NOTES ON THE EUROPEAN COMMISSION’S CONFERENCE
Palais Egmont, Brussels 22/23 rd June, 2004
By Stewart Fleming
Worries about the threat of costly new legislation, fears that the implementation of Financial Services Action Plan (FSAP) legislation could “renationalize domestic markets through the back door,” and a demand that the European Commission should be sensitive to the international competitive challenge to the EU’s financial institutions.
These were amongst the themes which emerged at a two day conference which the Commission organized in Brussels at the end of
June.
Opening the seminar Internal Market Commissioner Frits Bolkestein claimed that the legislative phase of the Action Plan, launched in May
1999, had been a success.
Thirty nine of forty two FSAP legislative proposals had been agreed.
The plan had set a clear time plan to eliminate remaining financial market fragmentation. It had combined ambitious with technically sound proposals and, not least, it had reformed the way the EU develops financial services legislation.
Although he conceded that there had been bitter clashes and unhappy compromises such as the Takeover Bids Directive, he claimed that there had been “buy-in” from member states and particularly the financial services industry.
Amongst the principles which he maintained had been established were the concept that EU financial rules shall not dictate market structures, and that EU level harmonization should occur only when absolutely necessary. He conceded however that the reports on integration by the four expert groups -which formed the background to the conference- painted a mixed picture of the FSAP’s progress so far.
The reports and the Financial Services Committee (FSC) report to
Finance Ministers had, he said, underlined the importance of consistent enforcement and enhanced supervisory co-operation and of industry demands for a legislative breathing space. “We agree” he said, “that where there is no demonstrable and duly motivated case for further action none should be proposed.”

Mr. John Tiner, Chief Executive of the Financial Services Authority, echoed the view that “the heavy lifting is still ahead.” Crucial will be the effectiveness with which national regulators work together through the three Level Three committees of the Lamfalussy Process to ensure consistent implementation of legislation across member states, he said. The immense burden which change will place on market participants should not be underestimated either when they are also trying to respond to the pressures from global competition and the need to provide shareholders with acceptable returns.
He also stressed his support for the Commission’s view that EU legislation must in future be subject to “much more rigorous costbenefit analysis.” But he welcomed the fact that the Commission is
“consulting openly amongst interested parties and experts and seeking to analyse the state of integration before proposing new measures.”
Several measures of the FSAP have not yet been transposed into national legislation across the EU Mr. Pierre Delsaux, Head of the
Securities Markets and Investment Services Unit of DG Internal Market pointed out.
Mr Bolkestein too stressed that the Commission’s priorities now in the field of financial integration, which the ECOFIN Council of June 2 nd had put at the heart of EU economic reform, should, in the post enlargement and post legislative phase, be to establish “what are the right mechanisms and structures to ensure consistent implementation and supervisory convergence.” How to ensure that competition policy and consumer protection policies work more effectively in the financial services field was also an important theme for the future.
Returning at the end of the conference to address the lessons that had been learned during the two days, Commissioner Bolkestein said he had heard no fundamental disagreement with the original vision of a single deep and liquid capital market. The debate has centred more on the methods to achieve this objective, the pace at which we move towards this objective, and the mix of legislative and non-legislative actions.
Second, proposals for financial legislation cannot be drafted in an ivory tower. They must be prepared in consultation with the firms required to comply with them, and by the authorities charged with implementing them. “We are now firmly wedded to a culture of consultation and open law-making in all segments of financial legislation,” he said.

“Third,” he said, “we must also make the new rules stick, implementation is crucial, and it would be foolish to underestimate the task ahead.” If we cannot ensure this, the legitimacy of further EU level action will be open to challenge. This is a shared responsibility for
EU institutions and national authorities together. Framework Directives on their own cannot deliver the necessary degree of legal certainty and supervisory convergence. The Lamfalussy process is a landmark development in this respect. We cannot deliver 21 st century financial regulation with 20 th century supervisory arrangements.
Fourth, we also need to ensure that the overall process is organized.
We have heard the call for “less but better regulation” and for a
“legislative breathing space,” he said.
On this point, Ireland’s Finance Minister Mr. Charlie McCreevy could not have been clearer. “Greater attention must be paid to the sequencing of measures as well as their overall effect,” he said.
Mr. Gyorgy Suranyi, Head of Central and Eastern Europe region for
BancaIntesa, also called for time to consolidate and stressed concerns that the EU could suffer competitively against the US and other global players because the Continental legal system tends to be less flexible than elsewhere – a particular worry in relation to the implementation of the Basle II capital adequacy regime. Flexibility of implementation is needed
At the opening of the conference Mr. McCreevy, had stressed that
“new legislative measures should be a last resort and proposed only where they could pass a strict cost-benefit test and where nonlegislative approaches such as the Commission’s competition powers or private sector codes of conduct were judged to be unable to remove the barriers to integration or the market failures in question.
But he added, “regulators have to play “catch-up” in the fast moving financial services industry all the time. So a delicate balance has to be struck between on the one hand restricting excessively the innovation that is essential to the sector and whose absence could undermine its competitiveness and on the other addressing the threat from the increasing vulnerability of financial systems to cross border financial contagion. “Attention must be paid to the priority tasks of crisis prevention, containment and management,” he said.
Dr. Christa Randzio-Plath, Chair of the Economic and Monetary Affairs
Committee of the European Parliament, maintained it was simply too early to decide whether or not the legislative measures which had

been accepted “ have really made a difference in terms of integrating and boosting EU financial markets,” adding that until this is clear “ there is no point launching follow up measures.”
Mr. Antonio Borges, Vice Chairman of Goldman Sachs, maintained that there is “ no doubt that EU financial markets are now far more integrated”, but he said it is too early to say to what extent the FSAP, rather than other factors such as technology, are responsible for this.
Ms. Randzio-Plath was not alone either in stressing the difficulty of actually measuring the costs and benefits of legislation on financial integration. She called for “a thorough background study” of the differences and similarities of EU financial markets – something she said should have been done before the FSAP was launched. She argued too that political discussions on a strategy as comprehensive as the FSAP should, next time, precede technical discussions.
And she expressed concern that “different parts of the Commission are bringing forward initiatives which are taking as their basis differing principles and objectives. “Commissioners must co-ordinate their work rather than set to work on individual and separate issues” she said.
She also came out forcefully against the idea of creating “a centralized
European (financial services) supervisor,” saying that this would not be appropriate, not least because different market sectors should be subject to different approaches. This view drew widespread support at the meeting in spite of calls from Mr. Freddy van den Spiegel, Chief
Economist of Fortis for the adoption of a “lead supervisor” approach focusing on issues of solvency and liquidity. This is the idea backed by the European Financial Services Round Table of large financial services firms which is chaired by Mr. Pehr Gyllenhammar.
Mr. Jose Maria Roldan, Chairman of the Committee of European
Banking Supervisors, indicated however that he was not a supporter of the lead supervisor idea. He said that regulators had got the message about supervisory competition, but there are no short cuts in implementation. Supervision based on consolidated accounts is already here but we should not move to a new concept of the lead supervisor.
Time would be needed to develop successfully the convergence of
Levels one, two and three of the Lamfalussy process. But a debate now about whether or not to address the issue of creating a pan-
European “single” bank supervisor would delay progress by five or more years he argued.

Other participants pointed too at the problem of who would pay for a bank failure if responsibility for supervision were moved from a national to a European level. How would Europe’s widely differing deposit guarantee schemes fit even with the narrowed down “lead supervisor” concept where one national supervisor would take responsibility?
Mr Gyllenhammar, Chairman of Aviva, himself maintained that the legislative progress of the FSAP had only been achieved at the cost of
“heavy compromises,” he said he was sceptical about the chances for consistent implementation. The “Lead Supervisor” concept for large cross border groups, he said, avoided the need to create a single EU wide supervisor for financial institutions. He worried that without this concept in place, national supervisors would adopt policies aimed at protecting their domestic financial services industries, especially in the retail consumer sector. “Consumer regulation is a protectionist snake pit,” he said.
Mr. Andre Villeneuve, Chairman of Euronext-Liffe, also questioned the degree of financial market integration in the EU. The “repo” market he said is fragmented legally, IPO’s tend to be a national closed shop, and the heavily bank orientated EU wholesale lending business still lacks a corporate debt market with the depth and liquidity of the US.
It is, he maintained, the big US investment banks with global reach which are most successfully exploiting the EU markets’ fragmentation.
Ironically, there are also some departments in EU based banks which benefit from fragmentation and therefore are half-hearted in their embrace of integration policies even by their own institutions. Political obstacles to integration also remain, he argued. And he wondered how many EU players will survive if the EU remains fragmented. Structural problems remain, he added. “Venture capitalists can check in to new companies but cannot check out,” he said.
Focusing on the banking sector, Mr. Patrick Pearson, Head of the
Banking Unit of DG Internal Market said that the FSAP had delivered the process for financial integration but not yet the product. The focus now must be on withdrawing or modifying legislation which is not working, on implementation through the Committee of European
Banking Supervisors (CEBS). The use of a Directive should only come as a last resort to correct problems. Stakeholders must be consulted.
“Legislating without consulting is like winking at the girl in the dark, you know what you are doing but nobody else does,” he said.

A fast track mechanism to remedy bad legislation is also needed added
Mr. Delsaux of DG Internal Market, and it is important to make sure there is adequate time for consultation in future.He said that the reports which had been prepared into the current state of the FSAP and presented to the conference are “clear about what not to do, but less clear on what to do next.” Mr. Delsaux identified two priorities, clearing and settlement and the Risk Based Capital directive based around the Basel II discussions.
Ms. Angela Knight, Chief Executive of the Association of Private Client
Investment Managers, stressed the need for cost/benefit analyses for legislation saying that the UK Treasury had identified costs of £40-50 million for the impact of the Market Abuse Directive, but had not come up with a figure for benefits.
She also maintained that there is greater need still for communication and transparency between the Commission, the regulators and the market participants. As far as clearing and settlement is concerned, she said, this is where heavy costs are but the Commission should avoid putting forward a Directive. We need a legislative pause, she said.
Mr. Olivier Lefebvre, Managing Board Member at Euronext, echoed her call for a quick, anonymous appeal process against the decision of a regulator. Commission infringement processes against individual states are far too slow for these markets.
Mr. Fabrice Demarigny, Secretary General of the Committee of
European Securities Regulators (CESR) took up the theme of regulatory co-operation, saying that already supervisors know each other better and that Levels 1 and 2 of the Lamfalussy Process are working well.The spotlight is moving now, he said, to the need for convergence of regulatory and supervisory methods. But he added
“you cannot get an effective network of supervision unless all participants have equal powers,” including powers to make rules, investigate and sanction.
Fresh thinking on supervision may be needed too with different national supervisors taking on different responsibilities as a specialization to avoid duplicating and overlapping into all areas of each others work. CESR will present in the autumn an analysis of the regulatory framework, he added.

Sir Nigel Wicks, Deputy Chairman of Euroclear, given the task of highlighting some of the main themes of the conference, said that it was clear that partly as a result of the FSAP, the integration of EU financial markets had come a long way, but Europe still has essentially national markets overlaid with some cross border operations.
Integration of markets had gone much further in securities than in insurance for example.
Cross border distribution of retail products was particularly disappointing however. “Should this mean that the focus should continue to be on wholesale markets?” he asked. “No,” was his answer. Only if the retail consumer is involved will ordinary citizens realize that they are involved and benefiting from the integration process.
On the future he said that although there was a strong feeling at the conference against further legislation by the Commission, some new legislation would be needed, on the modernization of the UCITS
Directive, for example.
On the issue of closer regulatory dialogue and co-operation, he pointed out that a problem is that no national supervisor has an European vocation written into its constitutional mandate and suggested that the
Lamfalussy process has to be seen as a transition structure, the question is a transition to what? He said that he saw the evolution of greater cross-border co-operation and co-ordination amongst supervisors and regulators, and the need to make it efficient, as a new challenge.
Sir Nigel welcomed the moves by the Commission, led by
Commissioner Bolkestein and Dr. Alexander Schaub, Director General
DG Internal Market, to deepen the trans-Atlantic dialogue on financial market issues, but he doubted whether suggestions that it should be formalized would actually lead to greater effectiveness.
Dr. Schaub himself said that in the next stage of the evolution of the financial services markets the commission itself needed to exploit more effectively its powers in the fields of consumer protection, competition and intellectual property to promote financial market integration.
But he maintained it would be a mistake to try and reorganize the
Commission directorates general to try and achieve this. “You would merely waste two years quarrelling about the reorganization. What is

needed is coherence between several DG’s and the new President of the Commission is going to be judged in part by whether he will be able to deliver more political coherence between different
Commissioners,” he said.
Graham Bishop pointed out that although consultation is needed to try and avoid conflicts, in the end supervisors are dealing with competitors with differing interests so policy makers would have to make decisions which would not satisfy all sides.
In his concluding remarks Commissioner Bolkestein said that the goal said that the goal should be a market in which commercial freedom, choice, competition and the search for excellence are the drivers of growth.
There should, he said, be no place for national “beggar-thy-neighbour” policies to build strong local champions. Cross-border systemic risk and investor detriment should be subject to state-of-the art prudential rules.
The latter should be enforced by a network of national supervisory authorities working closely together. Differences in tax rates and structures will remain a reality for the next phase – but discriminatory and unjustified tax obstacles must disappear.
“Behind this cosy consensus, however, we are faced with fundamental choices where more thinking is needed,” he said. The centre of gravity is shifting away from purely-national based solutions towards
European and global answers to increasingly common problems.
This conference has, he said, highlighted two broad areas to which we will have to give further careful consideration.“The first is that there is no Single Market yet for retail financial services. The issue is for which retail financial services is EU level legislative intervention needed to support cross-border delivery? ”he said. A second area which has been highlighted by the expert groups and conference discussions is the demand for a better and more cost-effective organisation of prudential supervision.
A personal reflection from Graham Bishop:
This event attracted 2-300 of the top officials and executives from the
EU’s financial services industries. After one and a half days, the

conference hall was still crowded to hear Commissioner Bolkestein sum up the feeling of the meeting. There had been no voices raised against the idea of a single financial market – or any arguments advanced that it would not be beneficial to society.
Instead, there was a palpable mood of satisfaction that a worthwhile – but difficult - task was well underway and there was a broad consensus that it should be seen through to the next stage. Difficulties on the road ahead are inevitable and some might suffer commercially from the new competition but there seemed to be an emotional - almost tangible - buy-in to take the next steps along that road.