European Commissioner for Internal Market and Services
Initiative Finanzstandort Deutschland
Frankfurt, 20 December 2004
I am delighted to have been invited to address you today. Your initiative, the IFD (Initiative Finanzstandort Deutschland), is a very important undertaking for the German financial marketplace, for the European financial market place – and, if I may add this too, for the work of the European Commission. It is very important for us to be able to learn from our stakeholders. Germany has one of the major European capital markets. Its voice is crucial as we strive for a wholly integrated European capital market.
Consultation, transparency and openness have been keys to the success of the Financial Services Action Plan and I am strongly committed to sticking to these fundamental principles. Therefore I am very glad to be able to be here today and tell you about my thoughts for the coming years. And learning about yours.
President Barroso has underlined the importance he attaches to meeting the objectives set out in the Lisbon strategy. If we cannot improve our economic growth performance – our social systems and priorities will come under increasing strain. We will not create and maintain the jobs we need. And our pensions crisis will deteriorate further. Higher, sustained economic growth needs modern, competitive and integrated European financial markets. Low cost of capital. Innovative funding for SMEs. Good returns for investors. Indeed, this is something that you have stated clearly in your own assessment of the need for further financial integration in Europe: Financial integration is a key driver for growth. It enhances competition, reduces the cost of financial intermediaries and increases the supply of financial products. This matters then for the whole economy.
A crucial element of this is proper regulation and responsible, ethical, behaviour by market participants. Regrettably, recently there have been too many scandals – damaging the global reputation of the financial-service industry. We have to restore this confidence..
Financial Services Action Plan
The legislative phase of the Financial Services Action plan is drawing to a close and much has been achieved. The FSAP was one of the real success stories of the last Commission: the legislative measures have been delivered on time; good cooperation between the European Institutions, the Member States, industry and consumer organisations; the establishment of the innovative Lamfalussy architecture to speed up and improve the quality of decision making.
What really counts now is the impact that these legislative measures have on the markets and whether we can realise the increases in efficiency, stability and security that they were designed to achieve. It is of course too early to draw any firm conclusions. It will take time for all of the measures to be fully implemented and to take effect. To implement them – evenly – across the whole European Union is a massive, painstaking job – working in 20 languages, with 25 Member States! But we can already see remarkable moves towards integration.
In the wholesale sector in particular integration is leading to bigger markets, it is creating economies of scale and it is bringing down trading costs, the cost of capital, spreads in the bond market and so forth.
Integration is particularly well advanced in the money market, but in the bond and stock markets too, good progress has been made. The landscape of these markets is being reshaped on a pan-European basis. We have seen a number of mergers and takeovers between European stock exchanges and the newspaper headlines of the past few days show that this process is continuing. Across all exchanges, the share of foreign participation is on the rise. More efficient trading platforms and post-trading infrastructures emerging. Collective investment funds are already traded cross-border on a large scale – and it could be much larger in the future.
There have been numerous drivers behind these developments including technological progress and the introduction of the Euro. But there is no doubt that the Action Plan has considerably accelerated the whole process. Competition policy as well. It is not for us to steer the markets in a certain direction, nor shape markets, but to remove obstacles for new activities and growth. The FSAP did that.
More than a year ago the Commission started an extensive consultation exercise on the way forward. It is extremely important for us to get the views of all the participants in this process: industry, consumers, the European Parliament and the Member States.
Although this exercise has not yet been completed, it is already clear to me that there will be considerably fewer new regulatory initiatives. Stakeholders now need time to digest what is already on their plates. New accounting rules (IAS) from 1 January 2005. The new securities trading rules (e.g. MIFID). The new capital adequacy rules (Basle II on the way). These, combined with other regulatory and corporate governance requirements – including for European companies with a U.S. listing – the Sarbanes-Oxley rules are imposing a heavy burden on business.
At the moment I see three main challenges facing us (1) implementation and enforcement of the existing legislation, (2) consolidation of the internal market for financial services and (3) enhanced global cooperation. Let me say a few words on each of these.
(1) Implementation and enforcement of the existing legislation
I am putting considerable emphasis on working with member states on the timely and coherent implementation of the measures that have already been passed. This is crucial. We must avoid a re-fragmentation of the internal market or dilution of what has already been achieved by different, erroneous, selective or partial interpretations of Community law in the Member States in the process of transposition. We must do our utmost to prevent this from happening. My staff will be in constant contact with the member states, we will work closely with them and the regulators to achieve convergence on implementation of technical provisions. We will work constructively to solve any problems encountered. An overall objective will be to ensure that implementation is synchronised and that the measures passed are effective in practice.
A key test for this will be the implementation of the Capital Adequacy Directive based on the Basel 2 accord. Despite the difficulties that have been reported in the press, we share industry’s hopes that the proposal will be adopted by the European Parliament by next summer.
The new framework puts greater emphasis on the cooperative responsibilities of the supervisors. We want the concept of a “consolidating supervisor” to work and cross-border groups not to be subject to multiplicative requirements.
But I am also grateful for the more proactive role of the financial services industry. We are dependent on your input to tell us where you believe things are not working. I am convinced that the IFD and its members can play a very important and helpful role in this. The sooner you alert us, the easier it is for us to avoid any damage to the integration project. I appeal to you and all of the financial industry to be more active than in the past to help the Commission. If everyone behaves like blushing virgins in the corner – the prince, the prize will go elsewhere!
I am confident that this co-operative relationship will lead to considerable achievements over the coming years. However if it does not – I will deploy the full legal battery the Commission has at its disposal to enforce what we believe are the correct and intended rules.
(2) Consolidation of the internal market for financial services
There are a number of “leftovers” from the FSAP and a few holes in the financial markets fabric that need to be stitched together. What immediately comes to mind is the area of clearing and settlement. It is widely accepted that cross-border clearing and settlement arrangements in the EU are complex and fragmented, resulting in much higher costs, risks and inefficiencies. Action is therefore required, both by private and public sector bodies, in order to achieve the efficient, integrated and safe securities clearing and settlement market that the EU needs. The Commission has set up its strategy and policy priorities in its Communication in April 2004. In 2005 we will go on to consult with market participants and draw up a detailed economic impact assessment in order to be able to take an informed decision.
Secondly, we need to apply to insurance what we have already done with the Capital Adequacy Directive in banking and establish a state-of-the-art and up-to-date prudential framework for European companies. This is a demanding task as we will be taking the global lead. But thereby it also gives the European industry a head-start and an excellent chance to further increase its global competitiveness. In collaboration with the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) we are working on a Framework Directive. Again, we are aiming at the convergence of quantitative and qualitative supervisory methods to achieve transparency and a level playing field.
Thirdly, we have known for some time that the current single market framework for investment funds has had its day. The other day I called it an old banger; clapped out, in short, kaputt! It is in need of considerable improvement in terms of flexibility. With the European pension timebomb ticking in the background, we need to release the single market freedoms for the fund industry, so it can provide more innovative, better tailored and lower cost products. In this way we can smooth the transition to higher capital funding of pension schemes which is a vital necessity for many European countries.
And we can give the asset management industry unique opportunities for growth, for job creation and for increasing their global competitiveness.
We will publish the Commission’s assessment of priorities in this area in the second half of 2005. Stakeholders will then have the opportunity to comment on our assessment and my proposed approach.
Finally, the focus of the FSAP has to a large extent been on the wholesale markets. There were good reasons for this, since they have the greatest potential for short term gains and are less fraught with the complex issues of differing legal systems and consumer protection concerns.
But we cannot leave the huge potential that lies in the retail business buried in the undergrowth, never to see the light of day. At the end of the day it is Europe’s 400 million consumers that rightfully expect to benefit from an integrating European financial market.
Over the next few years, I would like to work towards an integrated EU retail banking market where those consumers who wish to, can actively shop across borders for financial services. But we also want to enhance the opportunities for EU financial institutions to offer their products and services on a cross-border basis or locally through branches or intermediaries. So our views on retail financial services will be in the forthcoming “post-FSAP” Communication.
(3) Enhanced global cooperation
The third challenge I see for the coming years is to enhance global cooperation in the financial field. I am not so much talking about global cooperation and integration in the markets, which has been taking place at considerable speed for quite some time. I mean cooperation between legislators and supervisors who urgently need to catch up with the markets in the way they work together worldwide. Because markets are growing together, regulation increasingly spills over into other jurisdictions – across the Atlantic as well as the Pacific Ocean.
It was the Sarbanes-Oxley Act and the Financial Conglomerates Directive that first highlighted for us the full extent of this problem. When faced with a very difficult situation, as was the case with the US Congress after Enron and Worldcom, political pressure and indeed the attention of the legislators acted purely domestically. The Sarbanes Oxley Act was drawn up in smoke filled rooms on the hull – without the slightest external consultation. And of course – it caused particular problems for the EU. In essence – conflicts of laws. For example in Germany – your auditors, for historical reasons, simply cannot hand over personal details of all the clients, auditors etc. Nor could a French auditor hand over confidential work papers to a third country oversight body – or else he (or she) would go to jail. There was a major challenge to sort this out. So, in order to move forward and better institutionalise the international perspective in our respective political process we commenced the Financial Markets Regulatory Dialogue with the US. We are also having regular dialogues with Japan and we are intensifying our contacts with China and India, among others.
By building a closer working relationship and an atmosphere of trust, we are able to detect and solve problems upstream, before regulation starts. The motto is ex-ante regulatory dialogue, to avoid downstream regulatory repair.
This is also true for the issue of accounting standards. From next year onwards there will be two major sets of standards in operation:
US GAAP and IFRS. We have to find a way to free businesses which are active on both sides of the Atlantic of the costly requirement to publish their accounts according to two sets of rules. We are working hard with the SEC to try to reach an agreement on equivalence recognition. The time has come for the SEC to move.
Similarly, we need to find a mutually acceptable way through on the ability of companies to deregister from exchanges in the US. The SEC is indicating that it will respond to the growing pressure and I am hopeful that they will come forward with a proposal for a change of their rules.
It cannot be in their interest that once an issuer goes into the US market it can never leave. Wasn’t that the rule of the Hotel California? (Numerous shareholders used to leave).
In conclusion, we have come a long way over the last few years in integrating Europe’s financial markets. But there is also still a long way to go. For the coming years we will concentrate on the implementation and enforcement of what has already been agreed on. After we conclude our consultation on the state of European financial integration I will come forward with a more detailed plan for what to do next. Rest assured, there won’t be another Action Plan but rather targeted, well assessed and calibrated action in the fields where real gains are to be made. The watchword will be consolidation, building strength through stability – and improving the efficiency of our regulatory processes.
 Asmussen, Mai, Nawrath « Zur Weiterentwicklung der EU-Finanzmarktintegration », 2004. IFD-paper on further financial integration in Europe.