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Leader : From MAD to Worse

Financial Times; September 19, 2002

There is clearly something amiss when the Financial Times and other news organisations feel threatened by European regulators armed with draft legislation to stamp out insider trading and other market abuses.

Honest and liquid markets are a cornerstone of enlightened capitalism, to which this newspaper is committed. But Europe's media organisations are in dispute with the Committee of European Securities Regulators, a new and so far little-known body set up under the Lamfalussy programme for speeding up securities market regulation. Established to advise the European Commission on preparing secondary legislation on European Union financial matters, CESR, pronounced Caesar, appears to have imperial ambitions that - left unchecked - could turn financial regulators into media controllers.

At issue is article 6 of the EU's planned market abuse directive (MAD), currently going through the hoops in Brussels on its way to becoming part of the EU's regulatory architecture for the long-sought single market in financial services. The article's fifth paragraph aims to regulate conflicts of interest among analysts by making them disclose personal holdings of investments in the research they publish. But a CESR consultation document suggests this rule also be applied to journalists. They would disclose their own potential conflicts of interest and those of the analysts when reporting their views in the stories they write.

Clearly, journalists should be subject to rules outlawing conflicts of interest. But the CESR paper raises a host of practical editorial problems - not least that of clogging news stories with third parties' disclaimers. Worse, it ignores the fact that the European media are already subject to well established rules, based on long experience.

In its defence, CESR says its paper is a consultation exercise in which parties have an opportunity to change its views. But it has taken an maximalist approach when interpreting how to cast the market abuse directive as secondary legislation. It has also omitted to consult the press before publishing its views, against the recommendations of the original Lamfalussy report.

This is unfortunate for wider reasons than press amour propre. It was very difficult to obtain European Parliament approval for the Lamfalussy process, precisely because MEPs feared committees such as CESR would become too big for their boots.

CESR's approach to the market abuse directive risks alienating parliament when the committee's role in secondary legislation is being tested for the first time. The European parliament still has an opportunity to resolve this folly by amending article 6(5) to exclude journalists from its scope.

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