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Good evening Ladies and Gentlemen,
It is a great pleasure to be here tonight to share with you my views on the importance of competitive EU financial services markets. Nobody understands better than corporate treasurers how important efficiently functioning, competitive financial markets are to businesses and long term economic growth. Over the last six years, the Commission has taken up the challenge of integrating European financial markets, to grow them and to maximise their strength and impact on the real economy so as to be able to lead rather than to lag globalisation. It is not an easy challenge, but we have come a long way: the adoption of the Financial Services Action Plan has been a milestone in this respect. Comparing EU financial markets today to those of our main competitor, the US, European markets are, for example, clearly leading in the areas of commercial banking, forex, OTC derivatives, insurance, reinsurance and foreign equity trading. In addition, in relative terms, our markets have considerably gained in importance over the past five years in the areas of investment banking, hedge funds and IPOs. As the major European financial centre, London is contributing in an important way to this success. In 2005, London registered the highest numbers of foreign IPOs. It also represents close to 25% of the EU primary insurance market and 45% of the EU's private pension fund market.
Better regulation
To continue along this improving path, there is no time for complacency. Creating and maintaining an efficiently functioning and competitive Single Market for financial services requires taking the right action when and where needed. Our overall regulatory process must be tip top: responsive, flexible, economics driven, consultative, open, continuously evaluating where it works and where not. We must continue to bring down remaining barriers. To verify the correct and consistent implementation of legislation. To uphold high standards of corporate governance to make our markets attractive. And, last but not least, to take the global dimension of financial markets into account when bringing our policy forward.
Those who know me well recognise that this is not a plea for regulatory action, rather for the most "appropriate and proportionate" response in each area. Appropriate can be to let the industry take the initiative, such as in the case of the Single European Payments Area. Appropriate can be not to legislate but to agree upon a set of principles, such as in the case of the Code of conduct for Clearing and Settlement, with industry agreeing to implement, subject to strict monitoring. . Appropriate can be to amend a directive to bring it up to date or to repeal it when it becomes redundant. There is no "one fits all" solution across financial services, nor should there be.
Before taking any decision, the Commission carries out impact assessments and consults extensively with stakeholders. Many of you have already been consulted or have expressed opinions, for which I am grateful. Indeed, the success of any measure - be it legislative or non-legislative- largely depends on the input it enjoys from regulators, supervisors and market participants.
The Markets in Financial Instruments Directive
A recent example of appropriate and proportionate action is the Markets in Financial Instruments' Directive, the cornerstone of the FSAP edifice in the area of financial markets. The Commission consulted extensively on the original directive and on the technical implementing measures, which will be applicable from November 2007. The outcome of these consultations is a balanced, proportionate and sensible set of measures which I hope will enhance competitiveness and protect investors without placing undue burdens on business. They have been agreed by all 25 Member States and the European Parliament and welcomed by CESR and the vast majority of market participants.
This is crucial as the MiFID will transform the landscape for securities trading by introducing much-needed competition throughout Europe’s financial markets. This will be done by introducing an effective ‘single passport’ for investment firms, allowing them to operate across the EU as well as across a wide range of financial instruments and investment activities on the basis of one single authorization. The ‘single passport’ also entails that a firm will answer to one regulator -its home state regulator- while the host state regulator's will be confined to supervising branches in its territory.
The introduction of a single passport would not have been possible if it were not accompanied by an EU-wide agreement on strong and consistent investor protection rules. For the first time, we now have robust European rules covering the core investor protection topics of best execution, information disclosure, suitability, investment advice, inducements and conflicts of interest.
Under the MiFID directive, the investor protection rules are also, I hope, flexible and proportionate, relying largely on a principles based approach rather than on excessively detailed prescriptive rules. The benefit of such an approach is that the level of regulatory detail is significantly reduced, especially in comparison with existing national rules. It can therefore be expected to reduce the regulatory burden for companies, provided there is no "gold-plating" by the national authorities. To counter this, an ‘anti-gold-plating clause’ has been included in the directive. This means that national supervisors will be required to cut back any rules that go beyond the MiFID, unless they can be rigorously justified in terms of investor protection or market integrity.
Let me give you two examples of this flexibility and proportionality which are of direct concern to you. These involve the issues of client classification and best execution.
Under MiFID, different categories of investors enjoy different levels of protection. Retail clients are rightly more shielded than professionals while eligible counterparties are pretty much on their own. The Level 1 directive gives clients the possibility to move between those categories. We have worked hard to preserve and extend the flexibility at Level 2. Both firms and clients will be able to choose, subject to some constraints, under which regime they wish to operate.
In an environment where multiple venues compete for order flow, a strong best execution obligation is critical. It is indispensable for proper price formation and key in ensuring that clients always get the best deal a firm can offer. MiFID is clear in saying that best execution - the obligation to seek the most favourable conditions when executing client orders - applies to all financial instruments and all types of markets.
MiFID, however, recognises the fact that best execution cannot be applied in the same manner in all circumstances but we want to see a convergence in European practice. There is no reason why a client should be given a better treatment on the one or the other side of the border. This is why we strongly support CESR's decision to put guidance on best execution at the top of their agenda.
Another important element of the MiFID relates to trading venues and transparency. We have significantly deregulated the business of trading venues in Europe. This will no longer be the sole preserve of the local exchange, as it is still the case today in a number of Member States. Investors will also benefit from easier cross-border access to foreign stock exchanges and multilateral trading facilities. We would not have obtained agreement to prise the market for trading wide open if we did not, at the same time, mandate a level playing field for transparency.
My expectation is that MiFID will ultimately increase the overall depth and liquidity of our financial markets, drive down the cost of capital for the businesses operating on them, thus providing a further boost to our competitiveness. And I am encouraged by some recent market-led initiatives which indicate that some new creative trading approaches are emerging.
The global dimension
MiFID is, I hope, a good example of better regulation that will enhance the EU's competitiveness in an increasingly global financial playing field. I believe it is important however not to become misty eyed about regulation that one has worked hard on and done one's best to deliver an optimal and balanced solution. That’s why the Commission wants to keep in active touch with industry and regulators to learn of any teething problems or of practical obstacles or difficulties that arise when you start to put the rules into practice. MIFID is an important building block but just one. There are many others, an increasing number of which have a global dimension. The policies developed at EU level are both affected by, and have an influence on, policies and legislation elsewhere in the world. To preserve the competitiveness of our markets and of our companies, these issues need to be discussed with our main trading partners. We have therefore started up Financial Market Regulatory Dialogues (FMRD) with our main trading partners, not only with the United States but also with China, Japan, Russia and India.
Of these Dialogues, the one with the US is the most developed. The EU-US Financial Markets Regulatory Dialogue – covering almost 80% of world financial markets- was kick-started in the wake of the Enron scandal in 2002 when we worked intensively with our US counterparts to minimise some of the negative impact for European companies of the Sarbanes Oxley Act.
Since then, we have moved from regulatory repair of outstanding problems to discussing regulatory developments upstream. The motto on both sides is ex-ante regulatory dialogue to avoid difficult ex-post regulatory repair. The Dialogue also provides us with a setting in which to work towards more general convergence of our respective regulatory frameworks.
The issues currently being addressed in this context include accounting, auditing, the implementation of global standards such as Basel II and deregistration. A clear agreement on these issues will help our companies to operate efficiently in the transatlantic context and to remain competitive.
In the field of accounting, significant steps forward have been taken. In April 2005, the Securities and Exchange Committee (SEC) staff proposed 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 European Parliament and the European Securities Committee (ESC) have recently approved the Commission's proposal that will enable US GAAP, Japanese GAAP, Canadian GAAP and other third country accounting standards that are converging towards IFRS to continue to be used for another 2 years in the EU. This brings the deadline to 2009, and thus aligns the EU and US timetables on this issue. This will also give recognition to other countries' efforts to converge towards IFRS, thereby promoting use of the international standards globally.
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 an acid test for the EU-US relationship in financial services because it will test the fundamental proposition of whether we can converge our regulatory systems or not.
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 focus on the "equivalence assessment" of the respective 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 timing and other practicalities surrounding the implementation of Basel II.
In our discussions with the US we are also pushing hard for real progress on the so-called "Hotel California" syndrome, whereby firms can enter the US capital markets but can never leave, i.e. they can, at the moment never deregister from the SEC. 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.
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 have the most open and dynamic financial market in the world. Openness is a real strength, as you here in London well know. By making sure that we remain open for investment, that we allow issuers and traders to enter and to leave, we create a climate that actively encourages competition, innovation and greater efficiency. The figures speak for themselves: In 2005 alone, close to 2500 cross-border merger and acquisition transactions targeting EU firms took place, for a total amount of close to 240 billion euros. Nearly 45% of all cross-border merger and acquisition activity involved a non-EU company. This proves not only the openness of our investment climate within the Single Market but also from outside. In this "open investment climate", it is vital that the EU is among the early movers in terms of top-class international standards, and so a driver for change and improvement. The fact that some of our partners in these regulatory dialogues are considering adopting part of our standards is a sign that we are on the right path.
Some countries, in the EU and elsewhere, nevertheless abuse the sensitive “national security” argument to stand in the way of foreign investment. These must be constrained. Actions on these grounds must not lead to discriminatory authorisation procedures and discouragement of foreign investment in key sectors of the economy.
To counter this as much as possible, I have recently put forward a proposal that will tighten the procedures that Member States' supervisory authorities have to follow when assessing proposed mergers and acquisitions (M&A) in the banking, insurance and securities sectors. And I want full support from Member States.
In this context the Commission is also monitoring developments in the United States with regard to an amendment of the Exon-Florio law.
Conclusions
Let me conclude, ladies and gentlemen, by recalling the main elements of my presentation tonight: The ultimate aim of the Single market for financial services is to set the stage by providing the appropriate regulatory framework for European companies and markets to compete in the EU and on a global scale. We are building a framework which is flexible and proportionate, while providing the necessary degree of transparency, openness and investor protection. A lot has been done. The market figures speak for themselves. More needs to be done in terms of finalising and implementing current legislative and non-legislative measures. The success of our policies will ultimately be measured by the competitiveness of our financial industry. But I believe today we are beginning to see the first green shoots of a deeper, more integrated, stronger European capital market, impacting positively on the real economy. We must nurture and develop these green shoots and turn them into powerful, unbending, solid oak trees –the European pillars of tomorrow's global financial markets.
