07 December 2004

Forum Notes

Notes on the European Finance Forum
Crowne Plaza Hotel, Brussels

1. Report of the Inter-Institutional Monitoring Group (IIMG).

European government officials are advising their ministers to sign directives knowing full well that, for many Member States, domestic constitutional requirements make it certain that they will not be implemented on time, Graham Bishop told the Graham Bishop.Com European Finance Forum meeting on December 7th.

The meeting opened with an overview of the findings of the third report by the IIMG which was set up to monitor implementation of the Lamfalussy Process. The process was designed to speed up both the approval of new financial market legislation, accelerate the amendment process and contribute to the more efficient cross border regulation of the European Union’s fast evolving financial markets.

Graham Bishop, a member of the IIMG (which is being reconstituted with new members in 2005) and Rapporteur of this report, said that in the case of the MIFID
Directive the pace at which implementation is taking place means that it should be able to be implemented by April 2006. But, he went on, the uncertainty about the timing of implementation into national laws means that, in some states for example, the technological platform needed to monitor pre-trade transparency cannot be designed because national rules and regulations will not be in place. Late implementation of the directive will thus have a direct impact on the operation of financial markets.

Another issue of concern to the monitoring group, Bishop said, was the realization that, because of the way in which Commission Decision setting up the Committee of European Securities Regulators (CESR) had been drafted, the Committee only has the legal power to advise the European Commission. This means that rules its members proposes may be binding in their own Member State, but the application around the rest of the EU may be uncertain.

A third issue highlighted in the Monitoring Group report, Graham Bishop said, is that there is still a risk of excessively detailed legislation at Level 1 of the Lamfalussy Process, which should be focused on establishing legislative principles. This opens the door for industry representatives to lobby in order to get detailed issues of national interest into the Level 1 legislation, when it should be confined to Level 2, which “challenges the rationale for setting up the Lamfalussy process in the first place,” he added.

A fourth issue of potential concern is the timing of the ratification of the Constitutional Treaty which should be completed by November 2006. However, if it does not come into force by April 2007, the “sunset” clauses of the Market Abuse Directive will begin to come into effect.

The Monitoring Group report also highlighted a number of positive results from the creation of the Lamfalussy Process, including some evidence that the legislative process is working more swiftly, Graham Bishop said.
He added that greater direct consultation between the Commission and governments’ permanent representatives is building up trust and confidence amongst the participants in the legislative process. “We see a change in the willingness of the Commission to go out and consult,” he said. This marks a sea change since the Prospectus Directive, when, in retrospect, even the Commission itself conceded that it had not done enough consultation with market participants.

Ian Vollbracht, a staff member of the European Parliament’s Economic and Monetary Affairs Committee, said that already the Lamfalussy Process was resulting in much greater involvement of the Parliament in generating legislation. But this is also making Parliament more aware, or aware at an earlier, stage than it was before of problems in framing legislation.

He said that there was evidence too that the Parliament was not being pressed to fast track legislation, approving it on a single reading. “The mood music in ECON is that this is tricky.” he said. Sometimes too, he said, the Parliament has a sense that the Council has finished work on a legislative proposal before Parliament has begun, with the result that the Parliament feels that it is being asked to endorse a “fait accompli,” when Article 251 of the Treaty says it should have equal legislative weight with the Council.
Gerben de Noord of Standard and Poor’s expressed concern that a single fast track reading of legislation would also diminish transparency.

2. Report on EU /US Financial Market Relations.

John Sammis, Minister-Counsellor for Economic Affairs, at the US Mission to the European Union, said that he anticipated that the political relationship across the Atlantic would be more constructive and more pragmatic in the year ahead.

He cited the planned February visit of President George W Bush to Brussels as both a practical and symbolic sign of the shift, as well as recent visits by the President’s new National Security Adviser, Steve Hadley and the retiring Secretary of State Colin Powell.

The meetings of the Informal U.S.-EU Financial Markets Regulatory Dialogue as are a “bright spot” which had contributed to dealing with potential problems such as the impact on EU companies of the Sarbanes/Oxley law. Bill McDonough, the former President of the New York Federal Reserve Board and now chairman of the Public Company Accounting Oversight Board is expected to visit Europe in December, another indicator of the recognition on both sides of the value of dialogue and the need to protect the trans-Atlantic economic relationship, he said. Recent meetings of the Dialogue have included not only representatives from the Federal Reserve Board, the US Treasury and the Securities and Exchange Commission, but also from the National Association of Insurance Commissioners, their EU counterparts and private sector representatives.

Sammis suggested that now US business is much more active than twenty years ago through local subsidiaries and affiliates (which have some 4 million employees in the EU) rather than direct exports. So American industry has a much more intense interest in EU affairs and a stake in seeing de-regulation and faster growth.

The approach of the Dialogue, John Sammis said, is unlike trade negotiations. Instead, it tries to deal with potential problems in a pragmatic way, keeping out of the public eye and avoiding high-level political involvement where possible. Difficult issues now to be dealt with included the “last snags” relating to the new Financial Conglomerates Directive, and the ongoing debate about the acceptability of US GAAP accounting rules in the EU and International Financial Reporting Standards in the US.

He underscored the US position, specifically that taken by the Securities and Exchange Commission, whose job it is to protect (especially small) investors, namely that “ we need more time to see how IFRS will work in practice.” He pointed out, too, that the US prefers to see accounting standards developed in the private sector. Some participants made it clear that they did not find this US approach particularly reassuring.

Another issue he said was the question of collateral requirements in the reinsurance business, where, he pointed out, foreign firms have around 77 per cent of the US market (of which around 45 per cent is from non-US based operations).

As an example of the pragmatic approach the US is taking on financial market issues, John Sammis cited suggestions that some EU companies were considering delisting from US stock exchanges. The US law on this question dated back several decades, he said, and was designed to protect US investors from companies raising money in US markets and then swiftly de-listing and so preventing investors from trading their shares. He expected a solution to be found during the next year, he said.

On the issue of EU exchanges having trading screens in the US, he said that the SEC is currently carrying out an examination of financial market structures in the US and he pointed out that, in spite of the alleged market entry difficulties for one large exchange, the trading platform and clearing and settlement structures within which it operates in the US compare favourably to cross border facilities in Europe.

3. Consumer Credit Directive

Dr. Joachim Wuermeling MEP, the Parliament’s Rapporteur on the revised directive said that MEP’s had submitted 152 amendments to the Commission’s first proposal - a lot for a directive comprising only 40 articles! As a result, it seemed likely that the basis of the Council’s future deliberations would be the Parliament's proposal with the amendments, rather than the revised Commission proposal.

The Parliament, he said, had proposed fundamental changes but a big conceptual divide existed amongst MEP’s, who favoured “minimum harmonization” across EU states and some sections of the financial services industry who preferred “maximum harmonization.”

He argued that the maximum harmonization approach would be tantamount to over- regulation and lead to less consumer protection. The public policy choice was between having the complexity and detail of a single, unique legislative structure or minimum standards and greater national flexibility.

It was accepted however by both sides that there should be a lighter regulatory regime for consumer credit than for mortgages. Door to door selling had been left out of the proposals he said, adding that the legislation as drafted would not be designed to be part of the fight against consumer over-indebtedness.

He pointed out however that since the initial proposals were drawn up, the political weather has changed with a new Commission having taken office. Its priority is now accelerating the Lisbon competitiveness agenda, not enlargement and the Constitutional Treaty which pre-occupied the Prodi Commission. There is also a new Parliament and a newly constituted Liberal Party, a group which could have a decisive voice.

He suggested that, given the importance of economic growth and competitiveness, the political thrust will be against over-regulation and a directive which might have the effect of putting a brake on consumption. “The first Commission proposal went against the Lisbon goals,” he said “But I am sure now we will get a framework for a dynamic, not an over-regulated consumer credit market.”

Graham Bishop wondered whether the Directive would have to go through the Lamfalussy Process. The answer, according to Dr. Wuermeling is no since what is up for discussion is not part of the Financial Services Action Plan. He added that after the amended Commission proposal the legislation would not need a new First Reading in the Parliament since it was amended, not new, legislation.

Christoph Wengler of the European Association of Public Banks, said that public banks and savings banks wanted minimum harmonization and that it was the private sector banks which wanted maximum harmonization. Dominique Graber of BNP Paribas rejected this interpretation of the private banks position saying the sector wanted “full harmonization”, meaning that Member States are not permitted to adopt provisions other than those laid down by the directive. Otherwise consumers would be facing having to cope with twenty four other, and different, consumer credit legislative regimes if they dealt outside their home state. The important thing, she suggested, was for the legislation to identify key issues where harmonization was necessary, thus identifying the scope and degree of the harmonisation. The issue was not maximum or minimum harmonization but properly “targeted” harmonization.

A key question would be, it was suggested, whether EU member states could insist on higher standards than those laid down at the European level. If they could this, would keep open the door to covert protectionism.

It emerged too that the debate about the Directive was likely to be complicated by the fact that DG Health and Consumer Protection is fighting to retain its leading role within the Commission on consumer finance issues and that it is trying to keep other Commissioners off its turf.

Provisional Date of Next Meeting: 15 March (14:00-17:00 Scotland House, Brussels)

Provisional Dates for 2005:

3 March
14 June
19 October
7 December

© Graham Bishop