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03 March 2005

Forum Notes




Report of the meeting held at the offices of FESE
Brussels

 

Financial market practitioners doubt whether the “regulatory pause”, which Internal Market Commissioner Charlie McCreevy has promised, will prove anything more than a temporary respite from new initiatives from Brussels. Some even doubt whether such a pause is desirable.

There are also broad differences of opinion over how financial market regulation should evolve, particularly over issues such as the practicality and benefits of trying to improve pan-European financial regulation by creating a “lead supervisor.”

These were some of the views expressed at the March 3rd meeting of Graham Bishop.com’s European Finance Forum.
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Ms Ieke van den Burg MEP, who has prepared a draft report on the “Current State of Integration of EU Financial Markets” for the European Parliament’s Economic and Monetary Affairs Committee, told the meeting that she does not support the superficial idea of halting the development of new regulations. Financial markets are too dynamic for that. There is a continuing need to try to foster financial market stability, a level competitive playing field, well functioning capital markets and the provision of proper protection for consumers. These objectives should be achieved without regulating everything in detail. The debate, however, should not be about whether or not to stop regulating, but about what needs to be done.

Referring to her report, she said that part of it was devoted to raising issues which need to be looked at with the Commission, including the regulation of hedge funds and special purpose vehicles, and examining risks to stability and systemic risks. In doing this, it was vital to have a close dialogue with regulatory counterparts in the United States, she maintained.

Turning to the regulatory system and the Lamfalussy process, she said that there are differences of opinion between the Parliament, the Council and the Member States. For herself, she said, the best approach is to try and improve the regulatory structure from the bottom up, through co-operation between member states. This requires building trust. Important issues about the level of detail to be included in Level I legislation and how to delegate responsibilities to supervisors remain, not least because there are differences of opinion, even in the Parliament’s committee, which reflect different legal procedures and traditions in different member states.

She said that personally she believes that certain issues needed to be regulated at a pan-European level, but this is being resisted so creating a “taboo” on the actual execution of supervision at European level which she is trying to break by stimulating a broader discussion. She favours, for example, a two tier system of financial regulation through the creation of one supervisor for big international cross-border financial institutions, focusing particularly on systemic and prudential issues. Supervision of smaller firms could nevertheless remain a national responsibility.

She expressed her concern that with only the solution of the lead supervisor regulatory competition might occur. It seems a nice solution at first sight for the supervised, but might be counterproductive if Member States would start using it to become attractive on the wrong terms. One lesson from the prospective bids for the London Stock Exchange is that it focuses attention on the need to create a single supervisor for what would, in effect, be a European stock exchange, assuming the LSE is taken over.

Graham Bishop interjected to say that, on his reading of Ms. Van den Burg’s Report, there are around fifteen items raised which point to the need for assessments and reviews these may ultimately lead on to legislative action. Another member added that, in two years time, the first sunset clauses on Directives enacted under the Lamfalussy process will come into effect. Moreover, there are many requirements for Commission reviews of how the Directives have functioned. Does the Commission have the resources to carry out all the reviews and analyses it is facing? Graham Bishop pointed out that the IIMG in its third Monitoring Report had estimated that it would take between two and three years to revise Directives.

Another area where action may be needed is Clearing and Settlement. The fundamental assumption of the report on this issue by Ms.Theresa Villiers was questioned as it was argued that her assumption that this was an area where competition should function was flawed, since clearing and settlement is a natural monopoly. The real battle over the LSE is not about the fate of the exchange but about the future of post market operations. The two models, Euronext and Deutsche Boerse, are not, in reality, different. Both operate in practice as monopoly suppliers.

A banking specialist maintained that it is crucial to make the distinction between securities market and banking issues and between wholesale markets and retail markets. For the securities markets, no new legislation is needed. But there may be a need in the banking sector. An insurance specialist said that the insurance industry is facing the Solvency II proposal -which the industry is not opposed to. But the Commission needs to find out what has actually happened on the implementation front with legislation such as the Distance Marketing Directive and the Insurance Intermediaries Directive.

Ms van den Burg added that Commissioner McCreevy has stated that his legislative goals are modest, suggesting that he is not trying to make a name for himself with ambitious new proposals, but, rather, is taking a pragmatic approach. She made clear her concern about the LSE situation since the approach of the British Financial Services Authority seems aimed at forcing the UK corporate governance system on the rest of Europe. We need, she maintained, a new, more in depth discussion about a European model.

However, the FSA was defended on the grounds that its views on the LSE situation are United Kingdom centric. It is regulating an international market in London and its rules reflect this; they are international rules. If the EU turns its back on an international approach to regulation, there is a danger that financial markets will migrate, not just out of London, but also out of the Union. But Ms van den Burg responded that it is not fair to expect the rest of the EU to fit in to the UK’s definitions of corporate governance. There needs to be a European level discussion about the supervision of stock exchanges.

One solution was posited: that there be a “26th” regime for products such as pension funds and mortgages where users could opt-in to a pan-EU regime, rather than relying on their national system

Ms van den Burg said that although she had welcomed the Committee of European Securities Regulators’ (CESR) Himalaya Report, some of her MEP colleagues are attacking CESR for being too proactive, particularly on clearing and settlement guidelines. The “host” versus “home” supervision issue and the need for co-operation, are crucial questions which need to be debated. Some MEPs are attacking CESR for raising these issues, which she maintained is not fair. Graham Bishop supported this view. Another member said that CESR’s Himalaya paper was correct to highlight emerging problems but wrong to suggest at this stage, for example, that the Prospectus Directive was a problem and that the passport will not work because it has not yet been implemented/put into effect. The question is more how will it work as it seems well designed for standardised products.

On the home/host supervisory debate, Euronext is an example of a firm that operates in five countries with five host supervisors. Its objective is to promote co-operation between these regulators and a European-level regulator is a long way off. However, there are practical problems as regulators do discuss and co-operate, then they go back home and take a decision, with the result that each, at different times, can ask for information on the same subject independently on the same topics, which is frustrating to the regulated. “Enhanced co-operation has got to be given real meaning,” - but each national regulator is reluctant to surrender power.

So another participant insisted that the idea of a pan-European supervisor, or even a two tier system, is premature. “Let’s let things settle down as they are first”.

On the DG Markt’s work programme, another speaker suggested that it is following three different streams of work. The first is implementation of existing directives and enforcement where implementation is not proceeding swiftly enough. This also includes numerous reviews, analyses and reports; some on Directives to see how they are functioning, others on new areas where action is already proposed or may be needed. Examples of the latter include UCITS, e-money, clearing and settlement, mortgages, money laundering and Solvency II for insurance companies.

The second line is analysing how to improve the quality of regulation, including the “better regulation” initiative. This involves looking to see where they may be market failures, getting empirical evidence from the industry concerned, deciding whether the costs of regulation are likely to exceed the benefits. The fact is, he suggested, we have a diverse single market with different legal systems and codes in different countries, raising the question of how to produce definitions of best practice.

The third is looking at the initiatives to evaluate the best way to move forward in specific cases; whether through Directives, codes, or competition policy initiatives, for example.

All of this work will require the application of huge resources by both the Commission and the financial services industry. Therefore there is an overarching need to set priorities. In the past, under the FSAP, the focus was on the third stream, which was immensely costly in terms of time and resources, so it is not sensible to throw this away with rapid changes to the new rules. But the emphasis now should be on the first two work streams.

Basel II was discussed at some length and it became clear that political consensus was being reached on many topics and that actions by the industry to re-open those debates could cause significant delay as there would then have to be a second reading procedure. But there is till room for careful amendments to correct what are strictly drafting errors.

Graham Bishop closed the meeting by thanking the Federation of European Securities Exchanges for their hospitality.

Date of next meeting: This is provisionally set for 14th June, 2005 in Brussels, but may change to 15th. Given the interest expressed in insurance matters, we will try to arrange a meeting with a distinctive insurance flavour and that may necessitate the later date. 

 



© Graham Bishop


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