16 October 2007

Forum Notes

Notes on the meeting held at the European Parliament on 16 October, 2007.

Accounting Standards
Jeroen Hooijer (European Commission, Head of Unit - Accounting) opened the discussion by reviewing the recent history of the roadmap towards convergence of accounting standards. He highlighted the initiative by Chancellor Merkel in convening the EU/US Summit earlier this year that set accounting divergence as a key barrier to be removed. In July, the SEC published for comment a proposal to allow firms to file accounts using International Accounting Standards (IAS) – as published by the IASB.

The European Commission sent a letter (amongst the 120 received by the SEC) stating there should be recognition of the “EU-adopted version” of IAS but the SEC is maintaining its position, even though the EU version is virtually identical. In practice, the only significant variation is the carve-out for bank hedging in IAS39 and only one bank that is listed in the US actually takes advantage of this option.

The SEC maintains that its stance is to defend US investors but the IASB-issued standards are “virtual” as the IASB is effectively a think-tank. So the standards need to be fleshed out by users – and the EU is by far the dominant user. Correspondingly, the SEC is likely to have to issue detailed guidance to US firms that choose IAS, thereby creating a US version!

Both the Prospectus and Transparency Directives require a declaration of equivalence and CESR will be involved in this process. At present, Canada and Japan are in the process of converging and Russia may be able to meet this by 2011. So there is a proposal on the table to permit the decision to be deferred until then, but this does not prevent an earlier determination of convergence e.g. for the US. However, ECON has criticised this further delay.

However, the EU does have a problem in that it does not yet devote the resources to drawing together its collective expertise so that it can challenge the US arguments in detail.

Alexander Radwan (MEP and ECON’s Rapporteur) introduced his draft Report on IFRS and the Governance of IASB by pointing out that there are three main issues: governance, convergence and SME’s. The European Parliament strongly supports IFRS as a global process and the governance issue is now an old story, but still a current one, where there is steadily rising support in the EP for a firm line.

The governance issue can be summed up by asking some questions about the transparency of the IASB: Who finances it, is that stable for say 5-10 years and who sets the agenda? How are the members elected? Who will be the next CEO? These appointments are not transparent and it is said that personnel issues should not be discussed in public. Listed companies pay towards the IASB but have no right to be heard. Perhaps there should be an annual stakeholder conference?

However, there is a central political dimension that must be addressed. In practice the IASB is making law – so there should be a public input. For the SEC, its final interpretations are subject to oversight by Congress, so the political authorities have the final say. In the EU, we still have 27 potential national Court interpretations and we must ensure there can only be one. In the new world of co-decision, the EP does not want to force the US to take EU interpretations but correspondingly, it does not wish to be told that it cannot exercise its powers as the US has already decided.

Sue Harding (Chief European Accountant of Standard and Poors) commented from the perspective of a user whose interests span the Atlantic (and beyond). Accounting is a crucial foundation of making a rating. However, a rating agency often has access to confidential company information and it then faces the problem of how relevant information might be brought into the public domain by suitable adjustment of accounting standards.

Despite the convergence so far, there is still a large menu of choices and the day-today user of financial statements faces the difficulty of undoing some of these choices to adjust the financial statements into a comparable format. S&P argued against the IASB changes on items such as capitalisation of interest and segmental disclosure, but accepts the outcome.

The upshot is that users can sometimes find it is very difficult to tell if possible carve-outs have actually been used. Clarity is required not only on this but additional policies and their application under IFRS, US GAAP or other standards. Nonetheless, this is a unique opportunity to shape developments toward a global GAAP and it must not be missed.

In the ensuing discussion, the contrast in resources made available for this work became apparent as the SEC has a huge staff of accountants but it is very difficult to get funding for the 8 people in EFRAG. It is even difficult to find EU candidates for posts, quite apart from the issue of how the appointments are actually made. There was considerable sympathy for the SEC’s concept of a single global set of standards as a goal. But is this sustainable in the longer term as even the US will find itself forced to issue interpretations once US firms use IAS? Everyone wants simplification and the best standards. The only question is how to achieve it. However, it is clear that endorsement by the EU is the main lever that we have at present.


Retail financial services
Eric Ducoulombier (European Commission, acting Head of Unit: Retail Issues, Consumer Policy and Payment Systems) opened the discussion by reporting that the Green paper had attracted 200 responses and that 300 people had attended the recent public Hearing. In the week of 19th November, the College of Commissioners is scheduled to adopt the Single Market Review and retail financial services are likely to have a strong position as the biggest untapped area. Whilst the Commission is determined to push developments, that does not mean another FSAP-style programme of 42 measures!

He identified three main building blocks:
1. Consumers must have more and better financial services than today.
2. Consumers must have confidence in the market, and this takes a long time to build but can be destroyed in an instant.
3. They must be empowered as consumers currently feel weak and vulnerable.
The challenge is to design policies to resolve these problems and he identified a number of distinct policies that might help:
• Bank account mobility Consumers resent the difficulties as they see obstacle, costs and bureaucracy. In later discussion, the apparent conflict with anti-money laundering laws was debated and the Commission said it was in touch with Member States (especially the UK) about the daily stream of complaints that it receives about excessive bureaucracy in the implementation of these otherwise-desirable measures.
• Credit data/registers The importance of these were highlighted by DG Competition’s report this year as people who move to another Member State are treated as “new-borns” for the purpose of their credit history.
• Retail insurance especially of cars creates many similar problems and the Commission is examining the 27 separate car insurance markets.
• Consumer Financial literacy This must be improved – but how? In any case, it is clearly a national competence.
• Financial inclusion Some citizens are simply left outside the conventional financial services system and the examples of best practice e.g. from France, UK and Belgium are being studied.
• Re-dress mechanisms The importance of these was underscored by the real-life problems of Equitable Life policyholders. However, FinNet is working well and the number of schemes has doubled but Member States are reluctant to force the creations of such mechanisms.

Finally, there is a strong need to communicate the benefits to individual citizens that will flow from SEPA and the PSD and the White paper on Mortgage Credit is likely to be released in about two months.

John Purvis (MEP and Vice Chair of ECON) surveyed the consumer landscape. His full speech is attached but, in summary:
• Cross- border services are compartmentalised and consumers are not getting the bank accounts they want. So there is a need to highlight the areas for further work to break down the barriers of tradition and culture, enabling consumers to take up appropriate products from sound suppliers as and when they want to. They have to be empowered but we must guard against over-information!
• The mortgage credit White Paper relates to a huge market – 44% of EU GDP (in 2003) – but Commissioner McCreevy has said if there are no demonstrable benefits then he will not proposes legislation. Moreover, the industry wants just voluntary standards rather than actual regulation. Should the EP be prepared to accept this?
• Implications from recent market turmoil: “sub-prime” must not become a dirty word as there is a strong social/political need for those further down the scale to be able to build up a stake in society. He did not believe the Northern Rock’s business model was the real problem. That arose from the contrast in the actions of the ECB/Fed and the Bank of England, which stood on its dignity about the types of collateral it would accept.
• But this saga did illustrate that deposit Guarantee schemes are inadequate – only a 100% guarantee by the government stemmed the queues of depositors. Hedge funds and private equity funds were as much victims of the problem and were not the culprit. Rating agencies are there to perform a credit analysis and not try to forecast market liquidity in a crisis.

The discussion ranged widely as there are many components to the debate including the DG Competition decision on Mastercard, DG Sanco’s review of the Distance Marketing of Financial Services Directive and the Rome I convention on electronic signatures. The Commission was able to confirm that the Single Market Review was likely to include something on electronic signatures. In particular, a discussion on the merits of consumer testing of proposals elicited the reply that it would be done as it was important to avoid an over-reaction to difficulties that might even compound them. Moreover, a proposal that had been consumer-tested was more likely to carry credibility.

Graham Bishop closed the meeting by thanking all the speakers.



Date of next meetings: Provisionally set for 17th December, but please note the special event that we have organised for November 6th on the Lamfalussy Process Review - see Agenda below.

Brussels Financial Circle and European Finance Forum


Special Joint meeting on
Reviewing the Lamfalussy Process

November 6th, 2007
Renaissance Brussels Hotel
Rue du Parnasse 19, 1050 Brussels
10.00 to 13.00 (followed by a buffet lunch)
________________________________________

Agenda

Introduction:
Graham Bishop
(Rapporteur of the First Inter-Institutional Monitoring Group (IIMG))

The Final Report of the Second IIMG:
Johnny Akerholm
(Chairman of Second IIMG)

Progress by the European Commission:
David Wright
(Director, Financial Services policy, DG Markt)

Technical Reactions:
Andrea Enria
CEBS (Secretary-General)
Carlos Montalvo
CEIOPS (Secretary-General)
Fabrice Demarigny
CESR (Secretary-General)

Political Responses:
Ieke van den Burg
ECON Committee of European Parliament
Mr. Gonçalo Castilho dos Santos
Portuguese Presidency of the Council

© Graham Bishop