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Graham Bishop’s Personal Overview
2007 ended with the Reform Treaty formally signed – and the growing sense of urgency that this Commission and Parliament now has well under twelve months of effective legislative time left. However, the implications of the Treaty for financial services remain in dispute. We out our view several months ago that the main effect would be an improvement due principally to the improved comitology arrangements between the co-legislators: Parliament and Council. There are other views, such as those expressed in an FT article “Europe's new treaty is a threat to the City of London”.
But there is a practical reality that is well underway and this was exemplified by CESR’s detailed legal analysis of sanctions available to each Member State to enforce infringements of the Market Abuse Directive. It runs to nearly 500 pages and all Member States seem agreed upon the logic of gradually drawing these sanctions closer so that there is effective enforcement of the Directive. Indeed this is the essence of the Lamfalussy Process (LP) Level 4 and was the entirely foreseeable (and intended) consequence when the LP was agreed unanimously by the Heads of Government back in 2001. So UK participants might do better to harness their energies to generating a beneficial outcome – or make it clear that their real wish is for the UK to leave the European Union, whatever the consequences. Carping comments may simply damage the long term prospects of the City of London as the financial centre for the euro.
Such analysts may even be disconcerted to recognise that the last month has witnessed a landmark in the number of Commission decisions … NOT to legislate!
• No Mortgage Credit Directive
• No new legal measures against sovereign wealth funds
• Pre and post trade transparency in the bond markets: “Both CESR and ESME concluded that there is little evidence of market failure in the wholesale business”, McCreevy said. “As far as I am concerned, the matter has been dealt with – no market failure, no regulation.”
• "One share, one vote" problem. Having weighed the arguments advanced, Commissioner McCreevy has decided there is no need for action at EU level.
• Directive on the cross-border transfer of registered office. Having weighed the arguments, Commissioner McCreevy has decided there is no need for action at EU level.
The continuing turbulence in financial markets claimed its share of political attention in December. “The European Council welcomes the significant steps adopted regarding the enhancement of EU arrangements for financial stability and strongly encourages their appropriate follow-up. It will come back to these issues at its Spring 2008 meeting on the basis of a progress report.” ECOFIN also set out a roadmap to mid-2009 to enhance supervisory coherence (in addition to the financial stability roadmap laid out in October).
The stability debate was enhanced by Commissioner McCreevy’s comments that “We have effective crisis prevention measures in the EU. Our crisis management arrangements need to match them”. Italian Finance Minister Padoa-Schioppa wrote a powerful letter to ECOFIN arguing that “the supervisors had failed - chiefly because they are scattered across the EU and answerable only to capitals….The recent financial turmoil was a revealing test of the shortcomings of the present system. It is now necessary and urgent to act decisively to enhance the European supervisory system” and called for a "single rule book that will be enforced uniformly all over the EU", a warning to Britain that this initiative is not confined to the eurozone states.
Whilst his initiative chimed well with the feeling at Eurofi’s major conference in Brussels, there are more concrete, detailed examples surfacing already of regulatory response. For example, CEBS proposed that hybrid capital instruments should only be eligible as Tier 1 capital if they simultaneously meet several requirements including that “they must be … easily understandable.” CEBS public consultation on the large exposures regime included discussion of a high level market failure/regulatory failure analysis but CEBS considers a key issue to clarify is the concept of connected clients and it proposes a clear distinction between 'connected clients' and 'connected parties'.
In the consumer space, Parliament’s IMCO Committee adopted the Consumer Credit Directive after 236 amendments had been tabled. The major changes adopted by the committee concern the scope of the directive, advertising, pre-contractual and contractual information, in particular for overdraft facilities and, in particular early repayment terms. MEPs chose to leave more room for manoeuvre than either the Commission or the Council proposed when it comes to this basic information. Lenders will be expected to provide information on both the benefits and the drawbacks of the loan offer. The text adopted by the Internal Market Committee is less strict than that in the Council's common position when it comes to contractual and pre-contractual information which lenders are obliged to provide to their customers in the case of overdrafts.
The Commission announced its long-waited decision on MasterCard’s interchange fees. Though they were held 'not illegal' as such, the Commission ordered MasterCard to withdraw its 'interchange fees' within six months because the fees are only compatible with EU competition laws if they contribute to “technical and economic progress and benefit consumers”. The Commission found that “MasterCard failed to submit the required empirical evidence to demonstrate any positive effects on innovation and efficiency which would allow passing on a fair share of the [interchange fee] benefits to consumers.” But there was little guidance on what this really means.
Despite this, Commissioner Kroes wants to encourage swift and coherent implementation of the PSD. She does not want “to see low cost national card schemes being replaced by more expensive payment card schemes, using SEPA as an excuse and a pretext for this move”. It seems that banks are interpreting SEPA to mean that any product must operate in all 31 SEPA states. But this is not necessary and she also feels that the SEPA Cards Framework seems to deny access to non-bank payment schemes. But access by new players is crucial to promote competition in the payments market.
As something of a post-script to the debates about SEPA, the UK's Payments Council is mulling plans to phase out paper-based cheques in favour of a UK-wide shift to automated and card-based payments. Cheque volumes now comprise 13% of UK non-cash payments compared with 64% at their peak in 1990.
The BBA published a paper on regulating multi-jurisdictional banks. It recommended that the EU concentrate on a supervisory convergence model which includes closer supervisory working; sharing of techniques; use of common processes; and elimination of duplication. There should also be a “college” of banking regulators from the relevant EU countries for each cross border bank. The further development of the lead/consolidated supervisor model should provide one point of contact between the bank and the regulator. But a major concern of internationally-oriented banks in London is that the EU should resist taking forward initiatives that would result in greater legal uncertainty. The BBA argues that, for instance, the Rome 1 Regulation on choice of laws could introduce uncertainty as to which law might apply to a contract. This could act as a barrier to banks entering cross-border business, impacting the momentum towards greater integration.
However, Parliament approved the Rome I regulation and the JHA Council “found a consensus” a few days later. The text provides common EU rules on the choice of the law to apply in case of cross-border disputes concerning contracts so a consumer should be advantaged by the choice of the most familiar court - the law of the country where the consumer has his habitual residence. Together with the recently approved Rome II regulation on non-contractual matters, this regulation provides a complete set of Community rules of private international law relating to contractual and non-contractual obligations.
A genuinely single market will be built upon many small details but the Commission’s proposal to modernise VAT treatment of insurance and financial services may be more profound than it appears at first sight. The critical element is that it will allow financial institutions to manage the costs of non-deductible VAT by allowing them to opt for taxation and by clarifying and extending the tax exemption for cost-sharing arrangements. That should remove an expensive impediment to cross-border sharing of resources and consequent economies of scale.
The ECB produced its consultation on T2S user requirements and the methodology for the economic impact assessment that the Eurosystem intends to adopt in order to calculate the costs, benefits and macroeconomic impact of T2S. However, FESE stated that T2S seems to have changed in terms of its scope and definition as it has become clear that other market participants would be allowed to connect directly to T2S. So FESE feels it is still extremely difficult to work out a meaningful costs/benefit analysis and decide on whether T2S will be beneficial or not.
There seems to have been an outbreak of peace on Trans-Atlantic accounting issues. Commissioner McCreevy criticised those who argue that the SEC should have accepted an EU brand of IFRS along with IFRS as adopted by the IASB, because there is only one minor carve-out and it has been used by only one dual-listed company – though by many in the EU alone. Correspondingly, the PCAOB Chairman said they have developed a framework for cross-border oversight by relying on foreign inspection programmes. Underlining the rules-base nature of US regulation, this has been achieved by varying guidance under rule number 4,012!
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Graham Bishop