Select Committee on European Union Forty-Fifth Report

CHAPTER 6: assessment and conclusions

An internal market for financial services

122. All the witnesses spoke strongly in favour of achieving a single, internal market in financial services. The benefits of such a market were evident. A truly liberal internal market in financial services would reduce the cost of capital and borrowing and increase the range of choice for savers and investors. It would broaden the market base, deepen liquidity and provide wider choice and adequate protection for the investor.

Financial Services Markets are Different

123. As Dr Schaub, Director-General for the Internal Market in the Commission rightly pointed out, financial services are different: there is an inherent risk of systemic collapse if the markets are not regulated with care.

The Global Context

124. It is essential for those involved in the process of regulating the financial markets to keep the global context firmly in view at all times. The European Union is not an island and business can and will go elsewhere[73]. The global context of every financial market reform should be a key criterion against which to judge the necessity for, and the impact of, proposed legislation and its implementation.


125. In this context, it is vitally important for the development of globally competitive financial markets in the European Union that a dialogue be maintained with the world's largest capital markets - the United States of America and the Asia-Pacific markets which embrace Japan, Singapore and Hong Kong. We look forward to IFRS, planned for introduction in the EU in 2005 being accepted by markets globally and for other equivalent standards such as US GAAP being accepted in EU capital markets.

The Commission's Financial Services Action Plan (FSAP)

126. The FSAP can play a major part in achieving a single financial market within the European Union and we support the thrust of the Action Plan. However, its scope is large and timescale challenging. It would be foolish to ignore some of the potential problems, notably the balance to be achieved between speed of implementing legislation and the quality of that legislation.

127. The retrogressive vote at the ECOFIN Council meeting on 7 October 2003 on the Investment Services Directive was "justified" in part by the need to meet the administrative deadline set for the jurist/linguists within the political deadline for the Directive to be adopted. Not only was this vote a breach of the convention that agreement in ECOFIN should be sought by consensus but the vote effectively undid progress made in the European Parliament to keep the balance between a light, regulatory touch - particularly for the large, international investors - and retail investor protection measures. We regard this ECOFIN decision as possibly the most important signal to date that mishandling the FSAP could lead to a movement of financial services away from the EU and to a reduction in the availability of low-cost capital for EU industry. We trust that the decision to force a vote will not be repeated when other decisions on the single market in financial services are taken by ECOFIN.

Volume of Legislation

128. The volume of legislation, some of it yet to be agreed in principle, most of it yet to be agreed in detail, imposes substantial demands on businesses, on regulators, and on the Commission. In our view, the European Council and ECOFIN, the Commission and the Committee of European Securities Regulators (CESR) all need to recognise this and to consider a clear strategy to assess how realistic the 2005 implementation date is and to have a clear sense of priorities.

The Role of London

129. The reason why London is currently the dominant wholesale capital market in Europe is in part because of the way in which the regulations have been drawn up and administered. London has welcomed foreign participants and has regulated with a light touch sensitive to the vagaries of the markets. However, there appears to be a widespread view in other Member States that the London-based markets are somehow a United Kingdom asset rather than an EU asset where profits are remitted to a Member State's companies or institutions. The wholly UK element is a very small proportion of this market. For example, the London Investment Banking Association lists 40 institutions which comprise its membership but of these, only 2 could be described as British and the British Bankers' Association has 272 members of which only 71 are UK institutions. A globally-efficient, low-cost financial market in London benefits both the EU industry and EU investors.

Lamfalussy Process

130. Effective consultation is at the heart of developing successful implementation of regulation. We welcome the fact that through this process the financial services industry itself has been formally integrated into the formulation of legislation. This was certainly not the case before in a number of Member States or at the European Commission and the earlier measures that constitute the FSAP were often marked by a lack of professional input.

131. We have also been impressed by the desire to consult, co-operate and to succeed at the heart of the Committee of European Securities Regulators. Witnesses have told us that the extent of consultation by national regulators now far exceeds that previously experienced. However, a much larger volume of work lies ahead, increased by the enlargement of the European Union to 25 Member States. Maintaining market responsiveness while achieving a large degree of harmonisation will be an enormous challenge to the whole process.

Harmonisation and Flexibility

132. A number of witnesses, both in the United Kingdom and France, expressed the hope that detailed legislation at the Lamfalussy process Level 2 and 3, would allow flexibility at Member State level. However, it is clear to us that CESR, in which the FSA plays an important role, is looking for maximum harmonisation and will face a real problem in seeking uniformity across 25 Member States. Some flexibility will undoubtedly be required. On the other hand, it will be important to ensure that the call for flexibility is not an excuse for non or slow implementation.

The Ability to respond to Changes in the Markets

133. It is important that the desire to achieve uniformity and harmonisation across 25 Member States does not result in sclerosis of the financial arteries of Europe. In spite of good intentions, detailed legislation at Level 2 could become inflexible and difficult to change quickly and it is vital that detailed legislation does not stifle financial innovation. By way of example, increased formal legislation is already slowing reaction times at national level. The listing rules on the London Stock Exchange used to be changed yearly. Now, to meet increased consultation through the FSA, it takes 18 months. Clearly, increased demand for consultation within 25 Member States and between 25 Member States will add a further drag on the flexibility of the regulatory system to respond rapidly to changes in the market[74].

Parliamentary Scrutiny

134. The major innovation in the Lamfalussy process is the introduction of the "comitology" procedure at Level 2. While this can lead to the more rapid implementation of regulations agreed under the Level 1 Framework principles, it also threatens the important principle of parliamentary accountability. We support the "call-back" provision which will require consultation with the European Parliament at Level 2.

Measures other than those proposed in the FSAP: Clearing and Settlement Systems

135. The FSAP alone cannot deliver a true internal market in financial services although it goes a considerable way towards creating a regulatory framework for such a market. There are elements which lie outside the formal corpus of measures which constitute the FSAP. One important example is the matter of cross-border clearing and settlement. This has been described by witnesses as the "plumbing system" of a single market in financial services. An efficient and effective cross-border single financial market must have efficient and effective clearing and settlement systems. This is a fundamental building block that has to be in place. In this context, we strongly support the work being done by the Giovannini Committee and we urge that an early decision be reached at all political levels whether EU legislation will be needed or whether the market itself realistically, could bring about a pan-European effective and flexible clearing and settlement system.

International Accountancy Standards

136. We have already referred to the importance of international accountancy standards and mutual recognition with other accountancy standards such as the United States GAAP. Together with a clearing and settlement system, accounting standards constitute the basic tools for operating a true single market in financial services.


137. Many market players believe that there is a fundamental problem at the stage when regulation is implemented. How will the Commission obtain the detailed information and evidence required to take timely and effective enforcement action against a Member State before the European Court of Justice? [Q. 315]. Many believe that professionals and businesses will be reluctant to report their national regulator to the Commission for failing to enforce the FSAP. One witness suggested an informal method of resolving the difficulties - resort to an arbitrator or an ombudsman for professionals. This is a problem that needs to be addressed before 2005.

A Single European Regulator

138. Some observers have cast doubt on whether the Lamfalussy process will be able to cope with the enormous regulatory burden which is looming. We agree that there will be difficulties and we are not yet convinced of the commitment of all Member States to speed-up implementation. But in our view, the Lamfalussy process has to be given every opportunity to develop its role. We agree with the overwhelming majority of the witnesses that a single European Regulator is neither necessary nor desirable for as far ahead as we can realistically see.

73   It is interesting to compare this possibility with the reaction expressed by Mr Philippe de Buck, Secretary General of the Federation of European Employers Organisation (UNICE) in connection with the Commission's draft Directive on the European Chemical Industry - EU Reporter, Week 42, 13-17 October 2003. Back

74   See the Editorial in the Times Business Section, 7 November 2003, Page 39. Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2003