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Brussels, 7th May 2002

Commission welcomes Council agreements on Market Abuse and Financial Conglomerates Directives

The European Commission has welcomed political agreements at the May 7th Council of Economics and Finance Ministers on the proposed Directive on Financial Conglomerates (see IP/02/417 and IP/01/609) and on the substance of the proposed Directive on Market Abuse (see IP/02/417 and IP/01/758). A final agreement on the latter proposal is expected in June. These agreements are important steps towards meeting the request of the Barcelona European Council in March 2002 for the adoption of all the measures of the Financial Services Action Plan currently being discussed in Council and Parliament. The proposals were put forward by the Commission in April and May respectively 2001. Both Directives will return to the European Parliament for a second reading under the co-decision procedure. The financial conglomerates proposal aims at reinforcing the prudential soundness of financial groups with activities in both the banking/investment services and insurance sectors. The Market Abuse proposal seeks to protect markets and investors from both insider dealing (which consists of trades based on non-public information) and market manipulation (which covers misleading trades and information).

Internal Market Commissioner Frits Bolkestein said: "I congratulate the Spanish Presidency, the Council and the European Parliament on the rapid progress so far on both these crucial measures in the Financial Services Action Plan. I hope we will now be able move forward swiftly to final adoption. Once adopted, these Directives will help make our financial markets more secure, stable, transparent, integrated and efficient."

"The Financial Conglomerates Directive will ensure that there is adequate supervision of conglomerates operating across more than one financial sector", Mr Bolkestein added. "The Market Abuse proposal will establish common rules throughout Europe on what is allowable practice and what is not. It will not be welcomed by fraudsters, hucksters and cheats. But consumers, investors and depositors will be better protected and so will society in general."

Financial conglomerates

The Directive would introduce specific legislation for the prudential supervision of financial conglomerates and large groups that are important for the stability of the financial system. The main objectives of the Directive are:

  • to ensure that financial conglomerates are adequately capitalised. In particular the proposed rules would prevent the same capital being counted twice over and so used simultaneously as a buffer against risk in different entities in the same financial conglomerate ('multiple gearing'). The proposal would also prevent "downstreaming" by parent companies whereby they issue debt and then use the proceeds as equity for their regulated subsidiaries ("excessive leveraging")

  • to introduce methods for calculating a conglomerate's overall solvency position

  • to deal with the issues of intra-group transactions, exposure to risks and the suitability and professionalism of management at financial conglomerate level

  • to ensure adequate internal control mechanisms and appropriate risk management processes in a conglomerate.

The Directive would also require Member States to ensure that one single authority is designated responsible for the overview of each financial conglomerate and to ensure coordination between the different supervisors involved in the supervision of a financial conglomerate's component parts. The proposal thereby aims to enhance effective group supervision across financial sectors and borders.

Finally, the Directive would include the necessary minimum steps to remove unnecessary inconsistencies between the regulations for homogeneous financial groups and for financial conglomerates, in order to ensure a minimum of equivalence in the treatment of these groups.

Market abuse

The proposed Directive would help heighten investor protection and make European financial markets more secure and more attractive for investors. It would:

  • increase standards for market integrity

  • contribute to the harmonisation of the rules for market abuse throughout Europe

  • establish a strong commitment to transparency and equal treatment of market participants

  • require closer co-operation and a higher degree of exchange of information between national authorities, thus ensuring the same framework for enforcement throughout the EU and reducing potential inconsistencies, confusion and loopholes.

The proposal covers both insider dealing and market manipulation. This would ensure that the same framework would be applied for both categories of market abuse. It would be administratively simpler and reduce the number of different rules and standards across the European Union.

The scope of the Directive would cover all financial instruments admitted to trading on at least one regulated market in the European Union, including primary markets. The Directive would apply to all transactions concerning those instruments, whether those transactions are undertaken on regulated markets or elsewhere. This is to avoid unregulated markets, Alternative Trading Systems and others being used for abusive purposes concerning those financial instruments.

The Directive would require each Member State to designate a single administrative regulatory and supervisory authority with a common minimum set of responsibilities to tackle insider trading and market manipulation.

The press

Under the text agreed by the Council, the situation of journalists in connection with the dissemination of false or misleading information would be assessed by taking into account existing national legislation on the press and freedom of expression, unless the journalists involved in disseminating the information knew or ought to have known it was false and they derived advantage or profit from it. In other words, journalists who in good faith received and passed on inaccurate information would not be covered by the Directive.

The criteria and procedures to be applied in order to determine whether journalists knowingly distributed false information and profited from it would also be a matter for national jurisdiction and could involve national courts or other bodies with responsibility for overseeing the media.

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