EP discussed the situation of the world financial system and its consequences on the European markets. EP also adopted the Rasmussen report on Hedge Funds and the Lehne report on Transparency of institutional investors.
EP discussed the situation of the world financial system and its consequences on the European markets and adopted the Rasmussen report on Hedge Funds and the Lehne report on Transparency of institutional investors. Parliament also adopted the Muscat report on the VAT on insurance and financial services.
Situation of the world financial system and its consequences on the European markets
French European Affairs Minister Jean-Pierre Jouyet and Commissioner Joaquín Almunia both underlined that EU Member States are not considering the kind of action as taken by the US government. The financial system in Europe is still stable and does not need these kind of measures, Jouyet said. However, he also made clear that the ‘laissez-faire’ approach of the past is over and made clear that regulatory action is urgently needed. It is up to the EU to take a lead in the regulation of world financial markets in the future, Jouyet said.
Commissioner Joaquín Almunia made clear that the current model of regulation and supervision needs to be revamped in the medium term.
Announcing the forthcoming proposals on CRD and CRAs, Almunia said that “it is likely that we will need to explore additional issues that have come to light”. But before taking action one need to analyse the situation carefully as regulators and market participants did not and could not foresee the current development.
Almunia finally called on the Member States to reach common solutions although internal European action is not sufficient to confront global challenges. We need to reinforce common external action in the FSF, Basel Committee and G7, as well as devote more attention to the future role of the IMF, he said. Looking ahead, we need to think about how we can shape the future of our financial systems and global governance. And the role of EU in this regard is vital.
Alexander Radwan (EPP/DE) criticised both the Commission and the Council as they show no sign of quick reaction in Europe. It is time to overcome the resistance against transparency in the US and the UK, he said. Europe has to go its own way, he said, without consideration of the SEC.
He also called for a European system of supervisors and heavily criticised McCreevy for not taking action against hedge fund and private equity.
However, other PPE members took a different stance. Piia-Noora Kauppi (EPP/FIN) said she was rather content on how the Commission has reacted to the crisis. Soft regulation issues should be considered before turning to hard regulation, she said and reminded that there is no need to change European approach as this shows that it is working well. Also, Europe can’t work in a vacuum, she noted, referring that financial markets are probably the most globalized markets in the world. And Karsten Hoppenstedt (PPE/DE) warned that even more and better regulation cannot prevent future crises.
John Purvis (PPE/UK) warned that the financial market might move from a liquidity problem to solvency problem. Key is now the restoration of confidence, he said and called for a summit of highest political leaders.
Martin Schulz (PSE/DE) called the recent experience a “bankrupt of an economic philosophy” and called the Commission to do all what could be done. This includes regulatory action with regard to Credit Rating Agencies and managers paying schemes. The rule that profits are privatised and losses are nationalised has to end, he said.
Supported by other PSE-speakers such as Pervenche Beres (PSE/FR) and José Manuel Garcia-Margallo (PPE/ES) he called for more regulation and supervision in Europe. Markets cannot be allowed to self-regulate as this does not work, Garcia-Margallo added, and Codes of Conduct are not enough. Mrs Beres called for "a modern type of regulation". She said there was no risk of hasty legislation: it was over a year since Commissioner McCreevy had laid blame at the door of rating agencies, but there were still no concrete proposals.
Speaking for the ALDE Group Silvana Koch-Merin (ALDE/DE) said that not the market economy is responsible for the situation, but those who neglect and ignore existing rules. Wolf Klinz (ALDE-DE) noted that the situation in the US is alarming and that this might be the end of pure investment banking. However, both called to act with a sense of proportion.
Speech Almunia
Parliament adopted the Rasmussen report on Hedge Funds and on the Lehne report on Transparency of Institutional Investors.
Financial stability and capital requirements
Regarding financial stability, capital and regulatory coverage, the Rasmussen report says, among other points, that capital requirements should apply to investment firms on the basis of risk rather than the particular type of entity. The interests of investors and loan originators should be aligned, either by obliging originators to retain a portion of securitised loans on their own books or by measures with equivalent effect.
Valuation of illiquid financial instruments, access to venture capital
MEPs want to see principles-based legislation on the valuation of illiquid financial instruments and better transparency requirements on prime brokers. They say there should be a harmonised EU-wide framework for venture capital and private equity, especially to ensure cross-border access to capital for SMEs.
Takeovers: information for employees, no “asset stripping”
Employees of companies which are taken over should always have the same rights to information and consultation under EU law, including when private equity investors or hedge funds are involved. The Parliament says measures should be introduced where needed to avoid unreasonable asset stripping of companies taken over by private investors. Capital rules should ensure the level of leverage is sustainable for both the private equity firms and the target company and there should be no unfair discrimination between different types of fund using similar strategies.
Similar points are made in the Lehne report, which asks for rules forbidding the “plunder” of companies by investors, and also asks whether and how banks might be held responsible, in some circumstances, for the use made by investors of the money they lend. MEPs also want a review of the relevant parts of the Transfers of Undertakings Directive.
Conflicts of interest and market concentration
Measures are also needed to tackle conflicts of interest within financial institutions of all kinds. Credit rating agencies should separate their rating business form any other services they offer, such as advising on structuring transactions – and there should be a mechanism for EU-review of these agencies.
The effects of market concentration in the financial services industry should be given a general review by the Commission’s Competition Directorate General, and assess among other things, whether there is legislation favouring incumbents which needs to be removed.
Wide-ranging review to find gaps in legislation
Finally Parliament asks the Commission to review all existing financial market legislation to identify any gaps regarding hedge funds and private equity and put forward any legislation needed for better regulation of these or other actors.
Transparency requirements
Regarding transparency, in adopting the Rasmussen report, MEPs call for a European Private Placement Regime, which would allow for the cross-border distribution of investment products, including alternative investment vehicles (such as hedge funds), to eligible groups of sophisticated investors. This would involve disclosure of their general investment strategy, leverage, risk-management and portfolio valuation methods, the source and amount of funds raised, rules for transparency on top executives remuneration and registration of shareholders beyond a certain proportion.
In the Lehne report, Parliament expands on this, calling for contract terms for alternative investments to provide “unambiguous disclosure and management of risk” and “full transparency of managers’ remuneration systems through formal approval by the general meeting of the company’s shareholders.”
Mr Lehne said: "There is a need for harmonisation in the banking sector to reduce risks in the financial markets", referring to current financial crisis.
The European Parliament also wants the Commission to consider whether hedge funds and private equity investors should be required to register and identify shareholders beyond a certain proportion.
Securities lending and voting on borrowed shares
Parliament wants more transparency on voting by hedge funds in general meetings, calling for exploration of whether intermediaries should be obliged to enable original shareholders to participate actively in voting. It wants to see a code of practice on how to rebalance corporate governance structures to re-inforce a long-term orientation. MEPs ask for an investigation of securities lending and voting on borrowed shares. It also asks whether reporting requirements should apply to co-operation agreements between several shareholders.
Report on Hedge Funds and Private Equity
Report on Transparency of Institutional Investors
VAT on insurance and financial services
Parliament adopted the report updating of the rules regarding the VAT treatment of financial services and insurance, with a number of amendments. The aim is to ensure legal certainty in a sector which has changed dramatically since the current rules were drawn up over 30 years ago.
Most financial services are exempt from VAT, but the legislation setting out how this exemption works in detail is out of date. The increasing level of cross-border services within the EU led to situations not provided for in the original legislation.
MEPs adopted a number of amendments which would clarify the scope of the VAT exemption – for example by explicitly including all derivatives. They also adopted a number of amendments aimed at ensuring a level playing field between different Member States and different types of financial institution.
Another aspect of the proposal from the Commission would give financial services companies everywhere in the EU the option of taxation on their services, which would enable them to claim back VAT they pay on their expenses in providing those services. MEPs want to ensure that the Council adopts uniform rules for applying this possibility across the EU and that its operation is subsequently reviewed by the Commission.
The Commission’s other proposed innovation is to allow for cost-sharing group so economic operators to pool investments and re-distribute the costs for these investments exempt from VAT. MEPs want to broaden the scope of this arrangement.
Parliament’s position is not binding, and the final decision requires unanimity among the 27 Member States in the Council.
Report
Internal Market Scoreboard
Parliament adopted the Resolution calling for a more developed Internal Market Scoreboard and an overall hoist of the internal market issues within the European Union.
Rapporteur Charlotte Cederschiöld is calling for internal market issues to be put back at the top of the agenda by ensuring funding for the SOLVIT system and by encouraging the recreation of an Internal Market Council. Moreover, the Scoreboard would merit from the inclusion of further parameters to measure the consequences of non-implementation. Closer co-operation between the Member and the Commission in the implementation process is also encouraged. States
Resolution on Internal Market Scoreboard
Draft Agenda (doc) / (online)
© Graham Bishop