European Financial Integration: progress and prospects
European Commission Conference, Brussels
22 June 2004
1. The completion of the legislative phase of the Financial
Services Action Plan represents a significant achievement
towards the completion of the single market in financial services
in the European Union. This has involved an enormous amount
of dedicated, hard work by politicians, Commission officials,
national officials, national regulators and people representing
firms and consumers. The policy development process has come
a long way, with consultation and cost benefit analysis now
the norm. So I think we should all be proud of what has been
achieved so far.
2. But the heavy-lifting is still ahead of us. The legislation
will only make a difference to the efficiency and openness
of markets if it is implemented effectively and consistently
across all member states. National regulators will need to
work together through the three level three committees, but
also with the firms they supervise and the customers of those
firms to make sure that legislation and the related implementation
measures become a reality in the business practices and systems
operated by firms in the financial markets across the EU.
We would all be foolish if we underestimated the effort required
to get this right and we must be understanding of the pressures
on market participants who have to implement such a huge wave
of change at the same time as responding to the increasing
pressures of global competition and the pre-requisite of providing
acceptable returns to shareholders.
3. It is a perfectly understandable fact of life that when
people come into new positions they want to make their mark
so that their legacy is clearly visible when they vacate their
positions. There will soon be a new European Parliament and
a new Commission. I would call on the new Commissioner of
DG Markt to stake his or her reputation on delivering the
effective and consistent implementation of the Financial Services
Action Plan. This objective should be backed up by judicious
use of level 4 enforcement powers and a commitment only to
propose new EU legislation where an identified market failure
cannot be meaningfully corrected by other means and the proposed
legislation and related rules pass a cost benefit test. I
am sure that non-legislative options such as wider use of
competition policy and measures to improve consumer confidence
have a central role in addressing market failures.
4. As we look forward, it is crucially important to remember
that the EU markets are part of global markets. While Europe
competes with the other major economies of the world for scarce
financial capital, knowledge capital and investment, we must
bear in mind that some issues are better dealt with through
international agreement. These include International Accounting
Standards, credit rating agencies and other issues such as
financial crime and terrorist financing. And so I urge the
Commission to continue its efforts to strengthen relationships
with the US authorities and with the authorities in other
major economies around the world.
5. There is one question which all policy-makers must ask
themselves: "is the effect of our policy-making reflected
in the achievement of desired outcomes?" To answer this
question in the EU context, we first have to ask ourselves
another – "how do we measure whether an integrated
market for financial services is emerging?" There are
quantitative market indicators which can help us: interest-rate
spreads for different segments of the fixed interest market
or the level of cross-border loans to non banks or the level
of cross-border IPOs, to give three simple examples. But I
think there are other important measures we should consider
which are about the behaviour of firms and consumers and so
not readily quantifiable. Here are a few ideas to get us started.
- When I telephone my bank during one of my regular trips to another member state, they ask me which language I require. This would tell me that we have pan-EU retail banks and that their customers came from all over the EU.
- When TV commercials start advertising European retail banking services.
- When a large proportion of households owns at least one financial product from a firm based in another member state but which does not have a physical presence in their home country.
- And these kinds of examples can relate to business as well. For example my small business bank loan being provided from a bank in another member state or my fleet of cars being insured by an insurer from another member state.
6. I hope that all of us are pleased with the successful application of the Lamfalussy approach in the area of securities and the recent extension of the approach to banking, insurance and pensions. Lamfalussy arrangements have been demonstrated to work effectively at levels 2 and 3 during the production of implementing measures on the Prospectus and Market Abuse Directives. This involved extensive open consultation by CESR with a wide range of providers and users of financial services, excellent co-ordination between regulatory authorities and finance ministries and greater transparency by the Commission.
7. Open consultation procedures have been one of the key contributors
to the success achieved to-date. One of the main lessons of
the FSAP is that there are benefits both for legislators and
regulators in consulting market participants at each stage
of the process and in publishing the results. Greater transparency
in the legislative process is also central to the new arrangements.
However, the Lamfalussy procedures, now well established,
need time to demonstrate what they can achieve. The time and
space required for this must be provided. The work of CESR
has only so far covered levels one and two of the process
and, of course, CEBS and CEIOPS are only just establishing
their agenda. So, I think the real test will come when existing
legislation is amended, say in four or five years time, in
response to market developments and the effectiveness of the
legislation working in practice. There is also much work that
can be achieved at level three in fostering supervisory convergence
and best practice, I would advocate around core standards,
and in responding to real supervisory issues that emerge day
in day out in the marketplace. The level three committees
are also well placed to help carry forward work on transposition
of EU law so that implementation issues do not develop into
enforcement problems.
8. I think the Commission has done a first-class job in developing
an outline strategy for the post-FSAP period. They are consulting
openly among interested parties, involving experts, and seeking
carefully to analyse the state of integration before proposing
further measures. We especially note the support that the
expert groups have given to making the Lamfalussy processes
and structures work in practice. We share their view that
EU legislation should be subject to far more rigorous and
meaningful market failure and cost benefit analysis than has
been the case until now. Clearing and settlement is an excellent
opportunity for the Commission to demonstrate that they are
taking their commitments to better regulation principles,
market failure and cost benefit analysis seriously, not least
when they are comparing and contrasting the various policy
options in this area.
9. The FSAP has focussed on wholesale and institutional markets.
What about the EU retail market: a single market does not
yet exist in this area, and in my view it is impossible to
wave a magic wand of legislation to achieve one. So what is
required?
- hard look at gaps and barriers and how best to address them.
- appropriate EU-wide consumer protection measures.
- research into consumer behaviour, buying experience, financial capability and the extent to which customers are being treated fairly across all member states. These are areas we are working hard at in the UK.
- state-of-the-art prudential rules and supervision that have the flexibility to evolve with changes to the regulatory environment and changes in industry risk management practice. By this I mean transforming Basel II into a Capital Requirements Directive and completing the insurance Solvency 2 project. These are major, critical tasks required to ensure that the financial underpinning of the EU financial markets framework is able to sustain future shocks while maintaining EU competitiveness.
10. To conclude I will make three comments from the point of view of a regulator concerned with maintaining confidence in markets and protecting the interests of consumers, in establishing priorities for the short medium term:
- State of the art prudential rules and supervision that have the flexibility to evolve with changes to the regulatory environment and changes in industry risk management practice.
- Transforming Basel II into a Capital Requirements Directive and completing the insurance Solvency 2 project represent major and critical tasks in the financial underpinning of the EU financial markets framework, which is able to sustain future shocks and yet maintain EU competitiveness.
- Implementation and enforcement: effective, proportionate and consistent implementation of the FSAP and other measures affecting the financial sector is key to delivering potential benefits of economic integration from EU financial services legislation while avoiding costly burdens on business.
11. The creation of a single market does not come without a price. Although we may all agree that the long term benefits of an efficient and well functioning single market are considerable, it is nevertheless a fact that in the short and medium term EU firms and their customers will have to absorb substantial one off costs. Ultimately, continued regulatory change will hurt the international competitiveness of Europe. Therefore it is essential that the FSAP is fully implemented and the lessons learned from this extensive period of negotiation and implementation be considered carefully before going ahead with any further round of legislative change.
