23 July 2007

July 2007

 Graham Bishop's Personal Overview

GrahamBishop.com is delighted to announce co-operation with Mlex – the EU’s leading news supplier on competition issues. So we have expanded this publication to include a section on competition topics relevant to financial services.

The summer has produced a bumper crop of events before the holidays set in but the autumn will include many significant developments. These include:
September: Mortgage credit White Paper; Business insurance sector enquiry by DG Comp
October: Planned agreement on the Reform Treaty; Lamfalussy Process review gets underway with the final report from the IIMG; UCITS amendment proposal
November: MiFID comes into force on the first day of the month; TARGET 2 begins operations with a first wave of migration; QIS 3 report for Solvency II consideration
December: CRD comes into force; Separate accounting for unbundled clearing and settlement services
Autumn: Single Market review – the Citizen’s Agenda – including results of retail financial services Green Paper.

The June agreement on the new Reform Treaty continues to reverberate around the politics of the EU but the direct implications for financial services may be quite limited. As competition policy is becoming ever-more important in this sector, the removal of competition as an objective of the Union came as a shock. But Competition Commissioner Neelie Kroes told MEPs she was not worried by the decision by EU leaders to move the commitment to free and undistorted competition into a protocol. She stressed that the protocol was legally binding, and that the same rules would continue to apply as now because “The protocol to the treaty is a legally binding confirmation that the system of undistorted competition is part of the internal market.”

The IGC is due to complete its work as quickly as possible - perhaps even in October and in any case before the end of 2007. That would allow for sufficient time to ratify the resulting Treaty before the European Parliament elections in June 2009. (For a more detailed discussion, see the special section on the European Council). That timing will enable the European Parliament to be sure that its powers under the old draft Treaty as co-legislator have not been diminished. The significance was highlighted when Commissioner McCreevy underlined that rapid progress in Council and in Parliament is needed to adopt the 'Comitology alignment package'. Otherwise the Commission will face an increased risk of seeing its implementing powers fade away because of the Sunset Clauses, as is already the case with the Conglomerates and Market Abuse Directives.

The politics of financial supervision were brought to the fore by the EBF’s reflections on the Lamfalussy Process. A high level of co-operation between the Level 3 Committees is essential but supervisory tools and approaches to achieve convergence should not necessarily be identical from one sector to another. For the EBF, supervisory convergence should be a principle-based, proportionate, outcome-focused approach to reaching consistent regulatory solutions and removing undue differences in regulatory practice that is ultimately based on best supervisory practices.

MEPs appear to go further when ECON approved an own-initiative report by Ieke van den Burg which notes that the nature, source and transfer of risks to the financial system are changing. It expressed concern that the “current nationally and sectorally based supervisory framework may potentially fail to keep pace with financial market dynamics”. MEPs stress that it must be well resourced co-ordinated and entitled legally to “give adequate responses in the case of major systemic crises that affect more than one Member State.” The report emphasises that home-host supervisory co-operation is the most significant building-block in the set-up of the single financial market. Greater convergence among supervisors should, it says, facilitate the business of companies dealing with more than one regulator – and encourage the emergence of a European retail financial market.

Solvency II finally appeared – weighing in at 371 pages, before including the accompanying assessments. However, the scope is enormous as it seeks to consolidate 14 existing directives into just one, as well as introduce modern, economic risk-based solvency requirements across all EU Member States for the first time. These new solvency requirements will be more risk-sensitive and more sophisticated than in the past. The new regime will be a 'total balance sheet' type regime where all the risks and their interactions are considered. But the wider implications were also quite clear as it is expected to become a world standard for this industry – greatly enhancing the competitiveness of EU insurers. But it also feeds into the supervisory debate as the new framework will strengthen the role of the group supervisor in the home country that would have specific responsibilities to be exercised in close co-operation with the relevant national supervisors.

Global standards were also subject to some ECOFIN conclusions on IASB governance and funding. The Council welcomed the current private sector efforts to create a broad-based voluntary financing system for the IASB. But the Council also wants to see that comments from the Roundtable on Consistent Application of IFRS in the EU are fully taken into account and that Member States and the European Parliament are regularly informed at an early stage by members of the IASB about their intention to issue new standards, and by the Trustees on governance developments in the IASCF. ECOFIN continues to underline the importance/necessity of geographically balanced representation in all key Committees of the IASB/IASCF structure.

However, the emergence of the EU as a global standard setter for financial services was highlighted in an FT article by Tobias Buck. Twelve months ago, such a statement would have been questioned. Today it is becoming plain for all to see.
Graham Bishop

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