Appendix 6 Cost/benefit analysis of
the European Commission's Financial Services Action Plan (FSAP)|
One of the major criticisms of the Financial Services
Action has been that insufficient cost-benefit analysis has been
carried out on the directives. For example, HM Treasury, the Financial
Services Authority and the Bank of England wrote in ""The
EU Financial Services Action Plan: A Guide", July 2003:
"Many market experts consider that the Commission
should analyse in more detail the cost-effectiveness of proposed
new FSAP measures, and the interaction between them. Their impact
needs to be considered, not just on market behaviour and the efficiency
of financial markets within the EU, but also on the EU 's global
competitiveness, and in particular in relation to the US."
- The Commission's "impact assessments"
for each measure are inadequately detailed, especially in financial
- However, some detailed estimates have been made
of the overall benefits of European financial integration. These
add up to an annual benefit to the EU economy after 10 years of
at least 189bn.
- To outweigh this public benefit, the annual private
cost of each of the 40 measures would have to be nearly 5bn.
The consultancy OC&C estimates the cost to the
EU of the currently proposed Investment Services Directive
to be up to 450m per annum.
The Commission analyses make no attempt to estimate
the costs involved in securing the assumed benefits.
Graham Bishop, Specialist Advisor
The Lamfalussy report concluded the following benefits
to EU financial integration:
On the issue of the size of these benefits, the report
concluded, "It is not simple to quantify the net sum of these
benefits, but potentially they are large". However, recently
two reports have attempted such quantification.
London Economics produced a "Quantification
of the Macro-Economic Impact of Integration of EU Financial Markets"
for the European Commission. Specifically, they investigated "the
extent to which the merging of the presently still regionally-fragmented
liquidity into a single liquidity pool would reduce the cost of
equity and bond finance for businesses in Europe, help stimulate
investment and expand productive capacity." So their focus
was exclusively on integration of wholesale markets. Their conclusion
"The level of EU-wide real GDP is raised by
1.1%, or 130 billion in 2002 prices, in the long-run. The
press release states that "the long-run" is "defined
as over a decade or so".
ZEW/IEP produced a report for the European Financial
Services Round Table entitled "The Benefits of a Working
European Retail Market for Financial Services". Their focus
was exclusively on the retail side. Their conclusion was "World-wide
cross-country samples show that differences in financial integration
between countries amounting to one standard deviation of the relevant
integration indicators can explain annual growth differences of
0.5 - 0.7 per cent. Although these results do not cover all present
EU member states they indicate roughly the potential for growth
through financial integration: in terms of the EU GDP of the year
2000 the lower per cent figure of 0.5 would mean an additional
growth effect of 43 billion euro annually."
The benefits set out in the two reports are additive
because the first report looks exclusively at the integration
of bond and equity markets, while the second looks at retail markets.
The wholesale benefit is 130 billon after 10 years. The
retail benefit (if we also express in 2002 prices) is 59-83
billion annually - with no timeframe given. But if we assume the
same timetable, after 10 years the annual benefit is at least
Commission "impact assessments"
For each new proposal for a directive, the Commission
is required to produce an assessment of the "impact on business
with special reference to small and medium-sized enterprises".
This involves providing answers to the following template of questions:
Sample of Commission Impact Assessments
Though the impact assessments conducted by the Commission
are fairly short, they are too long to all be included in their
entirety. Possibly the most important question in the Commission's
Impact Assessment template is "4c", "What economic
effects is the proposal likely to have on the competitiveness
of business?" The following table sets out the answer for
the 15 directives for which this analysis has been done. A spreadsheet
is available from those who wish to read all the impact assessments.
Impact Assessments - A Private Sector Example
Ian McKenzie and Andy Sparks of OC&C Strategy
Consultants published a study on "The Potential Impact of
ISD2 Article 25" in August 2003. Its objectives were:
1. To identify and, to the extent possible, quantify
the impact of the Article 25:
(i) As originally drafted (Note that this is the
major thrust of this paper);
(ii) As per the compromise amendments that are emerging
(as at mid-July)
2. To investigate the extent to which "off-exchange"
trading is a likely to be detrimental to the effectiveness and
efficiency of equity markets. We have addressed this by:
(i) Estimating the actual extent to which 'true'
off-exchange trading currently occurs
(ii) Investigating the extent to which such principal
trading can provide economic benefit to investors (as opposed
to passing orders through to a central market on an agency basis)
Their main conclusions are:
In terms of quantifying the cost of the compromise
proposals, OC&C conclude:
"While the narrowing of scope to the most active/systematic
providers of principal execution appears a welcome step, the shift
to normal/standard market size would move the impact of Article
25 directly onto the (core) institutional market. Without the
ability to choose counterparties or the ability to price improve,
those Firms who are caught by this provision will probably find
it unattractive to continue to provide principal liquidity, This
loss of liquidity would cause deterioration of prices for institutional
clients (which might be worth 375- 450m (around £300m)
per annum) and loss of price immediacy."
This last figure was cited by the Chief Secretary
to the UK Treasury, Paul Boateng, in his argument against the
political agreement reached by the European Council on the ISD
on October 7th 2003.