Select Committee on European Union Forty-Fifth Report

CHAPTER 1: background

1. A single market in financial services has been an important part of the long-standing European Union objective of an Internal Market which ensures the free movement of people, goods, services and capital. At a time when the Commission is celebrating ten years of the European internal market[1], this report considers issues relating to a single market in financial services.

2. A single market in financial services means that a financial services provider authorised to provide financial services in one Member State is able to offer the same services throughout the EU competing on an equal basis within a regulatory framework that is consistent across the Union. On the other side, the consumer would have access to a wider range of more competitively priced products and would be able to shop with confidence and safety in the market place.

origin of the fsap

3. The Commission published a Financial Services Action Plan (FSAP) in May 1999[2]. This Action Plan outlined three specific strategic objectives to improve the Single Market for financial services:

  • a genuine single market for wholesale financial services including measures to enable corporate issuers to raise equity or debt on an EU-wide basis; to develop a common legal framework for integrated securities and derivatives markets; to work towards a single set of financial statements for listed companies; to provide legal security for cross-border securities trades; and to create a secure and transparent environment for cross-border restructuring.
  • open and secure retail markets including measures to promote enhanced information, transparency and security for cross-border provision of retail financial services; to achieve speedy resolution of consumer disputes; and to develop balanced application of local consumer protection rules; and
  • clear, efficient prudential rules and supervision of financial services.

Political Endorsement

4. The Lisbon European Council in March 2000 gave new impetus to the Financial Services Action Plan as a key component of broader EU economic reform and as a means of making the EU the "most competitive and dynamic knowledge-based economy in the world"[3]. The Council reaffirmed the tight timetable for adopting FSAP measures by 2005 and set the deadline for the adoption of the Risk Capital Action Plan for 2003.

5. Successive European Councils have reiterated commitment to the FSAP and its deadlines. In its conclusion of the Brussels meeting on 16 and 17 October 2003, the European Council stated: "fully integrated and stable financial markets will play a crucial role in channelling savings into productive investment and enhancing economic growth". The European Council also "reiterates its call for rapid progress on all the outstanding components of the Financial Services Action Plan with a view to finalisation in accordance with the agreed timetable"[4].

The FSAP is only part of the Process

6. The FSAP is the main driver towards creating an internal market in financial services but it is only part of the process. For a market to function effectively, there also needs to be an unimpeded system for cross-border clearance and settlement. As the Bank of England points out (paragraph 18), legislation alone may be an ineffective instrument to secure changes in customer practice and FSAP measures have not always lived up to expectations whether in terms of their formulation or their implementation.

Progress to date

7. As we concluded this inquiry, thirty-five of the original forty-two measures outlined in the FSAP had been finalised[5]. The vast majority of the FSAP has therefore met the original deadline in the sense that they have been agreed in principle though most have yet to be implemented. It is uncertain whether all the FSAP measures can meet the 2005 deadline for implementation. There are three outstanding measures under negotiation at present: the Takeover Directive, the Investment Services Directive, and the Transparency Directive. The Proposals on the 10th and 14th Company Law Directives which cover cross-border mergers and allow companies to transfer their corporate seat to another Member State and the Directive on Risk-based Capital have yet to be brought forward by the Commission.


8. The draft Directives issued by the Commission are subject to agreement between the Council of Ministers and the European Parliament under the co-decision procedure. Once agreement has been reached on a Directive, a date is stipulated for the measure to come into force. Member States are then given a period (usually 18 months) to implement the Directive by transposing the provisions into national law. To meet the stipulated deadline of 31 December 2005 and allow eighteen months for transposing the EU Directive into national law, the final date for adoption of measures at EU level is April 2004. This coincides with the end of the current European Parliament and elections for the new, post-enlargement Parliament. Such time pressure for the adoption and implementation of FSAP measures has led to claims that the "quality" of Directives is suffering. This report considers these claims in detail.

The Lamfalussy Process

9. The tight timeframe for adoption and implementation of FSAP measures agreed at the Lisbon Council in 2000 required a review of decision-making procedures for adopting EU legislation. In particular, the lengthy timetable for enacting previous legislation demonstrated that it would be difficult to review this round of primary legislation sufficiently quickly as and when circumstances change - as they inevitably will in such a fast-moving industry.

10. So a Committee of Wise Men was appointed, chaired by Baron Alexandre Lamfalussy, to address this problem. The Committee recommended a tiered decision-making process for EU legislation affecting securities markets[6] which was endorsed by the Stockholm European Council in March 2001. In December 2002, ECOFIN agreed to extend the Lamfalussy Process to apply not only to legislation on securities, but also to legislation on banking, insurance and financial conglomerates. The European Parliament has not yet agreed to this proposal because it wishes to ensure that it has full co-decision powers with the Council under the proposed Constitutional Treaty.

  1. The Lamfalussy Process distinguishes several levels of decision-making. The first level of legislation adopted by the Council and the European Parliament following a Commission proposal under the co-decision procedure should only relate to framework principles and the definition of Commission implementing powers. Technical details for adopting Level 1 framework principles should be agreed at a second level by the Commission and Member State experts under the so-called Comitology procedure. Level 3 and Level 4 of the Lamfalussy procedure cover supervision of Member State implementation of the Directives (see Box 1).

Box 1
Lamfalussy Process

Level 1

Community legislation adopted by the Council and the European Parliament, upon a proposal by the European Commission, under the co-decision procedure: should be based only on framework principles and definition of implementing powers for the Commission

Level 2

Community legislation adopted by the Commission to lay down the technical details for the principles agreed at Level 1 under the so-called Comitology Procedure. Particular features:

  • Technical advice prepared by the Committee of European Securities Regulators (CESR); following mandates issued by the Commission and based on consultation with market users;
  • Favourable vote of Member States (qualified majority) as represented in the European Securities Committee (ESC);
  • European Parliament may adopt resolutions a) within three months on the draft implementing measure; b) within one month after the vote of the ESC if level 2 measures go beyond implementing powers

Level 3

Committee of European Securities Regulators (CESR) in which the national supervisory authorities are represented, to facilitate consistent day-to-day implementation of Community law. CESR may issue guidelines and common, but non-binding, standards.

Level 4

Commission checks compliance of Member State laws with the EU legislation. If necessary, it takes legal action against Member States before the Court of Justice.

Source: Inter-Institutional Monitoring Committee, First Interim Report, May 2003.

Structure of this Report

12. In Chapter 2, we describe the major concerns which we seek to address in this Report. In Chapters 3, we examine specific themes, in Chapter 4 the outstanding Directives, and in Chapter 5 implementation and enforcement. In Chapter 6 we list our conclusions and in Chapter 7, our recomnmendations.


13. We have received a heartening response to our Call for Evidence[7]. We are grateful to the many individuals and organisations who gave written and oral evidence[8]. In particular, we wish to thank the United Kingdom Permanent Representative to the European Union and his staff for helping us to meet witnesses in Brussels, and to H.M Ambassador and his staff at the British Embassy, Paris, for enabling us to meet a range of French witnesses. In Paris, we were particularly grateful to Senator Philippe Marini, the General Rapporteur of the Finance Committee in the French Senate, for making himself available to the Committee. Finally, we express our gratitude to our Specialist Advisers, Mr Graham Bishop, an independent consultant, and Mr Tom Troubridge, a partner in PricewaterhouseCoopers.

1   The Internal Market - Ten Years Without Frontiers, Commission paper. Back

2   Financial Services: Implementing the Framework for Financial Markets: Action Plan. Back

3   Presidency Conclusions, Lisbon European Council, 23 and 24 March 2000. Back

4   Presidency Conclusions, Brussels European Council, 16 and 17 October 2003. Back

5   See Appendix 4 for a list of the expected timeline of key outstanding FSAP measures. The EU Financial Services Action Plan: A Guide. Paper prepared by HM Treasury, the Financial Services Authority and the Bank of England, 31 July 2003.  Back

6   The Regulation of European Securities Markets, February 2001. Back

7   See Appendix 2. Back

8   See Appendix 3. Back

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