15 March 2004

Forum Notes

Notes of meeting held at Scotland House, Brussels.

 Summary

The meeting considered four main topics:
 Round-up on the FSAP: J-C Thebault, DG Markt, European Commission
 Expert Groups & prospects for retail markets: J-C Thebault, DG Markt, European Commission
 Review of the Lamfalussy Monitoring Group: Graham Bishop, Rapporteur to the IIMG
 Extension of Lamfalussy to Banking: R. Petschnigg, Brussels Representative of Oesterreichische Nationalbank.

These notes do not purport to be a verbatim record but are intended to provide useful highlights of the main exchanges.

Opening remarks

Graham Bishop welcomed those present and presented apologies on behalf of a number of institutions, which were unable to attend. Graham’s remarks were illustrated by a ‘sight byte’ of the services provided by GrahamBishop.com. This emphasised that GB.com is independent of any particular interest, promotes leading-edge thinking, monitoring services and pursues the quest of ‘enquiring for a single market’ which is the focus of the European Financial Forum.


European Commission perspective

Jean-Claude Thebault is Director Financial Institutions in DG Markt ( David Wright is Director for Financial Markets) and they have one unit which co-ordinates the FSAP process and reports jointly to both directors. J-C T had just returned from a visit to the USA, where he said he was received by Mr Ferguson, of the Federal Reserve, who is strongly committed to reaching a joint solution on capital adequacy by mid 2004.

J-C T identified a number of issues which are currently dominating DG Markt’s agenda:

• The FSAP and the creation of an integrated financial market were progressing well. Until five years ago, the capital markets had underperformed but the introduction of the Euro and the FSAP had combined to rationalise the capital markets and provide European solutions for EU challenges. The FSAP was all about enabling providers and consumers of capital market services to enjoy the freedoms embedded in the EU treaties. In particular, the FSAP enabled firms to comply with national regulations, raise capital and trade products and services across the EU-25. 90% of the original FSAP measures had now been adopted. The immediate priority was to ensure that the two outstanding directives (the ISD and Transparency Directive) are adopted before the European elections in June.

• Other current projects planned included a directive on Capital Adequacy. M Thebault sits on the Basel committee so is well informed on thinking and work in progress. Other plans are for a prudential framework for re-insurance and a Solvency II Directive in early 2005 to parallel the capital adequacy regime of the banking system. The statutory audit proposal was due to be published on 16 March.

• Derivatives and International Accounting Standards: the Commission is aware of the profound concerns and the current debate is less about concepts. The Commission is concerned that Art 39 of the IAS is not “principles based”, but in the end will do everything possible to get a solution.

• Future EU regulation: the Commission is thinking about how to proceed in terms of the extension of Lamfalussy to banking, insurance and asset management for an EU of 25 countries. On other issues, there will be an open debate and full consultation but where there is no need for legislation, the Commission will not propose action. Unlike the original FSAP there will not be a complete legislative programme proposed for an FSAP II because banking and insurance have different needs to capital markets. However, the essence of an open debate is that market practitioners are also involved – by responding to the reports of the expert groups, for example.


During an open discussion, several issues were raised:
Capital Adequacy: M Thebault informed members that PWC have been studying the macro impact and the impact on banks’ balance sheets of Basel II. This PWC report would be published in 2 or 3 weeks time and the Commission hope to adopt a directive in July just after the Basel II agreement foreseen for June. Mr Thebault stated that the Basel II accord would be beneficial overall to EU banks.

The debate in the US is not yet resolved. There are tensions between the Fed and Congress because Congress feel under-consulted. More work is needed, it is felt, in the US on the impact on investment firms. Within the EU, the national representatives of Basel share the view that the EU needs a “stable but dynamic” approach, if this is not too much of a euphemism. The US is reluctant to talk of any final agreement;

Representatives from FEE raised a question as to whether the promised consultation on Cap Adequacy would be just about the proposal published in December or the full package including items not yet agreed?

IAS: IAS 39 was already being applied in Austria and Germany but the French banks appeared to oppose its use. A representative from a French bank pointed out that it was not only French banks that have reservations: The European Financial Roundtable has also raised concerns. We need to have principle-based standards and IAS 39 cannot be simply a copy of US FAS 133.

M Thebault agreed that doubts were not exclusive to France; the Basel Committee has doubts as to whether IAS 39 addresses fair value adequately. The IASB has not facilitated an open debate. FEE agreed that the IASB has not been seen to be going through a ‘due process’. The Commission is concerned to get a resolution on IAS 39 asap. Moreover, the US is waiting to see the result before any further progress can be made to mutual recognition, even though there is much goodwill.

M Thebault informed members that the proposal on re-insurance should be adopted by end March in Commission. They are keen to proceed as fast as possible and should be ready for a debate with the new EP committees when they return in September.

Solvency II: M Thebault said that until the Lamfalussy process was extended there is no legal possibility to proceed formally. If there is an agreement, as anticipated this week, then there will be an urgent need to give a mandate to the level 3 committee. However, there was unlikely to be a draft directive before 2005.

Gender-neutral insurance: M Thebault gently reminded members that since the proposal is a Commission one he supports it.

Rohan Malhotra, representing the Association of British Insurers, ABI, explained that the industry already uses a risk based approach. Originally, the proposal to outlaw discrimination on the basis of sex had been intended to cover a range of services including the media and advertising but these had been excluded leaving insurance feeling exposed.

Mr Malhotra stated that in the UK insurers offered different premia to male and female drivers. In practice over 97% of convictions in the UK for dangerous driving were male; if use of gender is outlawed women will face significantly higher premia. Similar effects would be felt in areas such as term life insurance; re annuities, the current differences in income are based on clear actuarial data showing that as women live longer they receive different terms.

The Gender Neutral Insurance proposal is being considered by at least six committees in the EP at present and then has to go to plenary in March – it is not yet certain that the proposal will survive in its current form. The change of Greek Commissioner is not expected to be germane but the Social Affairs Council may well request a fuller and more extensive economic impact assessment, which could effectively delay adoption.

Retail financial issues: Changing money; cross-border payments; opening bank accounts in different member states, consumer credit, mortgages and consumer protection were just a few of the thorny problems still faced by EU citizens. M Thebault was asked whether there were any positive messages that citizens and voters could anticipate ahead of the June elections.

M Thebault reported that relations between DG Markt and DG SANCO over the Consumer Credit Directive are cooperative. Essentially there is a debate between full harmonisation versus mutual recognition. Potential agreement was also hampered by over 1,000 amendments having been tabled in the EP, but the key rapporteurs were now close to a compromise.

In July 2003, the Commission had required EU banks to charge the same for cross-border payments as for domestic payments. While this had been resisted by the banks and there had been some rises in domestic fees these were mainly due to other factors. One member expressed surprise and was invited to send any hard evidence of over-charging to the Commission.

The worldwide fight by authorities against Money-Laundering and Fraud had made it more difficult to open bank accounts in other member states but the Commission accepted the main recommendations of the EFR and was actively reviewing its internal market strategy for a more rational system of consumer protection. This should be available in late 2004 or early 2005. Complete harmonisation of consumer protection was neither possible nor desirable. The commission favoured a case-by-case approach and commended the work of the Mortgage Group of bankers and insurance companies. This method could be extended to other sectors.

Finally, M Thebault promised that making the single market real for retail customers would be a central aim of the next legislative period.

Review of the Lamfalussy Monitoring Group

Graham Bishop briefed members on a recent meeting of the Inter-Institutional Monitoring Group, IIMG, which is due to produce its third (and perhaps last) report this year. The following points emerged:
 Report will be issued in October in time for the incoming Commission on 1 Nov.
 Welcomed the revised and less radical report from Randzio-Plath on the extension of Lamfalussy to banking and insurance.
 EP is due to vote on 16 March
 Seven professional trade associations have collated their views, which seems to be positive for the development of a pan-European market and, to date, no stakeholders have opposed the Lamfalussy process or its extension.
 A year ago the predominant practitioner view was that the process needed to speed-up; today, by contrast, the majority view is that quality of regulation was more important than speed.
 Active debate as to the balance between the two tiers of committees. The European Securities Committee (ESC) does not support increasing the strength of level 3 committees; indeed the content of level three committees needs clearer definitions: standards, guidance notes etc. There was still a tendency by some practitioners to want to include specific details rather than principles into Level one – for example there is a current effort to hard-code trading sizes for equity markets.
 The original Council agreement in Stockholm in 2001 stated a preference for Regulations over Directives as the preferred legal vehicle for reforms. Today there is a preference for Directives over Regulations – to an extent this reflects the reality of the sometimes substantial differences in the relative strength or weakness of regulations in individual Member States - does this matter?
 Consultation – everyone recognises the benefits of open and full consultation prior to regulation but we also need to avoid excessive consultation – perhaps the IAS debate has been allowed to drag on too long?
 Ombudsman – there seemed to be a need for a third party system of collating complaints and evidence of administrative malpractices from practitioners, since practitioners were wary of being punished if they complained too often or too loudly. A level four ombudsman system to facilitate anonymous complaints might work and the ESC had commented favourably.


Extension of Lamfalussy to Banking/Committee of European Banking Supervisors (CEBS)

Reinhard Petschnigg presented an outline of the charter of the CEBS. 

On 5 November 2003, the European Commission adopted a Decision establishing the Committee of European Banking Supervisors (CEBS). This Decision entered into force on 1 January 2004, and the first meeting of the new Committee was held on 29 January.
The Secretariat of the Committee of the European Banking Supervisors is based in London and is currently in the process of setting up offices.

CEBS will fulfill the functions of Level 3 Committee for the banking sector in the application of the "Lamfalussy" process.                                           
The major tasks of CEBS include:
• Advise the Commission, either at the Commission’s request, within a time limit which the Commission may lay down according to the urgency of the matter, or on the Committee’s own initiative, in particular as regards the preparation of draft implementing measures for Level 2 (European Banking Committee) measures in the field of banking activities.
• Contribute to the consistent implementation of Community Directives and to the convergence of Member States’ supervisory practices throughout the Community.
• Enhance supervisory co-operation, including the exchange of information.

CEBS is comprised of two high level representatives from each banking supervisory authority and central bank of the European Union. The EU acceding countries will participate as observers until 1 May 2004. The EEA countries which are not members of the EU will participate as observers on a permanent basis.

The Committee is chaired by Mr José-María Roldán (Banco de España, Spain). The Vice-Chair is Ms Danièle Nouy (Commission Bancaire, France). The Chair is supported by a “Bureau”, or steering group, comprising Mr Andres Ittner (Oesterreichische Nationalbank, Austria), Mr Helmut Bauer (Bundesanstalt für Finanzdienstleistungsaufsicht, Germany) and Ms Kerstin af Jochnick (Finansinspektionen, Sweden). The Committee’s Secretariat will be based in London, UK.
Reinhard Petschnigg pointed out that it seemed clear to improve qualitative supervision of EU Banking – there was a need for a greater proximity to the supervised entities, in turn this implies that there would also have to be some discretion. The Lamfalussy process and its focus on transparency and consultation would contribute to more convergence of national practices over time. From a financial stability perspective, it would be important that central banks are closely involved in supervision and that they contribute to regulation.

Graham Bishop suggested that there might be a divergence between what CESR was aiming for and what CEBS was seeking: CESR is seeking more harmonised and uniform results between EU member states; whereas CEBS seemed to be seeking more flexibility and discretion.

A member of the Forum asked whether having the three main supervisory committees located in three different cities (CESR in Paris, CEBS in London and CIOPS in Frankfurt) is the best way to co-ordinate financial institutions and markets? M Thébault responded that how the three were co-ordinated would be important especially since there is no level 3 committee created for financial conglomerates at this stage, where perhaps the need is greatest. In practice, the EU would expect and encourage the three Chairs to meet each other regularly, both with and without the Commission being present.

Finally, M Thebault referred again to the desire by the US regulators for a regular transatlantic dialogue on financial services regulatory trends.

There being no other business, Graham Bishop thanked the guest speakers for their presentations and for answering questions from the Forum.
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Provisional dates for future meetings in 2004: 15 June, 13 October and 3 December.

© Graham Bishop