The changes in investing services and securities trading in the European Union have forced the European Commission to update the Investment Services Directive (ISD), which has been in force for five years.
A communication published last month on upgrading the ISD has been identified by the Commission as one of its 10 priorities under the Financial Services Action Plan (FSAP), which aims to create a fully integrated single market in financial services by 2005.
“We need to update the union’s securities markets legislation to reflect the profound changes in securities trading infrastructure, exchanges, clearing and settlement systems since the ISD came into force five years ago,” says internal market commissioner Frits Bolkestein. “Under the influence of the euro and new technologies the pace of change can only accelerate and we want to ensure that the new rules protect investors, promote orderly, efficient integrated markets, and preserve financial stability.”
The communication discusses the modifications needed if the ISD is to reflect the many changes the market is facing such as the implementation of a fully operational ‘single passport’ - for investment firms to facilitate the progressive elimination of remaining obstacles to the cross-border provision of investment services – and an appropriate regulatory framework for the trading infrastructure.
In the same line, the Commission has also published another paper on the application of ‘conduct of business rules’ for investors to ensure the level of protection. “This communication goes hand-in-hand with our review on the upgrading of the ISD,” says Bolkestein. “We need to guarantee that investment firms using the single passport are adequately supervised and the investors are properly protected.” This communication suggest a modification of Article 11 of the ISD which requires national authorities to distinguish between professional an other investors when implementing conduct of business rules. To date, compliance with this requirement has not always been achieved because due to the lack of common understanding of what constitutes a ‘professional investor’. Many investment firms making use of the ISD ‘single passport’ often find that, in practice, they are unnecessarily burdened by having to comply with two sets of conduct of business rules. The communication finds it necessary to clarify the relative responsibilities of home and host country supervisors, considering that a modernised ISD should ensure that business between professionals can be undertaken subject only to the requirements on force in the country of the provider.
“We have launched this review of the legislation in order to encourage as wide a range of contributions as possible from all interested parties, including the European Parliament, national authorities, market players and regulators,” Bolkestein says.

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