SPEECH/06/50

Charlie McCreevy

European Commissioner for Internal Market and Services

Europe’s capital markets in a global marketplace

4^th Annual Financial Services Conference
Brussels, 31 January 2006

Introduction

I would like to thank you for your invitation today. This conference is becoming quite a landmark in the Brussels calendar, and I am delighted to have been able to join you this year. It is very appropriate that the title of your conference is "Europe's capital markets in a global marketplace". In this World Cup year, we have to be able to look beyond national or even continental boundaries, and embrace the increasingly global nature of financial markets. Of course, as an Irishman, I have to mourn the fact that my country will not be travelling to Germany in June, but at least it gives me the opportunity to act as a neutral observer! We are, however, hosting golf's Ryder Cup in Ireland this year, and my country will not miss the opportunity to celebrate if Europe records yet another victory.

Progress since last year's conference

It’s been an eventful year since your 2005 conference. On the one hand, you could be forgiven for thinking that it was all doom and gloom in Europe. After all, we saw the French "non" and the Dutch "nee" to the Constitution; the EU budget went through months of intricate negotiations; and the world trade talks in Hong Kong ended with a whimper rather than a bang.

On the other hand, the balance of the year for the financial services industry is rather positive. When we look at the financial services arena today, it’s a completely different picture to a decade ago. Real progress has been made. We have a huge and well-functioning Euro bond market. International issuance in Euros is increasing exponentially – almost reaching the level of the US. IPO’s and private equity are strong.

Pan-European financial business is developing. We have a single set of accounting and auditing rules, and have implemented sensible corporate governance and company law reforms.

2005 saw the introduction of some milestone legislation that we hope will build further on this positive momentum. For instance, the Capital Requirements Directive. With financial institutions’ capital being more closely aligned with the risks they face, the new framework will enhance consumer protection, reinforce financial stability and promote the competitiveness of European industry.

In Company Law, the adoption of the Cross-Border Mergers directive addressed an issue lying at the very heart of the internal market, namely the ability to merge companies governed by the laws of different Member States of the EU.

2005 also saw the adoption of the Directive necessary to extend the Lamfalussy approach to policy making to the areas of Banking, Insurance and Investment Funds. The greater flexibility afforded by this structure will be of great benefit to us in responding to market events in the coming years.

All in all, with the completion of the Financial Services Action Plan in 2005, we have succeeded in building a modern framework for the European markets which is fostering integration. Particularly in the wholesale area. Our policies for the coming years will build on these achievements and will look to extend the benefits of the internal market to retail financial markets, which for a variety of reasons have remained fragmented.

Retail financial services

For instance, in December we came forward with our proposal for a Directive on a New Legal Framework for Payments. Ultimately, we want Europe’s citizens to be able to execute intra-EU payments cheaply and efficiently, irrespective of the location of the sender or the recipient. To achieve this, I count on the support of the banking industry. It must agree as a matter of priority on European technical standards. I also count on all the major users of payment services. I refer here to companies and public administrations. They should also prepare themselves to switch, b 2010, to a European payment system. The creation of a more cost-effective payment system will benefit everyone – it will also require everyone’s commitment.

Mortgages and consumer credit are two other areas in the retail sector where work is already underway. We expect to come forward with a White Paper on mortgage markets later this year, outlining the steps we think are necessary and justified to improve the functioning of these markets in the EU. And on Consumer Credit, a new directive is currently on the table with the European Parliament and Council. I hope that Member States and members of the Parliament will approve it quickly, thereby demonstrating the EU’s commitment to create an internal financial market that brings real benefits to our citizens.

White Paper

Speaking of our future activities, I would just like to say a few words on the White Paper on Financial Services Policy for 2005-2010, which was published on December 5. Just to reassure you, we are not seeking to drive an FSAP 2, but rather to build on what has already been achieved. Our motto is "dynamic consolidation". The blood, sweat and tears that have gone into the FSAP will all have been for nought if it is not implemented in a coherent, practical way. Only when rules are implemented on time and enforced effectively will companies and citizens benefit from true pan-European markets.

Unfortunately, our Member States' record of transposing Community law on time is not always satisfactory, which results in damaging fragmentation. We really need national regulators to speed up on implementation. It will avoid them to go through painful infringement procedures.

Supervisory Convergence

With the market structures in place, our next main priority is to develop a real European supervisory culture, with mutual trust and confidence. There is a critical role here for regulators in the new level 3 committees. Because the Lamfalussy structure is still young, the committees clearly need time to prove that the current structures can be exploited to their maximum potential. However in the coming years we will be looking to see that each supervisor can interact effectively with its peers, like cogs in a well-oiled supervisory machine. Enforcement mechanisms, too, need to be strengthened and joined-up across the Member States.

There are some vital questions here for the level 3 committees. Can they solve their day-to-day problems? Do they have the tools? Answer one: they must. Answer two: let's make practical improvements where we can – like mediation, delegation of tasks and common reporting formats. As a concrete deliverable, we would like to see the current system of expensive duplicative supervisory reporting requirements eliminated by 2008.

We consider any further fundamental change to the present supervisory arrangements to be premature. Instead, we should be focusing our attention on finding solutions to the problems posed by cross-border operations and the associated division of responsibilities between supervisors. There are issues here such as cross-border crisis management, liquidity, lender of last resort, deposit guarantee arrangements and winding-up proceedings. Finding effective and practical solutions for these issues is a real priority for the coming years.

Better regulation

Our new strategy has not identified many new regulatory initiatives. Action may need to be taken to improve integration in the retail financial services sector, as I mentioned before. Asset management and clearing and settlement, too, will definitely be the focus of attention, although we have not yet decided what form our action in these areas will take, if any.

Where we perceive that legislation is necessary, I can assure you that we are committed to "better regulation". Any proposal will have to be economically justified, and be proportionate to the challenge being presented. In order to ensure this, we will be continuing with our policy of extensive consultation and producing detailed impact assessments to accompany all new proposals. The Council and European Parliament must also subject themselves to the same discipline, as they have agreed.

At the other end of the timeframe, ex-post evaluation is also standard procedure. If we see that specific legal texts are not working, we will have no hesitation in amending or repealing them.

In parallel, to address an issue I know is a source of frustration to market participants, we are working to get rid of regulatory overlaps, conflicts, duplication and ambiguities in all relevant existing financial services rules.

Cross-border consolidation

One issue which merits special attention is the area of cross-border consolidation. The low level of cross-border mergers and acquisitions compared to domestic transactions is a symptom of shortcomings in the functioning of our Internal Market. When, on the request of Finance Ministers, we questioned companies on this issue, they pointed out that certain unjustified obstacles simply do not make the cross-border business case attractive enough.

The first of the obstacles raised by the companies we surveyed relates to the issue of supervisory convergence I mentioned earlier, with this key question: how can we put in place a more cost-efficient EU supervisory system, especially for those financial institutions active in several Member States? Unnecessary duplicative requirements rarely add to safety – the belt and braces syndrome. But they certainly add to costs.

The second challenge is to facilitate companies to expand and reorganise themselves efficiently, in order to streamline their operations on a pan-European basis. I already mentioned the progress made through the adoption of the cross-border mergers Directive. The introduction of IFRS and the European Company Statute also pave the way for greater synergies. Still, there is room for further progress. At the EU level, we are currently consulting on what the priorities should be for the coming years. In my view, there are also a number of rigidities to be looked at a national level.

The third and final challenge is to further integrate the retail markets, so that latent economies of scale are exploited to the full. The ongoing work in this area that I mentioned earlier will help unleash this untapped potential, improve the overall efficiency of the EU financial sector and offer end-users better and cheaper products and services.

A certain amount of political courage will be needed to tackle some of these obstacles. Let me be clear. Political courage does not mean pushing for protectionism in breach of fundamental EU principles. Political courage is not preventing companies from realising their full potential, when they see business opportunities.

Rather, it is daring to look outside of Europe, as this conference is doing, and see that global competition means that we cannot simply maintain the status quo. It is delivering to citizens the promise of an efficient, competitive and open financial sector.

We have put the issues on the table. The Commission’s White Paper addresses many of the challenges we are facing. I am looking forward to the European Parliament and the Ecofin Council's contributions to the debate.

External dimension

Finally, and something that is particularly relevant in the context of today's discussion, we will be emphasising the external dimension of our work.

Despite my title of Internal Market Commissioner, I can assure you that I, and my services, are anything but inward-looking. We are all too aware that standards and best practices are increasingly set and defined at the global level. In this context, the Commission is actively working for Europe to be represented more strongly in international bodies. European views also need to be better coordinated on the international scene. This makes Europe - and our case – much stronger.

We have been very encouraged by the open, ex-ante regulatory dialogues we have built up with our main trading partners such as the US and Japan. Our approach of exchanging information, identifying potential regulatory problems upstream and seeking mutually acceptable solutions has proved very successful. For instance, our continuing discussions on accounting convergence are making steady progress.

Last April the SEC came forward with its roadmap towards abolishing the reconciliation requirement for IFRS in the US. I will have further discussions on this issue when I go to Washington in a few days. I feel that the political will is there and that we can get rid of unnecessary, duplicative reporting requirements in the next couple of years.

I must also mention that, in the context of the EU-US Financial Services Regulatory Dialogue, the SEC recently made a proposal on how to reform US rules on deregistration, for which we are grateful. We are now studying the proposal carefully, together with industry.
It is important that the new rules make a real contribution to further opening the transatlantic capital markets.

In my talks with US counterparts next week in Washington I will be also hoping to find solutions to other key issues, such as one year difference in the timing of implementation of Basel II in the US and the EU, and the continuing collateral requirement for overseas insurers operating in the US.

Again and again we have to look at our rulebooks and ask the same simple questions: Do we really need duplicative or differing requirements in the EU and the US? Do our rules really protect consumers and ensure transparency and reliable information to investors? If I get a no to any of these answers I do not hesitate in pushing to scrap outdated and inefficient regulation.

Our international cooperation is not limited to our dialogues with established partners such as the US or Japan. It is of growing importance that we ensure the frictionless inclusion of the emerging economic powers into the world economy. It is now that we have to work with China, Russia, India and others and invest significant resources to help them develop up-to-date institutional structures and sound regulatory frameworks. This will be to everyone's benefit.

Conclusion

Ladies and gentlemen, allow me to summarise:

The only way that Europe can hope to compete in what is now a global financial services market is for the internal market to work, and work effectively. There is still a considerable amount of work to be done to open up borders in retail financial services, to converge supervisory structures and cultures and to bring down barriers to cross-border consolidation. But we also have to face the challenges of a globalising world. Global integration is not a threat, but rather an opportunity for Europe. We have a lot to gain from further integration of our markets and from taking part in the drive to a global economy.

The more open we are, the stronger we will be. And therein lies our new challenge: to create a world-beating regulatory framework for financial services. To be global number one. We should strive for nothing less.

Thank you for your attention.