that the Ombudsman at this stage should be established as a voluntary
service without the appropriate legal status, since the latter would take too long to obtain.
It is intended that the quality of the service would ultimately lead to the acquisition of
legal recognition. The service itself should be based in Brussels with a small secretariat.
Initially, it should be supported by the trade associations and by ‘case fees’. It would
have a ‘chief ombudsman’, acting as a non-executive chairman with a board drawn from
the trade associations or their nominees. The assessment of cases would be carried out by
a panel of experts, whose services would be required from time to time to consider the
specific cases referred to them, and propose the necessary changes to national practice
and/or law.
Its recognition would depend on the quality, integrity and status of the chief ombudsman,
the quality of its judgements, together with the expertise and independence of judgement
exercised by members of the panel of experts. Transparency and accountability arise
from the publication of its annual reports to the Commission, to CESR and to relevant
Parliamentary committees. All of these would help to ensure that CESR responded in a
2
constructive way and where possible, the national regulator would bring about the
necessary changes in national law and/or practice. The results of such investigations
might also provide the Commission with clear evidence of breaches of Community law,
enabling firm enforcement action to be taken.
1. The Problems and the Proposal.
FESE has proposed the establishment of a European Ombudsman to help to handle crossborder disputes, which may arise between businesses and national regulators, that is,
regulatory disputes, which are not easily solved by the interested parties themselves. Its
purpose would be to provide a speedy and cost-effective mechanism for dealing with
problems caused by the uneven enforcement and interpretation of EU directives, rules
and regulations by national regulators. That this is so is recognised by many firms,
seeking to extend their operations in other member states. The necessity of such a
mechanism was acknowledged by Commissioner Fritz Bolkestein in a recent speech in
which he stated that ‘ we would like to see an Internal Market ‘mechanism’ in each
Member State, which would help to ensure correct application on Internal Market law.
They should provide citizens and businesses with quick effective means of redress
located in their own member state’.1
The same issue arises in all areas of the financial services industry; for example, in its
submission in response to CESR’s Consultation Paper (CESR/03-378b), the German
Association of Investment Fund and Asset Management companies (BVI) argued that it
‘would be of the utmost importance if CESR would focus on the abolition of
administrative barriers to cross-border fund distribution in Europe. Many of the
impediments to cross-border fund distribution have their origin not actually in the law,
but in its practical application by regulators.’2 The survey conducted for FEFSI by PwC
indicated a range of obstacles to effectively marketing UCITS directly in another member
state.
The administrative and regulatory constraints include a range of registration
requirements (such as a statement of the company’s from the relevant home country
‘No time to get wobbly’. Address at the EDLR Annual Congress, Amsterdam, 13 November, 2003.
Letter to CESR from BVI regarding the consultation paper on ‘The role of CESR in the regulation and
supervision of UCITS and asset management activities in the EU’, December 1, 2003.
1
2
3
authority, a prospectus, and the latest annual report) plus additions to the prospectus
which differ from one country to another. Translation requirements vary considerably
with some countries in terms of the amount of information required (e.g. board minutes
may be required) and whether or not the translation is to be certified. Delays in the
registration process are frequent with requests for further information being made shortly
before the current time limit of eight weeks. The interpretation of the start of the time
limit varies from one country to another; for example, in Germany the time limit only
begins when the application is considered to be complete. In some countries marketing
material has to be approved and in others, a local representative of some kind is required.
The role varies from country to country with some confining the role to the transmission
of information to investors and in others their role is extended to centralising
subscriptions and redemption, the payment of investment income and/or the payment of
the supervisory authorities’ fees.3 In the case of investment funds, the Commission will
expect the Investment Services Directive to resolve these problems. But similar obstacles
may be found in the securities industry where developments in the internal market
through the Lamfalussy process are more advanced.
There can, therefore, be no doubt of the need for a body or ‘mechanism’ to enable
businesses to deal with the problem of variable interpretation of European law as it
applies to the securities markets, including both buyers and sellers. The issue is to
determine how this should operate, and to determine the status and powers of the
ombudsman and the relationship between the ombudsman, CESR and the European
Commission.
2. Other Alternative Dispute Resolution Services.
It should also be noted that other mechanisms are already in existence to handle such
problems and do so without encroaching on the powers of other relevant EU institutions
or the role of the Commission. The proposals in this document are not in that sense new,
PricewaterhouseCoopers & FEFSI, Cross-border marketing of ‘harmonised’ UCITS in Europe’,
November 2001.
3
4
but familiar mechanisms operating with the European Union. These are SOLVIT and
FIN-NET.
The latter was established in 2001 as an out-of-court complaints network for the
resolution of consumer disputes when the service provider is located in a member state
other than the state in which the consumer lives. This network brings together over 35
different national schemes, which either cover financial services in particular such as
banking and insurance ombudsman schemes or handle consumer complaints in general,
such as consumer complaint boards, and does so on the basis of a voluntary
Memorandum of Understanding.
It is designed to provide a simple, cheap and effective alternative to legal action. In
launching the scheme, the Commission commented that the ‘time-scale, technical
complexity, linguistic and cultural variance of legal procedures as well as their expense
can deter consumers from taking court action’.
Such alternative dispute resolution
procedures do not replace court action, since a dissatisfied consumer can generally bring
his case to court, but do provide a more efficient alternative to it. They provide an
independent third party dispute resolution.
The Memorandum covers the basic rules governing the operations of FIN-NET. Full
details of each scheme are registered with the Commission and published on the
Commission’s website together with consumer guidance on the use of the scheme. The
various schemes are expected to provide the Commission with an annual statistical report
on cross-border cases and their assessment of the functioning of the co-operation
network. The onus is on the appropriate scheme in the country in which the consumer
lives to provide him with all the necessary information and will also transfer the
complaint to the relevant scheme in the host country or advise the consumer to contact
the competent scheme directly. Once the complaint has been received, the scheme seeks
to resolve the complaint between the service provider and the consumer according to the
rules set out in its terms of reference.
5
SOLVIT was established in 2002 as a problem solving network designed for citizens and
businesses which run into difficulties in exercising their rights in the Internal Market
because a public administration in another member state misapplies the rules. The
purpose of SOLVIT is to resolve such problems as quickly as possible without the
necessity for legal action and the service is provided free of charge.
The system operates for businesses through a network of government officials in all the
relevant government departments and agencies. The system operates through the local
SOLVIT centre to which the business makes its application. The local centre will first
check the application and then enter the case into the on-line data system, allowing it to
be automatically forwarded to the SOLVIT centre in the other Member State, where the
problem has occurred. This centre is known as the ‘Lead’ SOLVIT centre and it will
confirm whether or not it will take on the case. If it does, the target deadline for dealing
with the case is 10 weeks. The two SOLVIT centres will liaise with each other in an
attempt to find a solution and the business concerned will be kept informed of the
progress on the case and the proposed solution to the problem by the home SOLVIT
centre. SOLVIT is another alternative dispute resolution mechanism. Proposed solutions
are non-binding on the applicants and cannot be challenged, but the applicant can take
more formal proceedings, including legal proceedings, if he is dissatisfied with the
outcome.
However, admirable though the work of SOLVIT may be, it does not meet the
requirements of the financial services industry, where the issues are more complex. First
of all, as the trade associations acknowledge, more attention does need to be given to the
implementation and enforcement process, and the Commission is very well aware of this.
But ‘a firm may not wish to supply the Commission with details of alleged infringements
of the FSAP rules by one country: its name would be in the public domain and so this
could well be prejudicial to its business.’
4
This is obviously important as the company
concerned, if successful in its complaint and in extending its business into another
4
APCIMS, Making the Financial Single Market Work, Priorities after the Financial Services Action Plan,
September, 2003.
6
member state, will have to have an ongoing relationship with the very organisation about
which it has complained.
3. The Place of the Proposed Ombudsman.
It is initially envisaged that the proposed alternative dispute resolution service is
complementary to the Lamfalussy Process. Levels 1 (primary legislation to define
‘broad framework principles) and
Level
2 (adoption of technical implementing
measures by the Commission with the assistance of a regulatory committee and an
advisory committee). Level 3 is designed to ensure consistent implementation of
Community law across Member States. The First Interim Report of the Inter-Institutional
Monitoring Group (May, 2003) takes the view that ‘although each Member State takes
full and sole responsibility for the transposition of Community law on its territory,
communication amongst national securities regulators and co-operation between Member
States’ legislators should take place prior to the transposition deadline. That would avoid
ambiguities in the future implementation of Community law in Member States. It may
also reduce instances of incomplete or incorrect implementation of Community law and
thus reduce legal actions being brought against Member States before Community or
national courts under Level 4.’5
The proposed dispute resolution service would
complement the work of Lamfalussy Process between Levels 2 and 3, and might provide
the CESR and the Commission with hard evidence of
instances of incomplete or
incorrect implementation of Community law, which may not be avoided, even with
greater cooperation between Member States in the transposition process.
The directives have not yet been transposed into national law; the first one, the Market
Abuse Directive, is due to be transposed by October, 2004, and the Financial Services
Action Plan as a whole is due for completion in 2005. The dispute resolution procedure
will therefore have a significant role to play in highlighting current differences in the
interpretation and implementation of Community law, thus providing lessons for the
future; for example, just when should the time limit for recognition begin and just how
5
Inter-Institutional Monitoring Group, First Interim Report Monitoring the New Process for Regulating
Securities Markets in Europe (The Lamfalussy Process), May, 2003, p. 17.
7
many translations should be required and what should be covered? Even with much
greater co-operation between Member States during the transposition is unlikely to
ensure complete uniformity throughout 25 Member States and the dispute resolution
procedure will be necessary until that uniformity is achieved.
The Inter-Institutional Monitoring Group pointed out in its first report that the use of
regulations at Level 2 would speed up the process (the transposition by the member
states) and would also reduce the risk of inconsistencies and a higher level of legal
certainty for market participants active in several Member States of the European Union.
The Committee also pointed out (at that stage) that a proposed Level 2 measure
implementing the Market Abuse Directive included the possibility of a regulation for
‘safe harbour’ provisions in the context of buy-back programmes and stabilization’. As at
least one interviewee pointed out in the course of discussions about the need for an
Ombudsman that far from clarifying the issue, the concept of a ‘safe harbour’ remains
obscure.
The Committee also noted that progress is being made on improving co-operation on
national enforcement issues, but pointed out that much more thought should be given to
putting Level 3 into practice and the nature of the instruments involved. CESR may still
be considering whether it should set up a more general system whereby it can act as
mediator but ‘strictly between national regulators in their capacity as CESR members,
and not between Member States’6. Pragmatic co-operation between members of CESR
could result in supervisory convergence, and this could also provide a valuable channel of
information to the Commission by giving examples of the incorrect implementation of
Community rules.
In effect, the Committee recognises the value of the work which would be carried out by
an independent dispute resolution procedure. It is noteworthy that it is envisioned that
CESR could act as a mediator between national regulators, but this concept seems to
leave the market participants out of account.
6
Ibid, p. 30
8
The relationship between CESR, the
European Commission and the ombudsman has to be carefully defined so that it is clear
that the ombudsman does not encroach on the powers and responsibilities of either body,
while adding its flexibility and impartiality to the overall implementation of the process.
4. Status, Powers and Relationship of the Ombudsman.
(a) This is one of the most difficult issues to address in the initial stages of the operations
of the Ombudsman. It may not be possible to provide the service with the appropriate
legal status in its early days, but once established and its value demonstrated, such
recognition would inevitably follow. One of the alternative dispute resolution procedures
in existence at present is not a separate body but simply a network of existing civil
servants in government departments (SOLVIT). FIN-NET is simply a formalised means
of co-operation between all the various ombudsmen in the member states some of which
are voluntary bodies funded by the industry and do not have statutory powers. Yet their
co-operation is required by the Commission. Despite their lack of a statutory basis, such
dispute resolution services are able to function in such a way as to provide a service
which meets the needs of the consumer and has the co-operation of the industry.
Initially, it is unlikely that the Ombudsman would have an approved legal status within
the European Union. It is therefore proposed that the Ombudsman should be an
independent Ombudsman funded by the relevant trade associations and also by specific
case fees. The aim would be to acquire official support once the office is established.
Even with this status, CESR and the national regulatory bodies with the co-operation of
the industry would have to agree to the Ombudsman status and commit themselves to any
decision reached as a result of the dispute resolution process, unless specifically
prohibited by law. This point will be further discussed in section
(b)
below.
Establishing the Ombudsman will require further consultation with the bodies which
might be willing to support the appointment, and the appointment of a suitable person as
an ombudsman.
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(b) The Ombudsman’s Mode of Operation.
The proposed Ombudsman would deal with cases of bureaucratic and administrative
obstacles to cross-border expansion and trading as well as the more difficult cases where
it appears that Community law has been misinterpreted or is ambiguous, giving rise to
variable interpretations. A key feature of support for an Ombudsman of this kind is that
the cases brought before him remain anonymous. Regulators take the view that it would
be impossible to maintain anonymity during the progress of an investigation. Some
expressed fears that it would be difficult to protect commercial confidentiality about a
company’s business plans.
It is possible to handle this problem in such a way that breaches of confidentiality are
kept to an absolute minimum.
It is true that during the course of the investigation, when
the Ombudsman seeks the national regulator’s view of the case that the national regulator
may have a shrewd suspicion about the identity of the company concerned. The point is
that the Ombudsman, acting in accordance with his terms of reference, would not in any
way confirm the identity of the company or breach commercial confidentiality. Details
of the business plans or proposed products of companies seeking the intervention of the
Ombudsman would not be revealed. When the Ombudsman comes to publish his annual
report, this will involve publishing a short summary of the case, together with CESR’s
reply but with due care to be taken about the details of the case so that any identifying
features are removed. There may at times be speculation and gossip, but that is where it
will remain. In preserving confidentiality, the Ombudsman will not only have regard for
his terms of reference, but also for his own reputation as a person of judgement.
The Ombudsman would initially examine a firm’s grievances, judging them on their
cross-border character and importance to the efficient functioning of the European capital
markets. It may well be the case that a number of complaints are bureaucratic and
administrative in character and it is likely that these would be settled by the
Ombudsman’s intervention, possibly less formal in character. The ombudsman would
10
then (anonymously) communicate his appraisal of the case to CESR. CESR would be
required to respond within three months.
CESR has expressed reservations about the nature of its response. The chief argument
here is that it does not have powers of enforcement and cannot overrule the national law
to which the national regulator will refer to justify his actions. First of all, it is already
clear that CESR cannot commit itself to any decision if it is specifically prohibited by
law. Even where the response would not specifically be prohibited by national law,
CESR has expressed reluctance to engage in the alternative dispute resolution service,
which it does not regard as part of its approved functions.
CESR is accustomed
handling confidentiality issues: for example, a representative of the Commission is
entitled to participate actively in all debates, ‘except when the Committee discusses
confidential matters relating to individuals and firms in the context of improving cooperation among European regulators’. (Article 3.1 of the Charter).
Other obligations laid upon CESR are highly relevant to the work of the proposed
Ombudsman. According to Articles 4.3 and 4.4, ‘the Committee will foster and review
common and uniform day to day implementation and application of Community
legislation. It will issue guidelines, recommendations and standards that members will
introduce in their regulatory practices on a voluntary basis. It will also undertake reviews
of regulatory practices within a single market. The Committee will develop effective
operational network mechanisms to enhance day-to-day consistent supervision and
enforcement of the Single Market for financial services’.
It is this context that the Ombudsman will operate. CESR has a clear duty to ensure that
Community law is applied consistently although the power to enforce the consistent
application of Community law rests with the Commission. The Commission alone has
the power to enforce Community law and take member states to court over alleged
breaches or inconstancies over the application of Community law. The legal process is
long drawn out and expensive for those seeking to challenge the decisions of national
authorities or member states, and even the Commission’s referral of cases to the
11
European Court of Justice takes many months. It is obviously advantageous for CESR
and the proposed Ombudsman to find a solution to the cases brought before them for
resolution and allowing the Ombudsman to publish a reasoned response to the case. It
may sometimes be the case that the national regulator is bound by national law, which he
is not in a position to change. The advantage of bringing the case before the Ombudsman
even in these circumstances is that it will reveal the fact that there are significant
inconsistencies in the application of Community law-a matter which would then be
referred to the Commission, if CESR and the Ombudsman failed to reach a satisfactory
solution.
5. The Structure of the Ombudsman Service.
(a) The service should consist of a small secretariat based in Brussels. It should be
funded by fees paid by the associations whose members wish to use the service. To widen
the base of potential users as much as possible, membership should be open to both
buyers and sellers in the market.
(b) In terms of appropriate corporate governance, the Ombudsman service should have a
board composed of representatives of the various organisations involved. The board
members would be drawn from the central organisations of the various interest groups in
order to ensure proper representation, albeit indirect. They would have a role in setting
the fees and in the general oversight of the processes involved in resolving disputes
(confidentiality, timeliness, due consideration etc). Proper procedures would be drafted
for the appointment of the Ombudsman and the panel of experts.
The latter would consist of a range of experts from each of the member states, who would
be nominated by the relevant associations but with their curriculum vitae approved by the
board. As well as expertise, they would be persons noted for their independence of
judgement and for their integrity. They would not, of course, be full-time employees of
the alternative dispute resolution services but would be called upon to adjudicate in
specific cases, and their fees would be chargeable (except perhaps for a small retainer)
12
when they had dealt with a particular case. The discussions with each party would be held
in private (with note-takers) and commercial details together with the name of the
company would remain confidential. There will be no public hearings as there is no
obligation under the European Convention of human Rights for dispute resolution unless
the disputants specifically request this. In practice, experience with ombudsmen in the
UK shows that no one ever wishes to do this.
© The Ombudsman Board.
There would be a chief ombudsman, acting as chairman of the board and hence in a nonexecutive capacity. In order to give the alternative dispute resolution procedure both a
hearing and a suitable status, the Ombudsman should be well-known, highly experienced
individual, whose status would ensure that the appraisals offered by Panel members
would (with the approval of the chief ombudsman) would gain a hearing and a response
from CESR. Representatives of the participating trade associations would act as members
of the board.
(d) Accountability and Transparency.
The Ombudsman will issue annual reports to the Commission, to CESR, and to the
relevant Parliamentary committees.
These reports will give summaries of the cases
handled and the resolution, if any. Even if CESR has not in its response been able to
resolve the issue with the national regulator or if the national regulator is bound by
national law, which nevertheless does not accord with Community law, then this will
highlight that fact and draw it to the attention of the Commission (and to MEPs) who will
then be able to act and in the case of the Commission engage in enforcement procedures.
In conclusion, it will be seen that the Ombudsman will not have formal powers or a legal
status in the first instance. To grant the Ombudsman such powers would be resisted by
the existing authorities, but once established and the Ombudsman is seen to make a
positive and constructive contribution to the working of the market, then it is likely to be
13
accepted and given the appropriate legal status. Part of its contribution will be to provide
hard evidence of discrepancies in the application of Community law, which neither
CESR nor the Commission can or do easily acquire. That is why much in the initial
stages will depend on the standing of the first chief ombudsman.
14