02 May 2006

April 2006

Graham Bishop’s Personal Overview.

The Payments Services Directive (PSD) finally gained approval from both Council and Parliament, though many compromises were required on capital requirements and permissible activities. However, Parliament struck a note of caution about avoiding extra charges as a result. The Directive must now be transposed by Member States and their dismal record on MiFID suggests that there may yet be more slippages on the SEPA timetable. In many states, cross-border direct debits will not be legal until the PSD is transposed. The European Banking Federation pointed out that the banks’ plans for these to be introduced at the beginning of 2008 were not now realistic after the long delays in approving SEPA. Nonetheless, the EBF thought the final result to be “a suitable compromise”.

That should be one item of good news already on the score sheet when the Commission imminently publishes its Communication on retail financial services. Commissioner McCreevy has emphasised to ECON the need for consumers to see practical benefits from the integrated financial market.

The shape of future EU financial regulation remains a constant source of concern and the IIMG’s second report sparked further reactions. Several professional associations commented in general support but with varying additional comments. However, the “Joint 3L3 response” said there is a need for a deeper discussion of home-host issues in this Lamfalussy review year. “In part this comes under the general heading of cooperation and supervisory convergence, but it is important and central to the future debate on EU supervisory cooperation”. However, the L3 committees need the necessary political backing – and the budgetary means.

The securities markets have been wondering whether Project Turquoise was merely sabre-rattling – but admittedly by the seven banks that provide about half the EU’s equity trading activities. The announcement that DTCC has been chosen as Clearance and Settlement provider for this new pan-European trading platform provided a clear answer. EuroCCP will provide all clearing, settlement and risk management services to Turquoise, whilst Citi's global transaction services business will serve as EuroCCP settlement agent.

This announcement of potentially real impact flowing on from MiFID should have been music to the ears of Commissioner McCreevy as he was forced to warn Member States that they could face legal action by private parties claiming damages for losses due to late implementation of MiFID into national law. He expressed deep concern about delays in transposition as only the United Kingdom and Romania had notified the Commission of full implementation of MiFID, though the German Parliament almost immediately took the first step to transposition.

The European insurance world is moving steadily closer to the momentous impact of Solvency II:
• Commissioner McCreevy said the Solvency II proposal to be adopted this summer “will streamline the supervision of groups by strengthening the powers of the group supervisor [Editor’s note: highlighting again the issue of regulatory convergence across the EU], allowing group-wide models to be used that also give lower capital requirements as a result of diversification. But he added that the full benefit from this new regime can only be achieved if there are convergent national implementations, and called on the Member States to ensure that supervisory authorities are sufficiently resourced.
But he also pointedly limited the influence of supervisors in the decision making process when he said that “supervisors will not decide the European Standard Formula. CEIOPS' advice is precious, but it is only advice.”

• CEIOPS launched QIS3, its third round of quantitative impact study. Although it is not the final exercise, this QIS represents a major step in the development of the new solvency regime.
• The UK’s ABI published its first Solvency II bulletin making the point strongly that Solvency II will be one of the first major Directives to embrace the Lamfalussy approach and is therefore highly significant both in its form and in its substance. On content, the Commission’s proposals for the Directive are rightly ambitious and herald the most significant changes for a generation in insurance regulation, introducing sophisticated, risk-based approaches to supervision and capital assessment, using modern techniques for market-based valuation of assets and liabilities.
• But the ABI also argued that Solvency II will require a new approach to legislation from the European Parliament. The Level One text must remain high level and principles-based if the process is to work as intended. Leaving the detailed technical provisions to Level Two allows the core principles at the heart of the Directive to remain unchanged, whilst the technical specifications can be updated to reflect changing market and product developments. The ABI says that the European Parliament has a unique opportunity to make Solvency II a reality, ensuring consistent standards of consumer protection and the promotion of a Single Market for insurance across the EU. By reaching consensus on a high level text, Solvency II can avoid the undue complexity seen in other European legislation and deliver real benefits for insurers and consumers. [Editor’s note: this is the core of the Lamfalussy approach but industry lobbyists could not resist asking for detail in MiFID level 1 to the point that it became extremely substantial and detailed – so much so that it is now widely criticised. Will the insurance industry do better?]

The Bruegel think tank published a paper on the ‘Global Accounting Experiment’ - presenting accounting standard-setting as a “frontier experiment” in international governance, where private initiative can succeed in solving a collective problem that nation-states could not tackle effectively. It argued that to make the adoption of IFRS sustainable, the legitimacy of the IASB has to be bolstered. Key supporters, such as the European Union, must help consolidate IFRS by implementing them consistently.

Hedge funds may turn out to pose another interesting experiment in international governance. According to IFLS, London is by far the largest centre for European hedge fund managers, accounting for four-fifths of European based hedge fund assets in 2006. Even though it doubled its share last year to 21%, that still lags New York’s 36%. But the Banque de France issued a Financial Stability Report dedicated to hedge funds with views from Central Bank Governors Christian Noyer, Axel Weber, Mario Draghi, amongst others. G7 leaders may well push "Something like a voluntary code of conduct," and, according to Reuters, German Chancellor Angela Merkel wants something substantive done about hedge funds by the time she hosts a summit of world leaders in June.

The European Parliament Socialist Group released a report on hedge funds and private equity. It questioned the increasing dominance of hedge funds and private equity funds, and its impact on the optimal conditions for the financial market in Europe. The Treasury Committee of the UK’s House of Commons decided to launch an inquiry into private equity funds as part of its work under the theme of ‘Transparency in Financial Markets and the Structure of UK Plc’. The Committee would welcome evidence on the regulatory environment, taxation, and the economic context.

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Graham Bishop

© Graham Bishop