Ladies and Gentlemen,
It's a great pleasure for me to open your conference this morning.
The free movement of capital is one of the fundamental freedoms on which the European Union is based. In fact, you could say that the success of the internal market stands or falls on the free movement of capital. It is this freedom that allows European businesses to grow and adapt to an ever-changing global market environment. It is crucial if we are to have global champions based in Europe.
Businesses are already taking full advantage of the opportunities on offer. Just look at the current merger wave! The European merger rules are there to make sure that there is a level playing field for such activities, with predictable and well-designed rules that apply to all participants equally, big or small, whatever the nationality. And easy access to adequate capital is also essential if we want companies to invest in infrastructure, in research and development, in launching new and innovative products. All things we need for the economic growth and jobs agenda.
In short, building more integrated and efficient capital markets is thus of critical importance for European growth. The case is clear:
- Accessing equity capital via public listing is an important driver of industrial growth.
- Markets also allow corporations to raise debt finance, and allow banks to offload default risk from their balance sheets. This contributes to financial stability and the safety of the private assets held by banks.
- And of course a well-functioning capital market provides a vehicle for private investment which both allocates capital efficiently and increases returns to investment holders.
But it is also very clear that everything is not yet rosy as concerns European financial services markets. I had my suspicions when I took up office two years ago, and so I launched extensive sector inquiries into this area. My aim was simple: to see whether there were still barriers to effective competition in these markets and if so, to identify possible solutions. Unfortunately, the answer to the first question is already evident from the interim results of our inquiries: things are not working as well as they should.
Our sector inquiries have led us to look closely at the functioning of several aspects of financial services: core retail banking, business insurance, and credit cards, as well as capital markets, which are our main focus for today.
And here we have discovered a recurring and fundamental problem, namely the very limited degree of competition in EU securities markets. In most cases, for securities listed on national stock exchanges, the location of issue of a security determines its trading location. Subsequent post trading processing is governed by a number of often exclusive arrangements between exchanges and clearing and settlement institutions which determines the location of post-trading operations.
With this in mind, I have been working closely with Charlie McCreevy to see how we can promote more competition in this vital sector. We both share the view that a truly competitive environment is the only way we can ensure the efficient capital market on which the success of our European businesses depends. That is why Charlie McCreevy has been so active in driving forward the MiFID directive. And it is why from our side, we published an Issues Paper in 2005 and are taking this forward in parallel to our other inquiries in the financial services sector.
And there is indeed a lot still to be done as regards the framework within which clearing and settlement systems operate in Europe, if we are to really break down the cross-border barriers identified in the Giovannini reports.
The Code of Conduct launched in July highlights the Commission's commitment to delivering this change, and doing so in a way which is consistent with our better regulation agenda. Rather than moving straight to new regulations to bring about much-needed improvements to clearing and settlement, my colleague Charlie McCreevy chose the approach of putting all the evidence – from his own research as well as the analysis built on my own Issues Paper - on the table and then giving industry the chance to come forward with a Code of Conduct.
I'm pleased to note that industry responded positively to this call. Charlie McCreevy has already welcomed the firm commitments made to transparency, interoperability and competition in the sector. I would firmly second his comments. I'd also like to say that, in my view, the Code of Conduct is as much about making competition work as removing cross-border impediments to trade. This is an important complement to the otherwise positive trend of exchange demutualization and consolidation.
But whilst the Commission is pleased with the initial positive response from industry, we are not complacent. We are very aware that a lot of effort will still be needed to achieve the results the market is entitled to expect. And it will be important to extend the Code beyond cash equities to cover other asset classes.
The Code of Conduct is a great example of how well the industry can work together, and generate a momentum to take a crucial challenge forward for fast results. But let me be clear: the proof of the pudding is in the eating. The Commission has no reason to doubt that the provisions of the Code will be properly implemented and applied by all parties. But of course we expect and need to see results. So we will continue to take a very keen interest in the next phases.
And a word of warning: if self-regulation doesn’t work, the Commission will not shy away from taking action, be it on the basis of internal market rules, or on the basis of competition rules, or indeed both together. Success or failure will be determined by how the industry - all of you - makes it work in practice. We have placed our trust in you, so please don't disappoint us.
Succeeding in this brave new world of self-regulation may mean some companies need to rethink their commercial strategies, including potential new entrants to the market. I trust your imagination and drive to deliver the changes needed.
I am sure that this industry which prides itself on fast-moving change and innovation will rise to this challenge. I very much hope that incumbents are not tempted to try to use MiFID implementation to close ranks, or the Code as an excuse not to tailor their service offering to the individual needs of market participants. We have called for price transparency so participants can understand ex-ante the likely cost of the operations they require, so they can choose to only purchase the services they need. It does not mean that they need to know the cost of their competitors’ operations as well. Uncertainty over the fees charged to competitors enables customers to drive a harder bargain, and get a deal which takes into account the overall value, present and future, of their business to the service provider. This incentive must not be weakened.
And please be aware that trading and post-trading infrastructures will still enable companies to offer private discounts to publicly-quoted fees, except where this is intended to abuse a company's dominant position. The Code changes nothing in this regard: there may be a reasonable presumption under certain conditions that public fee schedules constitute a price ceiling, but there is no presumption that they constitute a floor.
I hope you will permit me to make two final comments. Firstly: I do recognise that there are significant returns to scale, scope and network economies in capital markets. But this doesn't make monopoly provision efficient! So, because I am convinced that competition drives competitiveness, growth and productivity, I am encouraged by the news that a group of banks is considering launching a new trading platform. We do not yet have details on that project, but I trust that, if need be, it will be able to seamlessly plug into the existing post-trade infrastructure on a non-discriminatory basis. The same applies for some other platform providers. This will be a clear test of the Code in practice. As Competition Commissioner, I will watch it with great interest.
Secondly, I'd like to make a specific point on the relationship between prudential rules and competition. I think we are all aware that the relationship between the two is multifaceted and complex. But this does not mean that supervisors or competition authorities should neglect the impact of prudential rules on competition. This is, of course, not specific to trading and post-trading services but covers a wider range of issues in financial services. My services intend to develop their work on these issues over the coming months.
Ladies and gentlemen, I believe that everyone in this room this morning has a shared interest in making Europe’s capital markets more competitive. For the Commission it is fundamental to our efforts to raise the competitiveness of Europe’s economy. And for you, well - the future of your businesses depends upon it!
If we don't succeed in this task, capital market inefficiencies will raise the cost of capital to Europe’s businesses and undermine Europe's attractiveness to both European and global investors, limiting investment and foregoing growth and jobs. It's imperative that national protectionism and captive interests are not allowed to trump efforts by the market to create value for Europe’s consumers. The European Commission stands ready to do its part of the job – but we hope you'll do your part of it first!
I know you have a stimulating agenda ahead of you today which deals with a wide range of important issues. I hope that my comments this morning have provided food for thought, and wish you a successful conference.
Thank you for your attention.
