31 October 2006

October 2006

Graham Bishop’s Personal Overview .

The new Reform Treaty was agreed on October 19th and the EP President pointed out that “Parliament obtains co-decision over almost all Community legislation” when the Treaty comes into force – expected by mid-2009. However, in the meantime, the EP is still locked in negotiations with Council about the details of Comitology (effectively delegated powers to the Commission) especially about the so-called “Lamfalussy Directives”. This is the area of critical importance for financial services.

The aftermath of the summer’s financial crisis continues to reverberate around the EU’s political system. ECOFIN gave a strong mandate to the Economic and Finance Committee to prepare an extended EU-wide system of MoUs between the central banks, finance ministries and regulators of all 27 Member States – around 80 participants. But the BBA succinctly pointed out that the Northern Rock problem had failed to be resolved between just three participants in a single jurisdiction.

There can be little doubt that the Northern Rock affair is likely to turn out to have been a watershed in attitudes to regulation of cross-border financial activities in the EU. The bank itself was overwhelmingly domestic but other UK banks avoided the disturbed sterling money markets by borrowing from the ECB via their eurozone subsidiaries – at just the moment that ABN AMRO (a major EU bank rather than just Dutch) agreed to a take-over by a consortium led by a UK bank. Commissioner Charlie McCreevy wasted no time in outlining the first lessons from the sub-prime crisis. “The whole episode reinforces the need for greater international cooperation among regulators – EU-US and wider” and then went on to say “The real problem, as I see it, is that until now we have organised supervision in Europe along national lines”.

October also marked the final steps in preparations for MiFID and finally some strategic actions materialised! NYSE Euronext and two leading European investment banks, BNPParibas and HSBC, agreed to create an MTF, Project SmartPool, to make the execution of large orders in European listed stocks easier. However the rival Project Turquoise ran into difficulties when it terminated bid talks with UK trading platform Plus Markets, engendering some criticism that, after a year, it had almost nothing to show for its efforts. But it responded by appointing a CEO. Meanwhile, the rival platform run by Instinet Europe, known as Chi-X, is making some headway. Even as these events unfolded, it was reported that the vast majority of financial services firms - 93% - do not believe that MiFID will be consistently implemented and enforced across the EU. But CESR released details of enforcement measures for dealing with different levels of national preparedness for the switchover. It also published its future draft work programme for MiFID which focuses on the operational aspects of MiFID requirements. High priority is given to this aspect of the co-operation in the exercise of core supervisory functions.

MiFID may be hogging the newspaper headlines but reactions to the Solvency II proposal for insurance are now gathering pace. In the European Parliament, Rapporteur Peter Skinner said that “The accountability of supervisors and transparency of their way of work needs to be assured. Clear allocation of competences between group and local (solo) supervisors, and effective mechanisms for cooperation and information sharing need to be put in place.” That will impinge on the already highly-charged political debate about the locus of regulation.

However the potential breadth of application is causing deep disquiet amongst the EU’s pension funds. The Chairman of the EFRP described it as a ‘devil in disguise’ because it would load a very high cost on European occupational pension schemes. The Chairman of the UK’s NAPF joined in the colourful language, saying that applying it to pension funds would amount to “killing the goose.” But former CEIOPS Chair (and former trade union negotiator on pensions issues in Denmark) Bjerre-Nielsen disputed this analysis, saying that supervision should not be concerned with the nature of the promise being made, but once a provider made a promise then it had “to be backed up”.

Even that basic banking business of making payments is not immune to the competitive winds unleashed by the euro. Vocalink reported that European bankers are pessimistic about their ability to meet the initial January 2008 deadline for first stage implementation of Sepa. More than half the respondents thought that meeting the January 2008 deadline was unachievable and only eight per cent are already fully Sepa-compliant. 
                                                                                                                                         But the obvious competition for Sepa comes from the payment card industry. Competition Commissioner Kroes said her services hope to complete an inquiry into MasterCard and rule on the credit card group's interchange fee payments network by the end of the year, and then look at Visa. Initially, the decision was expected this summer, but continuous delays have brought harsh words from the European Central Bank, which believes that the development of Sepa is in the balance as long as uncertainty reigns over the fate of the card charges. The Commission banking and payment card sector inquiry said that while it would not abolish interchange fees, it would continue to assess the legality of current fee levels.

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Graham Bishop

© Graham Bishop