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Good evening Ladies and Gentlemen,
It is a privilege to address tonight an audience filled with such talented individuals. These awards are symbolic of the heights you all reach on a daily basis. So around here is a sense of innovation. Of financial daring. Of pushing back the frontiers.
I continue to be amazed by the inventiveness of the financial community. Who could have dreamed even 10 years ago that the machinery of today’s global and European markets would be oiled with such sophisticated products as credit default swaps and collateralised debt obligations?? And the pace of change is accelerating.
It is our job as regulators and legislators to keep up with that change. Not to stifle it. Not to dampen the fires of innovation driving the engines of global markets. But rather to strike a careful balance between providing oxygen for those fires and preventing explosions. We have a duty to remember that tied up, one way or another, in your businesses are the insurance premiums, savings and retirement provisions of our people. Wherever they come from. London, Bristol or Inverness. Athens, Talinn or Porto. We are expected, together with colleagues in national governments, regulators and the European Parliament, to come up with rules that create an environment in which investments can grow, within proper, sensible prudential boundaries. And you are entitled to expect that in coming up with these rules, we don't over-egg the pudding, stifle innovation, or undermine Europe's centres of excellence in financial markets.
Mifid
My job is to help remove barriers. Make markets work better. Find innovative ways to enhance development. Foster competition. Ensure consumer protection. Take the Markets in Financial Instruments Directive or MiFID.
MiFID will transform the landscape for the trading of securities, and I am confident that it will introduce much-needed competition and efficiency throughout Europe’s financial markets. This is good news in that it will both increase investor protection widen choice, and enhance Europe's competitiveness.
While you may often hear complaints of yet another crippling set of rules from Brussels, we actually believe that with MiFID, we will be reducing the overall level of regulation on firms. Provided, of course, that the "goldplaters" behave. The rules we have developed are principles-based – not a box-ticking exercise.
We have been consulting on the technical measures for well over two years now. The measures are balanced, proportionate and sensible. They will protect investors without placing undue burdens on business. And they have been agreed by every one of our 25 Member States and the European Parliament – without any opposition at all. Our securities regulators, CESR, are also happy. And market participants, broadly speaking, as well.
Regulation is a double-edged sword. Get it right and it can tear down barriers. Get it wrong and it can be part of the problem. I believe that MiFID is the right kind of regulation. It works with the grain of the market, not against it. It will unleash new competition and dynamism rather than stifling it. This is happening already. I note with interest recent initiatives in the area of trade reporting and market data dissemination. And, without doubt, the recent wave of possible transatlantic stock exchange mergers is explained – to some extent at least – by preparation for the post-MiFID scenario – and by the more attractive regulatory environment in Europe.
So, am I saying that the job is done? Can we all give ourselves a big slap on the back, tell ourselves that MiFID is a done deal and turn our attentions elsewhere? The answer, of course, is no. There is still a great deal of work to be done.
The spotlight is now on the Member States who must transpose MiFID – and its implementing measures – into their national law. I am very concerned that some Member States have stated publicly that they will not be able to transpose MiFID on time. This is very disappointing – particularly since we have repeatedly advised them to begin the transposition process early.
Let me be perfectly clear about this. The Commission will launch immediate infringement procedures against any Member State which fails to transpose on time. There will be no exceptions.
It is worth adding that Member States who fail to transpose on time could face legal action by market participants in their own national courts. By not transposing on time, Member States are also harming the competitiveness of their own firms who will not have the passport and so will be deprived of those all-important first mover advantages. Equally, it is wholly unacceptable that Member States should refuse to accept incoming firms from Member States that are fast out of the blocks. So late transposition is a high risk strategy.
That is why we are urgently working with Member States – in a pragmatic way – to find practical solutions to ensure that the EU passport system functions smoothly right from the word go. We will be working intensively with Member States in the coming months to make sure that MiFID is correctly transposed. Indeed, we have already embarked on an intensive round of transposition workshops and bi-lateral meetings with individual Member States.
CESR also have a lot of work ahead. They will have to develop so-called "level 3" guidance for regulators throughout the EU. On certain issues, the Commission may also issue interpretative advice. And we will soon be launching an inter-active Q & A database to answer issues of interpretation once we have consulted all the parties involved – "the Lamfalussy way".
Europe in the world
MiFID is just one example of where Europe is adopting good regulation. In a global economy, it is vital that we are among the early movers to top-class international standards, and are drivers for change and improvement. We were very interested to see Japan's new Financial Markets Law has been drawn up using many elements of the MiFID. This shows how important it is to be in close dialogue with our main international partners and competitors.
As the European Commissioner responsible for the Internal Market, you might think that I would only be concerned with looking at what is happening within Europe's boundaries. Nothing is further from the truth. The policies we develop at EU level are both affected by, and have an influence on, policies and legislation elsewhere in the world. A very important part of my brief is to engage closely with our partners elsewhere in the world.
EU-US Financial Markets Regulatory Dialogue
Of course as our major trading partner, and the country with whom we share almost 80% of the world's capital markets, it is obvious that our dialogue with the US is the most developed. The EU-US Financial Markets Regulatory Dialogue was kick-started in the wake of the Enron scandal in 2002 as we worked to minimise some of the negative impact for European companies of the Sarbanes Oxley Act.
Since then, real confidence and trust has been built up between the two sides. Far from being only a forum in which we try to resolve outstanding problems, the dialogue now gives us an opportunity to discuss regulatory developments upstream and, in doing so, avoid downstream conflicts or regulatory repair. It also gives us a setting in which to work towards more general convergence of our regulatory frameworks.
The issues currently being addressed in the Dialogue are highly important to us, with issues such as accounting, auditing, the implementation of global standards such as Basel II and international mergers and acquisitions high on the agenda.
In April 2005, SEC staff launched a "roadmap" towards eliminating the need for reconciliation to US GAAP for European firms by 2009. This roadmap, together with a joint work plan recently published by CESR and the SEC on the consistent application of accounting standards, go a long way towards the goal of removing the reconciliation to US GAAP requirement for EU issuers in the US.
On this side of the Atlantic, the Commission has made a proposal that would enable those Member States that currently accept US GAAP and other third country accounting standards to continue to do so for another 2 years. This would bring the deadline to 2009, and thereby align the EU and US timetables on this issue.
In the slightly longer term, both sides agree on the need for continued progress on the technical convergence of IFRS and US GAAP. If we can succeed in abolishing accounting reconciliation requirements, we will greatly reduce costs for transatlantic listed companies and create a more open transatlantic capital market. The success of the accounting standards convergence project will be a Litmus Test for the EU-US relationship in financial services.
With regard to auditing, much has been done since the time of the Enron and Worldcom scandals to enhance the quality of audits conducted on listed companies both in the US and in the EU. Current issues surround the equivalence assessment of each other’s oversight systems. We are working closely with the PCAOB and the SEC to find solutions to these challenges.
On Basel II, we are continuing our talks with the US regulators and with the industry on how to deal harmoniously with differences in the timing and other practicalities of the implementation of Basel II.
Another key issue in our discussions with the US has been that of deregistration from the SEC for those foreign firms that are no longer interested in being listed on U.S. stock markets. We are pushing hard for real progress to be made on the so-called "Hotel California" syndrome, whereby firms can enter the US capital markets but can never leave. The SEC came forward with a proposed rule at the end of 2005, on which the EU submitted detailed comments. A final rule is due to be published in the coming months. I am hopeful it will be a real opening.
Of course, no EU-US dialogue on financial services could possibly ignore the current proposals for cross-border exchange mergers. I firmly believe that it is not my place to determine the outcome of proposed deals. That is for shareholders to decide, provided of course that regulatory approvals are given and that competition rules on both sides of the Atlantic are adhered to. However, should these deals go through, the European Commission, the SEC and the national regulators concerned, have all made it abundantly clear that, regardless of the ownership of an exchange, EU companies listed on EU markets must continue to be subject to EU rules and EU regulators, "Balls clause" and all.
Other third country dialogues
But the US is not the only country with whom we are engaged in close dialogue on financial services issues. Our interaction with Japan has been running for a number of years, and is growing in importance. Here, too, accounting standard equivalence and convergence is a key topic. I made my first official visit to China in May, and was very impressed by the pace of development there. I made clear to my Chinese counterparts that such growth must go hand in hand with strong regulatory oversight and the strict application of the highest international standards. And we are now building relationships with financial authorities in Russia and India. I will continue to work with and encourage our emerging partners to build safe, modern regulatory and supervisory systems, drawing inspiration from the European model.
Open investment climate
On a more general level, one of the core themes that we explore in all of our dialogues is that of maintaining an open investment climate around the world. I want the EU to be the most open and dynamic financial market in the world. Openness is a real strength, as you in London well know. We must ensure that our doors are open for investment, issuance and trade to enter and leave. By doing so we create a climate that actively encourages competition, innovation and greater efficiency. These are not empty words. The figures back them up.
Last year, almost 2500 cross-border merger and acquisition transactions with EU target firms took place, at a value of nearly 240 billion euro. In more than 1100 cases, a company from a third country was involved, proving the openness of our investment climate, not only within the single market but also from outside.
The vast majority of these transactions were carried out in an orderly way, with clear legal certainty and without undue State interference. However, in a very limited number of recent cases, Governments did interfere with deals involving foreign companies. This isolated protectionism does not, as some may claim, signal the death knell for the internal market. In fact, in 2005, intra-EU foreign investment levels were twice those in 2004 and comparable to numbers last seen in the late 1990s. Nevertheless, it is important to remain vigilant.
If appropriate, I will not hesitate to launch infringement procedures against those Member States that maintain their protectionist practices and inhibit the free flow of capital, which is required under our Treaties. However, we are also taking more positive action to deter against protectionism. Commission action last year contributed to opening the way for banking takeovers in Italy and in Poland. And we recently put forward a proposal that will tighten the procedures that Member States' supervisory authorities have to follow when assessing proposed mergers and acquisitions in the banking, insurance and securities sectors.
Some countries, in the EU and elsewhere, make use of the sensitive “national security” argument to stand in the way of foreign investment. While national security may be a legitimate objective for state measures, all restrictions must correspond to the strict criteria. Actions on these grounds must not lead to discriminatory authorisation procedures and discouragement of foreign investment in key sectors of the economy.
In this context the Commission is also constantly monitoring developments in the US with regard to an amendment of the Exon-Florio law. This law subjects inward investment transactions by foreign companies to a review process and possible Presidential veto, where there are national security concerns. We are concerned about the potential for the widened scope of this review and any disadvantages it may entail for European investors. We will continue to follow developments on this closely, once Congress returns after the mid-term elections.
Conclusion
To conclude, ladies and gentlemen, I would like to thank you to the contribution that you, key members of the financial community, make to the economy of the EU. The work that you do every day, the creative solutions you come up with for your clients, the innovative deals that you enter into, have a real and beneficial effect on the health of the European economy.
The markets that you deal with on a daily basis are no longer limited to national borders, or even European time zones. You operate in the global marketplace. We must have a strong European position in that marketplace. In our international dialogues we are building consensus and working towards greater convergence. In our own policies we are standing up to the protectionist bullies and giving the message loud and clear that Europe is open for business.
Congratulations to those of you who will be taking home the prestigious awards that are presented here this evening. May the fire of financial creativity and innovation continue to burn for a long time to come. And may our work in the EU provide you with the framework for global success.
Thank you.
