Report of the meeting held at Scotland House, Brussels
Martin Merlin, from the Cabinet of Internal Market Commissioner Charlie McCreevy, in a detailed presentation, stressed that for the rest of his term the Commissioner would be putting increasing emphasis on the better regulation agenda, and in particular seeking to improve the quality of the regulatory impact assessment process. “The Commission services must reinforce their economic expertise in order to produce sound, well argued impact assessments,” he said.
Mr. Merlin said that during 2006-7, DG Internal Market would assess the process through which the Financial Services Action Plan was implemented. Then it would conduct an ex-post evaluation of the Financial Services Action Plan in 2008/09 to try and assess its economic impact on the ground, its costs and macro-economic benefits and whether the benefits outweighed the costs. The Commissioner also wanted to start looking horizontally at the financial services sector, particularly to see what cross-sectoral inconsistencies there may be in the regulation of retail investment products and the provision of information at the point of sale as provided for under the UCITS, MiFID and Insurance Intermediaries Directives
Mr. Merlin identified a number of important subjects on which the services of McCreevy will be working over the next few months and years.
· On clearing and settlement, he said that DG Markt is preparing an impact assessment on whether to legislate which would be completed in 1Q 2006. Key questions to be answered included whether a Directive is needed to grant cross-border access rights or whether post-trade actors can consolidate by themselves. The impact assessment would try to answer the question of whether consolidation is not happening or happening too slowly.
· Turning to Solvency II, Mr. Merlin said nobody questioned the need for a Directive to overhaul legislation covering the life, non-life and reinsurance sectors. This should come out in mid-2007. He stressed however that the Commissioner wanted this Directive to be focused on principles without too many details at Level 1 of the Lamfalussy process.
· On mortgage credit he said that a White Paper would be published in the first quarter of 2006, but Mr. McCreevy wanted to avoid raising too high expectations. In view of the difficulties facing the consumer credit directive it might be better to have a narrow proposal. The Council and the Parliament are finding it hard to reach agreement on consumer credit and mortgage credit is likely to be even more complex. We might end up, Mr. Merlin suggested, with a targeted legislation on information and consumer protection requirements only - perhaps in the form of a Regulation not a Directive. This will obviously depend on the outcome of the consultation and the results of the impact assessment. Certainly the Commissioner is not expecting to produce a wide-ranging Directive on integrating EU mortgage markets. The national regulations, products and cultures are too diverse, he said.
· On investment funds, he said there seemed to be several objectives. One would be to first take a modest step in trying to make the UCITs passport function better. In the medium-term, a more comprehensive review of the UCITS framework could be contemplated. Finally, the Commission will look into the issues raised by hedge funds and private equity funds. But no legislation is foreseen in this area.
As for the priorities the Commission had for the next six months of the Austrian Presidency, Mr. Merlin said that one goal would be to try and make progress on an inter-institutional agreement between the Parliament, Council and Commission on the issue of comitology. What we do in the financial services field, which is quite advanced, could be seen to be setting precedents for comitology in other fields, and this is something that some member states do not want. But if there is no agreement in 2006, there is a risk that the inter-institutional debate will begin to slow down the entire legislative process.
A second priority during the Austrian Presidency would be to make progress towards establishing a new legal framework for payments by establishing a “general orientation,” of policy by the end of the Presidency. Then a legislative text which could be adopted by co-legislation by the end of 2006. This would put pressure on the banks to realize a single payments area by 2010. “We want a genuine EU payments zone which eliminates purely national standards and protocols,” he said.
Mr. Gerhard Lerchbaumer, Financial Counsellor at the Austrian permanent representation, then outlined the Presidency priorities in the economic and financial policy field. Ecofin policy issues such as promoting the revised Lisbon agenda, the Broad Economic Policy Guidelines and the national reform programmes in order to improve conditions for economic growth and employment. These would be a top priority. The Commission’s report on the latter, which might also include country specific recommendations, would be available at the end of January. Austria will present a “key issues” paper at the February Ecofin Council which, as usual, will focus on economic policy. Austria was also preparing some ideas on how to make better use of the European Investment Bank’s ‘know how’ with regard to stipulating growth and employment in the EU. All these issues and procedures will finally be channelled into the Spring European Summit in March.
The better regulation agenda may not be “juicy” but is important. Austria was also hoping, because of its historic ties with the country, to get, based on the respective reports by the Commission and the European Central Bank, an agreement in principle on Slovenia’s entry into the single currency at the end of its Presidency. It might, however, seem more likely that such a decision – as well as for two other Member States - will be taken under the Finnish Presidency.
Graham Bishop then raised the question of comitology in the financial services sector asking why, given that agreement had been reached in the Constitution, this agreement could not be implemented even though the Constitution itself was in abeyance. Mr. Merlin said that the Constitution was agreed as a package and that individual items could not be cherry picked out of it. He suggested that the Commission can live without a comitology agreement until April 2008, when it would be needed for Solvency II. Graham Bishop pointed out tat other sunset clauses would already have come into operation before then, so an earlier solution seemed preferable.
Gary Roberts from UKREP felt that the emphasis should be on what was needed now, which was to update the current comitology to give the EP a role rather than refer to powers envisaged in the new Treaty, these other issues should be parked
Stefan Brill interjected that he doubted that the Parliament would adopt a pragmatic approach to the issue of comitology since the distribution of institutional powers between Council and Parliament has not been clarified. The representative responded that for the Parliament just to say it wanted the right of “call back” was not precise enough. It needed to articulate in detail what process it wanted.
Dr. Iris Leixner, from the Austrian permanent representation, explained that the comitology discussion should not be stirred up as a clash between the Council and the Parliament with the Commission in the middle. It would be counterproductive to demand parts of the constitution to be adopted in advance in a simple legislative procedure. Instead the EU institutions should respect the decision of the peoples of Europe with regard to the Constitution and hence try to solve the issues which are on the table (i.e. comitology and parliamentary involvement) within the given competences.
Graham Bishop added that it is unfortunate for the financial services sector that it is the focus of this clash over inter-institutional powers. More broadly, he added, he supported the idea of using the European Investment Bank. It had been instrumental in expanding the ECU bond market and so promoting the development of EU capital markets, and could do more to help create a globally competitive EU capital market. In addition, he said, the link between economic and financial market policy needed to be more of a focus, the way, for example, in which development of an EU mortgage market could promote labour market flexibility and mobility.
Iris Leixner then gave a more detailed account of the Presidency’s priorities in the financial services field. At the top is the objective of getting a deal with the Parliament on funds transfer and to establish a new legal framework for payments. Echoing Martin Merlin, she said the text was very long and complex with ninety articles.
On policy issues she said two topics would dominate: supervisory convergence, where Presidency conclusions should not be expected but discussions should make progress, and cross-border banking mergers where the aim was to produce Council conclusions in May.
Graham Bishop wondered why the complex Payment Directive was not a Lamfalussy directive, it seemed ideally suited for the Lamfalussy process. Martin Merlin replied that work had begun four years ago, before the Lamfalussy process was up and running and it was not expected that it would be so detailed. Moreover, given that the comitology process under Lamfalussy is so uncertain it was felt that it was better to go for a classical directive outside the Lamfalussy process.
Asked how the Commission would work with the European Payments Council (EPC), he said that there would have to be greater interaction in the future, not least because of the need to integrate direct debits and credit cards into the new legal framework. He repeated Commissioner McCreevy’s warning that the Commission would propose additional measures if the EPC process does not lead to a really integrated market. He said the Commission was working very closely, and harmoniously, with the European Central Bank in the areas where it has oversight responsibility, with agreement on all issues except new capital requirements for institutions. He added that the Commission is worried that some large individual banks do not see the business case for an EU payments area and that they are dragging their feet.
Questioned more generally about the degree of co-operation between the EPC and the Commission on the new legal framework for payments, he said that they were cooperating closely but repeated that while some banks subscribed to the NLF and the Commission’s vision, some do not and this is making working with the EPC “ very difficult. We feel there is a lack of ownership of SEPA by the banking community at the highest levels. Headded that there may be is a need for a summit between leading bank chief executives, Jean-Claude Trichet, the President of the European Central Bank, and Commissioner McCreevy.
In the general discussion which followed, sharp criticism was directed at the regulatory impact assessment (RIA) process, which it was said is not set up sufficiently at arms length from the officials devising policy and therefore is not truly independent. There is also a lack of consistency in the assessments. Martin Merlin said that the RIA process is new. There is a question about whether assessments are better done by Commission staff, who know the issues best, or by outside consultants who have the advantage of being independent.
Salim Nehme, of the French Banking Association, said that clearing and settlement highlighted this conundrum because the RIA needed to be done by people who understood clearing and settlement issues and knew the proposals the Commission was considering and could also give economic advice. Martin Merlin replied that the Commission was expecting to share the RIA on clearing and settlement with “ a select group of market participants,” and added that more generally the Commission was trying to separate the people who prepare an RIA from those to are pushing a legislative proposal.
Graham Bishop then asked for clarification on the issue of whether RIAs were to be updated on issues where legislation was being fundamentally changed. Martin Merlin responded that this was obviously necessary, but only for those sections of the RIA which were themselves impacted by new legislative proposals.
Several participants then mentioned that, so far as a ‘regulatory pause’ was concerned, although there was not much legislation being proposed, what there is will have a huge impact and is very complex. Graham Bishop pointed out that the FSAP, at its peak, was primarily focused on capital markets alone.
As for the alternative of self-regulation Martin Merlin said that while this was fine for national financial markets, he was not convinced it worked at a pan EU level.
Graham Bishop raised again the issue of supervisory convergence, especially about how cross-border groups are to be regulated, with the ultimate problem being deposit guarantee schemes. These topics raise major issues of national sovereignty and are highly politicized because of the question of who bails out whom in a crisis. There seemed to be widespread agreement that underneath the general issue of deposit guarantee schemes lay “a hornets nest.” The Austrian presidency planning to raise these issues at its informal Ecofin in April, not at a formal Ecofin, precisely because they are so sensitive politically and does not want to have to publish official Conclusions.
Martin Merlin added that the Commission wants to make full use of the Lamfalussy process, including Level 3 mediation, exchanges of supervisory staff and the delegation of supervisors’ powers for example. The Commission would also look at the legislative front for how more centralized supervision could be promoted in this way. Deposit guarantee schemes were one example. He added that the way one supervisor can decide, under the Capital Requirements Directive (based on Basle II), to accept a large bank’s risk assessment model is a step in the direction of the development of a consolidated or lead supervisor.
One participant warned that some large financial institutions were watching developments closely and how events unfolded would help them decide whether or not to focus their strategic expansion plans outside the EU. Another added that he was disappointed at the lack of ambition in the recent White Paper. But other participants took a diametrically opposed view, saying that the Commission’s objectives were quite ambitious enough.
The next meeting of the European Finance Forum is Thursday 9 March 2006 – this is a provisional date and will be confirmed as soon as possible.
© Graham Bishop
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