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Creation of internal market has been an extraordinary success of the European integration with the European Parliament playing one of the key roles in the process. The main legislative competence in creation of internal market for financial services has been in the hands of the Economic and Monetary Affairs Committee, which I have the honour to chair.
The main breakthrough in integration of national financial markets into one single market in financial services has happened with the adoption of the Commission's Financial Services Action Plan which the Parliament together with the Commission and the Member States has been working hard to complete.
This process lead to innovative legislative approach in regulation of securities' markets, Lamfallussy procedure, which has not so long ago been extended to banking, insurance, fund management (UCITS) and occupational pensions.
In the process of fast-track, flexible regulation that is trying to keep pace with financial market developments, the European Parliament has been playing an important forum for exchange of views, open not only to different political beliefs, but also to stakeholders active in the market: the industry, the consumers, as well as to concerns of national regulators.
Not only have the Parliament and the Econ been providing valuable input to the Commission's proposals in search for effective solutions in the light of specificities that exist in the European market, but have also been launching discussion and initiating legislation in areas overlooked by other institutions. There are currently several own initiative reports in the Committee that attracted attention of the industry, the regulators and the European Commission. Just yesterday, the Committee adopted an own initiative report on Clearing and Settlement, drafted by Ms Piia Noora Kauppi, also sitting in this panel (IF THE VOTE TOOK PLACE). The Econ has called the Commission to look into the issue of regulation in this area and is expecting the Commission to take on board the Parliament's recommendations.
One of the issues discussed in the report is competition between the providers of clearing and settlement services. An issue linked to the oral question of the Econ Committee to the Commissioners McCreevy and Kroes, on anticipated mergers of stock exchanges in Europe, scheduled for the final part of tonight's plenary session of the European Parliament. Regardless of the latest developments concerning Deutsche Boerse, we still believe that there is a real worry that a merger between the Euronext and the LSE might lessen price competitiveness of trading activities as regard to the fees charged to equity traders. We are of the opinion that such act would have Europe-wide consequences and should not be left to national regulators to take the final decision. With cross-border mergers legislation preventing European authorities to participate in decisions on mergers of biggest European stock exchanges, the role of European institutions in creation of new European financial architecture has been diminished. But most importantly, we should not forget one of the main aims of creation of internal market for financial services that is to enforce competition between providers, thereby offering consumers a more diversified range of products at lower prices, and increasing global competitiveness of European financial industry.
There are new measures needed in several other areas, where integration and competitiveness of products is still not satisfactory at the European level. With large companies in Europe increasingly turning to international banks for wholesale services the historical ties with local lenders have weakened. The euro increased cross border competition between banks in providing credit, investment advice or other services such as cash management. Such competition however is still lacking in retail banking, where provision of cross border services has not been matching the increased consumer mobility within the EU and where local providers remain strong. Explanations are many. Most European countries had or still have relatively segmented domestic market, where synergies have been explored and exploited through mergers of domestic players and seizing larger shares of domestic market. In some countries however, where consolidation activity has been weak, foreign banks have started to place bids for local players.
There are many significant cross border barriers linked to cultural differences, different distribution systems and product characteristics as well as difficulties in cross border consumer protection. Although the creation of euro provided consumers with more transparency, and new technology provided the banking sector with more option for offering their products and services Europe-wide, banks still prefer to enter the market through M&A rather then on a cross-border basis. Consumer business in retail banking will to a certain extend always remain localised due to the fact of consumer confidence as well as due to security dimension needed for a credit institution. However, establishing a level playing field with single legal framework would certainly increase provision of cross border banking services.
The European Parliament has already adopted the report on current state of integration of financial services in Europe, presented by my colleague Ieke van den Burg. We may however consider further initiatives in specific areas, not only in retail banking, but also in the field of asset management linked to the review of UCITS and to the Commission's green paper on asset management expected to be published this July. In the context of asset management, there is the issue of hedge funds that gained so much publicity in the past few months by hedge funds starting to play a role of an active investor as seen in the case of the Deutsche Boerse, as well as in the case of downgraded GM and Ford Motor bonds. Non-bank lenders, that is hedge funds and mutual funds have been aggressively lending to private business borrowers since the mortgage refinancing boom ended last June. Hedge funds and mutual funds are buying the loans in order to offer them to investors who often mistake them as safe money-market funds. The $1 trillion hedge fund industry has been on shaky ground for a while now as managers borrowed money when it was cheap and are now being squeezed as interest rates rise. Highly leveraged hedge funds could pose risks to market liquidity. Since the industry is not regulated, there is not much one can do apart from urging the banks to guard against providing hedge funds with easy credit, as US Fed Chair Greenspan did some weeks ago.
In the view of the forthcoming Capital Requirements Directive and the enhanced role played by credit rating agencies in its implementation, the Parliament may also consider providing a response to CESR advice against regulation of this market segment. The explanation of credit rating agencies acting in "natural" oligarchic market does not seem to justify the obstacles for new entrants and the lack of competition in this area.
Finally there are the international accounting standards, where
Europe needs to push for the convergence of the International Accounting
Standards Board and the Financial Accounting Standards Board, which
could greatly facilitate cross-border EU-US business. It needs to
push for mutual recognition, in particular the US recognition of
financial statements of European issuers that are listed in the
US. Financial statements could then be submitted to the Securities
and Exchange Commission based only on the IFRS, International Financial
Reporting Standards, without the need for reconciliation to US GAAP.
Europe also needs to prove that it can be consistent over the global
accounting standards and reach a compromise acceptable to everyone
on the IAS-39 carve-out.
In the so-called post FSAP period, we are facing strategic choices for the future consolidation of the single market in financial services. As a member of the Parliament and as the Chair of the Econ, being European co-legislator and co-regulator of financial markets, the overall strategic choices may be summarised in the following: How much regulation? What kind of regulation? At which level?
We need to find a balance between prevention of market disruptions and unnecessary rigidity that may lessen business activities and further development of financial market instruments, products and processes.
We need to ensure that the framework legislation enables flexibility in second and third level measures that will see the light of transposition and implementation in time. In this respect the monitoring role of the EP is crucial. Timely transposition of already adopted directives is necessary. Countries that efficiently impose compliance with laws tend to have better developed financial intermediaries than countries where enforcement is more lax. Legal and regulatory systems that give a high priority to creditors receiving the full present value of their claims on corporations have better functioning financial intermediaries than countries where the legal system provides weaker support to creditors. Information disclosure is highly relevant. Countries where corporations publish relatively comprehensive and accurate financial statements have better developed financial intermediaries than countries where published information on corporations is less reliable.
In the process of enforcement of decisions taken at the European level, we need to seek balance between EU level actors and discretions of national authorities, especially national regulators such as l'Autorité des marchés financiers in France, Financial Services Authority in the UK or Federal Financial Supervisory Authority in Germany.
In conclusion,
Almost five years ago Financial Services Action Plan has been adopted with the aim of coherent yet flexible regulation of securities, investment, banking and insurance in Europe. Today, most of the measures foreseen have been drafted, adopted and are in the process of transposition, implementation and enforcement in the Member States. Although Europe has as result become more competitive internationally, it still has more institutional oriented financial system in comparison to the US, system of which is more market oriented and therefore more efficient as well as diversified. European financial system still needs deepening in order to become globally competitive. Only then the impact of structural change in single European financial system will encourage economic growth and dynamism the Europe urgently needs.
