Small investors will be hit by EU share-trading overhaul

Date: 21/11/02

By Peter Chapman

CITY stockbrokers in London have warned that proposals unveiled this week by the European Commission would be the final nail in the coffin for their US-style cut-price share-dealing services.

They say that the draft Investment Services Directive would force them to offer full investment advice to clients who merely want to buy or sell shares quickly and cheaply.

Hans Georgeson, director of 'execution-only services' for Barclays Stockbrokers, told European Voice that many such clients do not require additional advice which would make it more expensive for them to buy and sell shares.

The proposal would 'in a nutshell, cripple the business', which has been able to offer fees as low as €27 per deal to attract small investors, he claimed.

Under the directive - also fiercely attacked this week by the EU banking industry - he said firms like his would have a duty to interview each potential client and identify the right service for them.

This red tape would add extra costs. For example, firms would have to keep and update a computer database of client preferences.

'I run an execution-only business. Clients call up and say they want to buy 100 shares in British Airways. That is the sum total of what we do,' said Georgeson.

His company provides extra investment advice services to clients - but that costs around €1,500 a year compared with the €27 for a straight purchase or sale.

Georgeson said some execution-only services were already on the brink of closure by the big banks that own most of them because the two-year long 'bear market' has led to a dip in share values and reduction in trading volumes of 40-60%.

Meanwhile, banking groups reacted angrily to other parts of the draft directive that will restrict the way big investment houses will be able to trade shares 'in-house' away from stock exchanges - a process known as 'internalisation'.

The European Banking Federation said Frits Bolkestein, the commissioner responsible for financial services, had produced a last-minute U-turn which had totally reversed previous drafts of the law.

These changes would 'kill off in-house trading' - allowed in the UK and Germany - 'before it can get off the ground' elsewhere.

Under the proposal big investment houses will have to disclose information - such as the intended price - to the stock exchange on retail orders that they plan to carry out in-house.

Banks argue that revealing pre-trade prices would allow rivals to move against them in the market, defying the whole incentive of trading away from the stock exchanges.

Bolkestein denied reports that he had caved in to the wishes of Commission President Romano Prodi after French and Italian regulators, which are opposing internalisation, had lobbied him on the issue.

'I strongly reject the slur,' said Bolkestein.

Ironically, the accusations that the Dutch commissioner's proposals will harm industry follow his own vicious attack against member states for hurting EU competitiveness by failing to agree on a pan-European patent system.

MEPs and member states must now examine the draft directive.

Under the terms of the so-called 'Lamfalussy' process, two committees of EU securities market experts and high-level officals will add the fine details on how the directive should be implemented.

City stockbrokers in London have warned that proposals for an investment services Directive unveiled in November 2002 by the European Commission would be the final nail in the coffin for their US-style cut-price share-dealing services.