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Charlie McCreevy, European Commissioner For Internal Market And Financial Affairs - “Recent Regulatory And Structural Developments In The EU Financial Sector” - 2nd EU-China Dialogue On Macroeconomic And Financial Regulatory Issues Beijing, 15 May 2006

Date 16/05/2006

Minister, Ladies and Gentlemen,

At first glance, it might seem that Europe and China hardly face the same structural challenges. In recent years, China has experienced phenomenal growth, with double digit figures. In Europe, over the same period of time, we have had to deal with subdued economic growth, even though some countries did better than others.

But let us reflect. Globalisation is here – and here to stay. Oil and commodities prices are high for everyone. Excessive imbalances are not a local problem, but can increase global risks. In today’s world, no one is immune from financial crises spreading across the globe. Although we are at different points, we have to take the same road – with the same hurdles to overcome and potholes to avoid – with the same objectives in mind: boosting economic development and social welfare for our peoples.

The vitality of the Chinese economy is something that we want and support. Deeper trading links, exchanges of culture, people and ideas strengthens global stability. We can get fresh inspiration from that dynamism. China, on the other hand, might be able to learn a lot from our experience in integrating and consolidating the European financial marketplace. For we all know that efficient and safe financial markets are an essential ingredient for robust, sustainable economic growth.

1. The ambition

The ambition of the European financial services policy is clear. We aspire to have the world’s most open, competitive, efficient and safe financial market. This is not blue sky thinking. But rather a necessity if we want to preserve the competitiveness of the European economy on the global stage and ensure robust economic growth.

The rationale

The creation of an integrated financial market is not for the sake of intellectual purity or integration for integration's sake.

Taken individually, financial markets in each of our 25 Member States may be efficient. But, alone, they are far from reaching the critical size when companies, investors, and even citizens think and operate globally. By fostering greater competition in a European ‘domestic’ market encompassing more than 450 million citizens, we want to improve the efficiency of our financial system. Make it stronger and more innovative so that it better meets the needs of our economy. That is why our key objective is to create an integrated pan-European financial sector.

Europe also faces some major challenges over its pension financing. I believe this is an area that is becoming increasingly important to China as well. Integration can deliver increased efficiency, through deepened liquidity and wider risk diversification. And any improvement has immediate and substantial benefits when we talk of savings of over 10 trillion euros.

Every area of business stands to benefit from the integration of Europe's financial markets. A single, deep and liquid capital market will enable access for all European consumers to efficient and innovative service providers. The availability of flexible and cheaper financing for corporate borrowers. A healthy rivalry between dynamic financial centres. The development of state-of-the-art market infrastructures. All of this is achievable, and our financial policy is about translating this potential into a reality.

Current state of integration

The scale of this challenge cannot be underestimated. With 25 different Member States, and even more legal systems within them, the consolidation of financial markets is a complex and demanding task.

At the 1st meeting of this Dialogue last year, we presented the substantial progress made through the implementation of the Financial Services Action Plan. The positive effects are beginning to be felt across European financial markets. A European reflex is emerging among market participants and operators. This is most obvious in the money markets, where the introduction of Euro has fostered a European pooling of liquidity. European bond markets are a reality – and growing fast. Equity markets are also increasingly more integrated and performing well. Pan-European asset allocation strategies are becoming the rule rather than the exception, notably thanks to the success of UCITS as mainstream investment vehicles.

At the same time, there remain some areas where integration can make further progress. This is particularly the case for the retail financial markets, where fragmentation hinders the exploitation of substantial economies of scale. When this comes at a cost for the consumer, and hence for the economy, it must be addressed and solved.

2. Consolidating the integration of the European financial market

Taking into account those structural developments in the EU financial marketplace, and building on past successes, the European Commission published last December its new Financial Services Policy, covering the next 5 years.

As I said earlier, the period of 1999-2005 saw an ambitious wave of measures, embodied in the Financial Services Action Plan, aimed at creating an integrated regulatory framework for European financial markets. This was – and still is – a lot for the European markets to digest. In an extensive consultation carried over more than two years, a wide consensus emerged that adding another thick layer of regulations now would be counterproductive. Rather, it was clear that Europe needed to enter into a period of dynamic consolidation.

Our first priority must be to complete what has already begun and to properly implement and enforce what has been agreed. Consolidation and completion of the existing regulatory framework are also paramount to the successful extension of the benefits of an integrated financial market to European businesses and citizens.

Making the rules work in practice

The EU financial services policy 2005-2010 is an important step in consolidating the work put into the building of a single financial market, with a view to tackling the uncertainty, unnecessary bureaucracy, and excessive costs for European firms, intermediaries and investors looking to operate across borders.

The key to achieve this is to ensure that the rules agreed over the last few years work in practice and deliver the expected results. That is why we will direct our effort towards proper implementation and consistent enforcement of the new rules. In simple terms, making the rules work.

In the areas of securities, banking and insurance we have established committees of national supervisors, within the so-called Lamfalussy architecture. Their role is essential to keep delivering convergence of rules and practices.

Having the right supervisory structures

There is also a question that we cannot avoid: Do we have the regulatory structures necessary for an integrated European financial market?

The Lamfalussy architecture, which in particular strengthens cooperation between national supervisors, provides us with the right tools. We must now make sure that we exploit the potential of this networked supervisory architecture to its fullest. We have, in essence, a “hub and spokes” system. There are practical steps to take now in order to improve the overall efficiency of European supervision. But, overall, the real challenge is to develop a true pan-European supervisory culture, just as markets are developing a pan-European reflex.

At the same time, we should not overlook structural issues, such as the need to clarify the allocation of tasks among national supervisors. This is vital as we see the integration of securities markets’ accelerate and the increasing role played by pan-European financial conglomerates. However, the creation of a pan-EU supervisor is not on the agenda. We favour a pragmatic and evolutionary approach, responding to demonstrated supervisory problems or threats to financial stability.

Targeted new initiatives when necessary

Where areas remain incomplete further legislation may be necessary to target specific market failures and regulatory gaps.

European financial markets have struggled for too long with complex and costly arrangements for clearing and settlement of pan-European transactions. When rumours abound on worldwide consolidation of stock exchanges, we can no longer afford the current situation. Since I took office, I have been consulting intensively with all stakeholders to find the best way forward. An impact assessment testing the different options is also being finalised. A decision on how to improve the current situation will be taken by this summer.

The European regulatory framework for investment funds also needs to be adjusted to new market realities. There is enormous potential in Europe if you compare the situation with the US. New products have emerged and are increasingly popular among investors. After wide-ranging consultation, the European Commission will soon issue a White Paper setting out its vision in the autumn.

Finally, the area of retail financial services requires further attention. It still lags behind the other areas in financial markets, much to the cost of European SMEs and citizens. While we should not shy away from new initiatives in this area, we must ensure that they are evidence-based, sustained by open consultation processes, solid economic foundations and strong investor protection standards.

3. A Modern Approach to Regulation

The White Paper does not only outline policy actions on the horizon for 2010. Building on the FSAP experience, it also defines a policy-making approach to be followed when implementing those actions – what we call the ‘Better Regulation’ agenda.

The first part of this agenda is to deploy a decision-making process as open, transparent and evidence-based as possible. Experience has shown that the best way to avoid serious difficulties downstream is to carry out open, wide-ranging consultation, with all stakeholders. This includes our main economic partners and Chinese financial institutions or regulators are welcome to contribute to our internet consultations. In parallel, there is also a need to justify why policy action is needed, economically measure the different options so as to ensure that the best ones are selected. This is the role of impact assessments, which we now conduct for all of our legislative proposals. I think this is good policy making. And it attracts goodwill and openness.

A second part of the ‘Better Regulation’ agenda is implementation and enforcement, which I already mentioned. This is especially important in the EU context, where Member States have to transpose in their national legislation the directives adopted at the EU level.

Finally, to close the ‘Better Regulation’ cycle, the effectiveness and efficiency of the regulatory framework has to be continuously monitored and assessed. The fundamental question here is whether the rules actually achieve their objective. If not, then corrective actions must be taken. To answer this question, we will regularly carry ex post evaluations of the individual measures but also of the whole Financial Services Action Plan.

4. The external dimension

An important lesson from the past years is also that regulators cannot ignore the external dimension of their work. It might surprise some that the Commissioner in charge of the European Internal Market visits distant countries such as China. This is not my desire to visit some of the world’s most renowned landmarks – pleasant though this is. When I look at my programme for the coming days, I can see that indeed my job is to be here and work with my estimated Chinese counterparts to tackle the common challenges we face.

Technology and changing business models mean that financial institutions operate across legal and tax frontiers. Issuers seek to raise capital in international markets. Market infrastructures are accessible to participants from around the globe. This cannot come without consequences for the regulators.

The first and foremost consequence is that only open markets have a chance to remain in the top league. Today, Europe is the most open financial market in the world. Do not pay attention to the protectionist noises here and there. The EU rules on the free movement of capital are clear. My job is to make sure they are respected – and they will be respected. Everyday, we see the benefits of attracting investors, issuers and financial services providers from all over the world. This cannot, and will not, be jeopardised by short term political interests. The stakes for the European economy are simply too high. That is why I do not hesitate to take the protectionists to the European Court of Justice, to enforce the free movement of capital principle.

The second consequence is that regulators must take into account the development of high quality global standards. I have the pleasure to say that Europe is in the forefront of this trend – be it with International Financial Reporting Standards (IFRS), the Basel II capital framework or the Financial Action Task Force (FATF) recommendations to fight money laundering and terrorist financing. All of these are crucial for investor confidence and to maintain an open and attractive financial capital marketplace.

In this interconnected world, frictions and spillover effects will inevitably appear. Those need to be anticipated as much as possible through regulatory cooperation. Unintended adverse effects must be avoided as much as possible. For example, when a bank is subject to rigorous prudential oversight in its home country, with stringent capital rules, I do not see the need for adding layers and layers of excessive capital requirements to operate in another. It will not add anything to financial stability, but will just result in higher costs for borrowers.

It is cooperation between countries and regulators that will build investor confidence and make financial markets more attractive. By cooperating to develop good and intelligent global standards we can ensure that we have the benefits of financial globalisation while fending off the risks attached to it.

5. Conclusion

Mr Minister, Ladies and Gentlemen, let me conclude.

As I said before, I believe that China and the EU have a lot to learn from each other. The European experience in building an integrated financial marketplace has common features with the efforts being undertaken by the Chinese authorities. I am sure that today’s discussions will be mutually rewarding – allowing us to share with each other our experiences, positive and negative, and the lessons we have learned..

This dialogue will be another important step in developing financial markets throughout the world. To meet the challenge of globalisation, we need to ensure that there is genuine international cooperation between the key global players. Today’s dialogue is a sign that the EU and China are taking our joint responsibilities seriously. Once again, I am delighted to be here in Beijing to discuss these issues. I have no doubt that we can continue to work together to build the foundations of a truly global financial marketplace.