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Brussels, 28 October 1998

Financial services: Commission proposes Framework for Action

A series of measures to ensure the European Unions's financial services sector realises its full potential, notably with the introduction of the euro, has been outlined in a Communication just adopted by the European Commission. "Financial Services: Building a Framework for Action" concentrates on ensuring deep and liquid European capital markets, which serve both issuers and investors better and the removal of remaining barriers to cross-border provision of retail financial services in order to ensure consumer choice while maintaining consumer confidence and a high level of consumer protection. The Commission concludes that EU financial services legislation needs to be enforced effectively but does not require radical surgery. However, new more flexible methods are required to adapt the rules to evolving market conditions and additional legislation is required in a few targeted areas including pension funds and consumer redress. The Framework for Action was requested by the June 1998 Cardiff European Council and will be presented to the Council of Finance Ministers, the European Parliament and the Vienna European Council. The Communication takes account of extensive consultations with users, providers and supervisors of financial services.

"This Communication recognises the crucial role of financial services in the EU's economy", commented Financial Services Commissioner Mario Monti. "The EU's financial services sector already accounts for some 6% of the EU's GDP, and offers essential financial products to both industry, notably investment capital, and individual consumers, such as mortgages, pensions, insurance. This Communication aims to complement the introduction of the euro by creating the right conditions for the sector to realise its full potential. Financial services already account for 2.45% of EU employment and there is considerable potential for job creation in the sector. An efficient financial services sector also boosts employment and competitiveness in the economy as a whole by assisting optimum allocation of investment capital."

The Commission concludes that the basic EU framework of prudential rules is generally satisfactory but that legislative techniques need to be more streamlined, flexible and faster. This is necessary to allow supervisory rules to be rapidly adapted to evolving market conditions. The Communication therefore calls upon the EU's Council of Ministers and the European Parliament to explore new pragmatic approaches to amending prudential rules.

The Communication also emphasises the crucial importance of enforcement of existing rules, through better implementation by Member States, stricter policing by the Commission and by clearer and more uniform interpretation of EU legislation. Differences in interpretation could be reduced by cooperation between Member States supervisory authorities to promote best supervisory practice, for example in the framework of bodies such as the Federation of European Stock Exchange Commissioners (FESCO), and by interpretative Communications from the Commission.

Wholesale markets

A coherent programme of action to smooth out remaining legislative, administrative and fiscal barriers to cross-border flotations and investment-related activities is necessary to complement the market-driven modernisation of EU wholesale markets prompted by the single currency. The Commission intends to:

  • - propose improvements to the public-offer and listing prospectus Directives to remove inconsistent national requirements and allow mutual recognition
  • - examine whether legal initiatives could assist specialised venture capital funds to mobilise capital on a pan-European basis for financing small-business start-ups
  • - propose a Directive for the dismantling of investment restrictions on supplementary pension funds (see IP/98/447)
  • - review whether the company reporting options in the Accounting Directives are compatible with the need for further harmonisation of financial reporting
  • - work towards maintaining consistency between EU financial reporting framework and international accounting standards developed by the International Accounting Standards Committee (IASC)
  • - determine the most expedient (legislative or non-legislative) means of improving the Investment Services Directive (ISD) notably as regards problems arising from national conduct of business rules.

    The Council and the European Parliament are urged to make progress in the adoption of proposals on take-over bid procedures (see IP/97/1022), the European Company Statute (ECS) and collective investment undertakings (UCITS see IP/98/673).

    Retail financial markets

    Despite great progress in the completion of a single financial market, the cross-border sale of traditional financial products to individual consumers remains the exception. Moreover, there are still very wide price disparities between Member States (e.g. fixed commissions for private equity transaction fees are 17 times more expensive in the dearest Member State compared with the cheapest). There is a need to develop pragmatic ways of reconciling the aim of promoting full financial market integration with that of ensuring high levels of consumer protection and consumer confidence. The Commission will in particular:

  • - promote a clear and common understanding of the distinction between professional and non-professional users of financial services. Efforts will be made to ensure that additional host country requirements may only be applied to services offered to private individuals (as opposed to professionals)
  • - identify and catalogue differences between Member States' 'general good' rules so as to improve transparency and allow verification that host country rules are proportionate to their stated objective
  • - make proposals to introduce an adequate level of consumer redress and complaints handling for customers of financial services
  • - follow-up the actions announced in its Communication on Enhancing Consumer Confidence in Financial Services (see IP/97/566)
  • - explore whether new proposals are necessary to ensure that insurance intermediaries comply with stringent safeguards.

    The Council and the European Parliament should adopt as soon as possible the proposals on electronic money (see IP/98/727) and distance selling of financial services (see IP/98/891) and are invited to co-operate with the Commission to the fullest extent in order to give effect to the suggested evolutionary approach.

    Supervisory cooperation

    The Commission considers that structured cooperation between national supervisory bodies rather than the creation of new EU level arrangements can be sufficient to ensure financial stability. However, this co-operation is currently organised on an ad hoc basis and will need to be strengthened. In the area of securities markets supervision in particular, present arrangements are unable to keep pace with the sudden acceleration in market integration. The Commission will therefore:

  • - contribute to the elaboration of a "supervisors charter", setting down relative responsibilities and mechanisms for co-ordination at EU level between different bodies having a supervisory function
  • - re-examine, with the Member States and in parallel with the Basle Committee on Banking Supervision, the EU bank capital rules (solvency ratio and own funds) to bring them up-to-date

    - consider the prudential issues that financial conglomerates may pose.

    For their part, the Council and the European Parliament€ should adopt the proposals for winding-up and liquidation Directives in banking and insurance.


    The advantages of open and competitive financial markets can be offset by harmful tax competition on financial activity. The taxation package agreed by EU Finance Ministers on 1 December 1997 demonstrates a new-found willingness to consider EU-level solutions to address the most pressing tax distortions to the single market namely, tax distortions to the allocation of savings and harmful tax competition between financial centres.

    This new political realism must be transformed into concrete policy action in those areas where the effects of harmful tax competition are particularly disruptive. Work must also be taken forward in respect of key financial products, such as life insurance and pension funds, where tax treatment prevents cross-border marketing. In particular, the Commission will make proposals to tackle tax obstacles to cross-border membership of pension funds.

    The creation of a fully effective single financial market in Europe also requires an integrated infrastructure. The Settlement Finality Directive tackles the issue of systemic risk, but a range of other legal and administrative issues must also be takcled. Appropriate mechanisms to combat fraud (see IP/98/590) and money-laundering (see IP/98/654) are also essential.

    Strict application of the Treaty rules on competition and state aid is essential to ensure a level playing field for financial operators. An increased effort will be needed, as competition in the financial services sector is likely to become fiercer after the introduction of the euro.

    The EU is not isolated from turmoil which is currently sweeping through international financial markets. The Commission and Member States must actively contribute to establishing an international base-line of prudential requirements and assist in the widest possible dissemination of best supervisory practice. The EU can help to give effect to these objectives in the candidate countries of Central and Eastern Europe.

    Policy Group

    The Commission invites the Council and the Parliament to participate actively in the debate. To maintain political momentum, the Commission proposes that personal representatives of Finance Ministers should meet in a Financial Services Policy Group, chaired by the Commission. The Group would suggest priorities amongst the measures outlined in the Communication. These should, in the view of the Commission, include the adoption of the draft Directives on winding-up and liquidation. The Group would also advise the Commission on how best to achieve other operational conditions needed to ensure the functioning of the single financial market. In particular, the Group would serve as a focal point for collective monitoring of implementation and enforcement of financial service legislation. The Commission would report regularly to the Council of Finance Ministers on progress in respect of the work programme and other activities monitored by the Group.

    The Commission will also establish a High Level consultation mechanism to ensure that both market practitioners and users of financial services are able to make a full contribution to the formulation of policy in this area.

    The full text of the Communication is available from the Europa server on the World Wide Web:

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