EU Financial Market Regulation Issues

1
EU Financial Market RegulationIssues Impact
Assessment

• World Bank 4/11/05
• Karel Lannoo
• Centre for European Policy Studies (CEPS)
• www.ceps.be

2
Framework

• gt 15 years of financial sector de- or
  re-regulation single passport under home country
  control
• Perception that single financial market is not
  (sufficiently) working, insufficient
  harmonisation, too much mutual recognition
• Further phase of harmonisation
• Financial Services Action Plan (FSAP)
• Lamfalussy report
• Basel II directive
• Taxation of savings
• Corporate governance, etc
• Dominance of banks continues to grow, market
  fragmentation remains, market based financing
  difficult, this has a cost for industry and users

3
The European Financial System
4
Strongly bank-based
5
But elements of more market-based system emerging
in bond market
6
Fund market fragmented
7
With diverse investor preferences
8
Financial Services Action Programme
(FSAP)Achievements - Drawbacks

• Achievements
• 40 of 42 FSAP measures adopted by October 2005
• Raised awareness of issues at stake
• Lamfalussy approach increased transparency of
  regulatory process
• Co-opetition between supervisory authorities
  high degree of regulatory cooperation, but
  competition remains
• Higher degree of regulatory harmonisation, less
  possibility for host country restrictions

• Drawbacks
• More detail at EU level higher common
  denominator
• More centralisation the European Commission is
  in the driving seat, role of national supervisory
  authorities is limited (advisory)
• New decision process is laborious, complex,
  time-consuming and resource-absorbing for the
  authorities as well as for the private sector
• Increases the opportunity for regulatory capture

9
Lamfalussy directives(prospectus, transparency,
MAD, MiFID)

• Build on earlier single market directives
• But more harmonisation, clearer definitions, more
  detail, to allow for full home country control
  and truly integrated market
• Implementing measures (level 2) further increase
  level of detail
• Requires member states to have independent
  supervisory authority to approve prospectus and
  monitor markets
• Single language regime
• Coming years should indicate whether it works
• International Accounting Standards (IAS) as basis
  for disclosure

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Prospectus directive

• Should allow for a truly single prospectus
  (maximum harmonisation!)
• composed of three different segments
• one for equity issuers (and home country control)
• a second for non-equity issues with denomination
  of at least 1,000 (choice of home country)
• a third and light for professional investors
  (gt50,000)
• Most debt issuers will go for the basic document
• But some markets (London, Dublin, Luxembourg)
  have launched alternative schemes also
  competition from non-EU centres (Switzerland,
  Singapore)
• US GAAP IAS equivalence agreement of 22 April
  2005 is important achievement

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Transparency market abuse

• Covers periodic and ad-hoc disclosure
• Annual, semi-annual and interim management
  reports ( Q reports)
• Material or price sensitive information must be
  made public as soon as possible (company website
  plus media/supervisory authority), and
  simultaneous
• Conflicts of interest in investment research must
  be prevented, member states must impose
  organisational structures
• Guidelines for information disclosure

12
MiFID (or ISD II)

• Abolishes concentration provision of ISD at a
  cost
• Elaborate pre- and post-trade transparency regime
  for exchanges (regulated markets), multilateral
  trading facilities (MTFs) and investment firms,
  (only for equity transactions)
• Best execution takes a full set of criteria into
  account (not only price), prior consent for
  internalisation
• Conduct of business rules to be worked out in
  level 2, fully harmonised, to avoid friction
  betw. home a host
• Rules on conflicts of interest
• Gone out of control in implementing measures?
  Calls for further delay of implementation date

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Making it work is main challenge!

• Focus should now be on implementation and
  enforcement
• Enforcement was weak point in post-1992 phase
• Committee structure should improve situation
  (co-opetition)
• But still some unclarity about who is finally in
  charge
• Can the EU Commission cope in EU-25?
• Supervisory convergence is new catchword
• What is supervisory convergence?
• Yes for objectives, no full convergence of
  procedures required
• Need for formal powers for the Committee of
  European Securities Regulators (CESR)?

14
FSAP transpositions I
15
FSAP transpositions II
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Overregulation?

• Financial markets, and capital markets in
  particular, require a well-developped regulatory
  structure
• Multi-layered
• Important but diminishing role for
  self-regulation
• Match needs of issuers and investors
• Was certainly underdevelopped in Europe
• Will only work when EU law is respected, and
  mutual recognition allowed to work (cfr. trend to
  full harmonisation)
• But regulatory process has a bias, adapted to the
  needs of the big players (one size fits all),
  but heavy or impossible for small ones

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Future priorities

• Retail financial markets
• New consumer credit directive (CCD)
• Single European Payment Area (SEPA)
• Review of deposit protection directive
• Asset management
• Adapting UCITS directive to new structure
• Application of competition policy
• Inquiries into retail banking, payments,
  cross-border MA, clearing and settlement
• Regulatory dialogues
• EU-US dialogue vibrant, but more may be needed
• Corporate governance
• Big item for this Commission, but will be
  difficult to achieve

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The New Regulatory Structure