Provisional Version
The distrust that has seeped into the relationship between the European Parliament and the Ecofin Council following the vote narrow defeat in the Ecofin meeting on November 7th of the Parliament’s laboriously crafted Investment Services Directive proposal could rumble on, making it harder to complete not only the ISD but other important financial services regulatory and legislative initiatives, the Forum heard from several participants.
Graham Bishop opened the meeting with a report on the forthcoming Irish Presidency’s priorities in the financial services field as relayed to him by John Norris, the Irish government’s Brussels based specialist on financial issues, who had had to go to Dublin at short notice and could not attend.
Financial Services Action Plan – the final act?
Ireland’s key objectives, according to Mr. Norris, will be to get the ISD, the Transparency Directive and the Lamfalussy Extension Directive approved Norris himself concedes that achieving passage of the ISD in particular will be a tall order. The point was underlined later by Theresa Villiers MEP, who also sees the Economic and Monetary Affairs Committee’s meeting on February 26 as the last chance to move the Directive towards approval in the current Parliament. The last opportunity for a plenary vote would then be in April (the detailed timetable will be available on our website – see the ISD Timeline).
To underline the importance of completing the FSAP and achieving fully integrated financial markets in the EU, Graham Bishop himself argued that success could produce potential economic benefits worth as much as �� billion a year. The City of London, he said, would indeed be a major beneficiary, but the City is an EU asset not just a British asset. This point was made strongly in the recent report from the House of Lords sub-committee.
Graham Bishop also gave some thoughts about the imminent IIMG Report (subsequently published on 10 December).
Theresa Villiers MEP, in a detailed account of the status of the ISD, expressed her concern that the Italian Presidency had placed too much emphasis on trying to push legislation forward with too little concern for its quality or the constitutional status of the Parliament. “The Council did not schedule one meeting to discuss our amendments” she said.
She also underscored not only how tight it will be to meet the deadline for the ISD, in part because the Italian Presidency railroaded its language through the Council on a qualified majority vote, and in part because it will need 314 votes, over half the membership of the Parliament, to secure approval for any changes to the Council text on a second reading in Parliament.
“The European Parliament’s proposals have more support than the Council text which is very ambiguous” she claimed, and which seemed to be born out by comments from several participants at the Forum.
Going into the detail of the current ISD text as approved by the Ecofin Council, Mrs. Villiers said that it contained both a very broad interpretation of what defines an investment firm which is a “systematic internaliser” of share deals. It also contains confusing language on a firm’s obligations to quote in specific sizes, she said. These ambiguities, she argued, would end up satisfying neither the advocates of greater transparency nor those who, in contrast, are putting the emphasis on enhancing market liquidity.
On some interpretations, she argued, the obligations to quote could be interpreted as inferring the requirement to publish firm quotes right up to block trading size. This could create severe counterparty risk, discourage firms from entering the business and so threaten to defeat the Commission’s objective of undermining the concentration rules which give some stock exchanges a privileged position protected from systematic competition.
Off-market, over-the-counter, telephone trading and even routine deals between big institutional investors could all be disrupted if the wording in the Council’s text prevails, she warned.
She also argued that the Council text on when investment firms are permitted to improve their prices is hard to square with the requirements both for publishing quotes and for best execution.
She also attacked the Council text which she claimed could require over five million investors in Germany, France and the United Kingdom alone, to take financial advice they do not want rather than opt for “execution only” services. She also stated that the Parliament is clearly against the extension of current transparency requirements from shares to bonds, as these rules are unsuitable for the purpose.
The future of Financial Sector Regulation
As the FSAP moves towards completion, the focus is shifting increasingly towards the challenges of implementing the new rules at national and trans-national levels and examining what is the most appropriate structure of supervision and regulation in an integrating EU financial market.
According to Freddy van den Spiegel of Fortis Bank, who acted as Rapporteur for a report on this issue for the European Financial Services Round Table (EFR - a grouping of the seventeen biggest financial services firms in the EU with major cross border businesses), the reality facing them operationally is that local rule books and local implementation of rules could fragment rather than integrate regulatory structures. “We could face more divergence and end up, for example, having to develop differing Basle II type capital adequacy implementation policies in each individual EU country”.
This, he argued, raises the question of which is the best option in terms of efficiency and prudential stability: the creation of a single regulator for the EU, the creation of a specialist cross-border supervisor for the big financial services firms which operate across borders, or reliance on local national regulators but underpinned by strenuous and successful efforts to ensure that their rule books are harmonized and implemented in an identical fashion in each EU state - in itself a tall order.
The EFR, he suggested, sees it as important to establish a “lead supervisor” for the big cross border financial services firms, so that they have a single access point and do not have to duplicate their filings to several different agencies. The lead supervisor concept would shift the co-ordination burden away from the supervised and on to the supervisor. The extension of the Lamfalussy process to the banking and insurance sectors would facilitate this development, he maintained – although it was noted later that the outcome of the Inter Governmental Conference on the EU Constitution raises doubts about whether this will indeed happen.
Graham Bishop pointed out that the Committee of European Securities Regulators (CESR) is indeed trying to ensure the harmonization of regulatory structures “so that a financial services firm would get the same answer to a specific regulatory question in any country even though it might be delivered through a different legal or regulatory framework.”
“The idea that Level 3 implementation of regulation in the Lamfalussy process will give regulators in different countries “ wiggle room” so that, for example, London’s Financial Services Authority (FSA) could end up being a “light touch” regulator compared with peers in other jurisdictions, is a fiction” he said.
“The FSA has to enforce European rules in a uniform way is my interpretation of how CESR will develop” Bishop argued. There was wide agreement however that the current squabble over which country, or countries, the new banking, insurance and securities regulatory forums should be based in, and whether they should all be in the same country in order to facilitate co-operation, was not a hopeful sign.
Ieke van den Burg MEP expressed her concern that the single EU regulator issue is on the table for discussion now. But the focus for the time being in the Parliament is still more on promoting co-operation and co-ordination amongst national regulators she said, even though her own very strong preference leant towards a single regulator for big firms operating across borders. “We need enhanced co-operation amongst national regulators but smaller domestic firms should still be supervised at national level” she maintained.
She expressed concern about possible “regulatory arbitrage” and regretted that the Financial Conglomerates Directive had been approved before the question of whether a single cross border regulator for big financial services firms could be fully debated and possibly implemented. However, no Forum participants were able to cite an example of a major firm changing domicile, though any new business would probably be placed in the most favourable regime – taking that business as a whole.
It was pointed out that it is not all clear that there is a legal basis in EU proposed-law for the creation of a single regulator for big cross border financial institutions. Certainly, lawyers for EFR members were clear that Article 3.68 is insufficient. The controversial Article 1.35 of the proposed new constitution does not provide such authority, and, on some interpretations, may even prevent the extension of the full Lamfalussy process to the banking and insurance sectors.
This needs to be clarified because, if Art. 1.35 is not satisfactory to the Parliament, it may well not approve the Directive that extends the Lamfalussy Process. The Commission proposal is that the Regulatory Committees at Level 2 will turn into Advisory Committees. BUT, according to Mrs. Ermfried Schwimann of the European Commission, after the Constitution is passed the Level 2 committees under the Lamfalussy process would remain but not as regulatory committees - only as advisory bodies to the Commission.
However, the net effect would be little changed because both Parliament and Council have full veto rights of what is delegated to the Committees and full call back rights if they feel the Commission has exceeded its delegated powers. But there is the subtle issue that the Commission chairs Advisory Committees - not Council. This may yet pose problems of acceptability to Council.
Mrs. Schwimann also questioned whether there is an urgent need for change at present. Yes, supervisory fragmentation and the danger of big financial services firms having to report to regulators through multiple channels in different countries is there, but a start could be made by streamlining national supervisory structures as there are 35 different supervisory agencies within the EU 15 already.
There are questions of cost and effectiveness to be considered when debating the creation of a single EU regulator and it might be better to wait until the volume of cross border business has increased substantially and to see how the Lamfalussy Process works in practice before venturing to undertake radical reforms.
As Freddy van den Spiegel argued, if the Lamfalussy process functions well, it will effectively replicate to a considerable degree the functioning of a single EU supervisor. If it fails, then it will highlight the need for one. So the final result will be the same.
List of Participants
© Graham Bishop
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