Notes on meeting held at the European Parliament,
(Due to time pressures on the speakers, these notes are largely uncorrected and may be subject to further revision)
Sharon Bowles MEP introduced her remarks on the Payment Service Directive by pointing out the enormous amount of work that has gone into this subject since the Parliament voted its report last year. There have been several “trialogues” but little progress was made under the Finnish Presidency and now the German presidency is making great efforts to produce results. The European Parliament is planning a vote in April, almost irrespective of developments.
She identified the main points of contention as (i) the solvency of the intermediary, (ii) granting of credit by that intermediary and (iii) timing of final settlement. The third topic is essentially a technical issue but the first two have produced a basic clash of philosophy and so could be deal breakers.
The solvency issue revolves around the competitive aspect of institutions that only exist to make payments, as opposed to a full credit institute that has to be fully capitalised for the range of banking activities such as taking deposits and granting credit. The Parliament leans towards a solution close to its own report that would permit such payment institutions (PIs) to operate with capital that simply covered their overheads. If a PI offers “accounts”, then the issue of sufficient “own funds” arises and the Parliament would like a minimum of €100,000 + 25% of fixed overheads. But some supervisors wish to see significantly higher levels of capital, especially in the mid-range providers. But this might well be prohibitive and thus shut out potential competition.
Granting of credit has proved another very difficult problem. Could this lead to non-bank credit cards even if it must be fully repaid in a short period?
So the central philosophical divide is whether to take a liberal, pro-competition view. Though this is often characterised as just a UK view, Sharon Bowles argued that there were enough Member States in this camp to create a blocking minority. Within the Parliament, she also thought there was a substantial minority for liberalisation. So there is a real possibility that agreement will not be reached. But if it were an illiberal measure would Commissioner McCreevy be able to say that it complied with the spirit of “better regulation”? Or might he feel obliged to withdraw the proposal?
This triggered discussion about the need for the Directive – in whole or perhaps only in part, in particular leaving out Title II. Whilst this has been floated, it now seems to be ruled out. However, the banks are fully committed to introducing SEPA but they need legal certainty. This is particularly true for cross-border direct debits as it seems that, in quite a few states, these would actually be illegal and not merely “uncertain”. One alternative might be an ECB Directive that resolved sufficient issue to enable these direct debits.
Given the timescales, it is now very tight to get a Directive that would enable banks to introduce SEPA products in 2008 and migrate fully by 2010. Parliament seems dis-inclined to agree to a “bad” directive at this stage and a second reading might not resolve these basic philosophical clashes. So if there is no agreement soon in Council, we might have to accept that this directive will be dead.
Jean-Michel Godeffroy (Director-General of Payments Systems and Market Infrastructure at the ECB) gave a comprehensive presentation about TARGET2 Securities, illustrated with the attached PowerPoint document. In his background comments and discussion, he mentioned the negative spin about the project presented in the media but pointed out that he felt the explanations and discussions with the market were now producing a better understanding of the project. Opposition was even turning to support in some areas, though erroneous articles continue to appear.
TARGET 2 itself will open in November and will then be one of the largest payment system, second only to CLS and bigger than the US systems. Importantly, this had been developed internally – demonstrating the ECB has the required expertise.
Mr Godeffroy said that the ECB Council would be considering the proposal the following day (8 March) and he expected they would decide to progress the project, given the support from the banking industry The support from the global custodians had been particularly welcome, as was the welcome from ECOFIN. The conditions set by ECOFIN were nothing more than those the ECB had set for itself.
The decision to broaden the scope beyond the government bonds that are the basic repo material for the ECB had been at the request of banks as they would prefer to have only one settlement system rather than one for some bonds and others for other securities, especially equities. As a securities settlement system, the ECB sees no problem in the securities regulators having oversight of the system, even though it is owned and run by the independent ECB.
For the ECB, the decisive factor was the inter-twining of settling cash and securities. Indeed in many states, the use of collateral meant that any failure of the securities settlement system would automatically lead to a failure of the cash system. Non-eurozone banks can use the system but they would need a Central Bank entry point that was part of the system. Graham Bishop pointed out that the Bank of England had declined to become associated with TARGET2 and so might not be able to fulfil that function for London-based banks. However, Godeffroy said the design of T2S would not close definitively until May 2008 so there could still be re-consideration.
The PowerPoint presentation gives a comprehensive overview: the reasons for setting up T2S; a precise description; outlines the benefits, deals specifically with the legal powers to undertake the task; governance arrangements and the proposed timetable.
Sebastijan Hrovatin from DG Markt – Financial Markets Infrastructure – gave the Forum an up-date on the progress being made in implementing the Code of Conduct for Clearing and Settlement. The Monitoring Group (MOG) met on January 22 to review the progress since the Code was actually signed in November. It consists of public officials from the Commission, the European Central Bank and Committee of European Securities Regulators. Users and market infrastructures are organised in two separate permanent groups. Both groups met separately with the MOG and presented their members' views on the progress achieved in implementing the Code.
Overall, users confirmed the amount of work that had been done by infrastructures to implement price transparency. However, they noted that further improvements are possible; for example they asked for additional information on discounts and rebates. In addition, they encouraged infrastructures to work towards improving price comparability and billing reconcilability. Whilst it was acknowledged that comparing prices across infrastructures is difficult because of the fact that different infrastructures bundle services differently, both users and infrastructures agreed to work together to improve the current situation. ECSDA has already formed a working group to tackle this particular issue.
Graham Bishop concluded the meeting by thanking Sharon Bowles, Jean-Michel-Godeffroy and Sebastijan Hrovatin for their presentations and answering questions. In particular, he thanked Carol Hall (assistant to Sharon Bowles) for her help in making the arrangements.
Next Meeting
Provisional date is June 12th and the planned topics include Solvency II, Hedge/Private Equity Funds and the Portuguese Presidency programme.
© Graham Bishop
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