The EU’s newfinancial servicesagenda

Alasdair Murray andAurore Wanlin

February 2006

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ADVISORY BOARD

PERCY BARNEVIK......................................... Board member, General Motors and Former Chairman, AstraZeneca

CARL BILDT.............................................................. Chairman, Kreab Group and Former Swedish Prime Minister

ANTONIO BORGES...................................................................................................... Former Dean of INSEADNICK BUTLER (CHAIR)........................................................................... Group Vice President, Strategy, BP p.l.c.

LORD DAHRENDORF .................................... Former Warden of St Antony’s College, Oxford & EU Commissioner

VERNON ELLIS............................................................................................ International Chairman, Accenture

RICHARD HAASS................................................................................... President, Council on Foreign Relations

LORD HANNAY..................................................................................... Former Ambassador to the UN & the EU

IAN HARGREAVES......................................................... Group Director of Corporate and Public Affairs, BAA plc LORD HASKINS ........................................................................................... Former Chairman, Northern Fo o d s

FRANÇOIS HEISBOURG................................................ Senior Advisor, Fondation pour la Recherche Stratégique

LORD KERR............................... Deputy Chairman, Royal Dutch Shell and former Permanent Under Secretary, FCO

FIORELLA KOSTORIS PADOA SCHIOPPA............................................... P r o f e s s o r, La Sapienza University, Rome

RICHARD LAMBERT......................................... Member of the Monetary Policy Committee, Bank of England

PASCAL LAMY.......................................................... Director General, WTO and Former European CommissionerD AVID MARSH................................................................................................... Pa r t n e r, David Marsh & Co Ltd

DOMINIQUE MOÏSI................................................ Senior Advisor, Institut Français des Relations Internationales

JOHN MONKS.............................................................. General Secretary, European Trade Union Confederation

DAME PAULINE NEVILLE-JONES............................................ Chairman, IAAC and Former Political Director, FCO

CHRISTINE OCKRENT....................................................................................... Editor in chief, France Télévision

WANDA RAPACZYNSKI................................................................... President of Management Board, Agora SALORD ROBERTSON............................. Deputy chairman, Cable and Wireless and former Secretary General of NAT O

KORI SCHAKE............................................... Research Fe l l o w, Hoover Institution and Bradley Professor, West Po i n t

LORD SIMON ............................................................ Former Minister for Trade and Competitiveness in Europe

PETER SUTHERLAND............................................................ Chairman, BP p.l.c. & Goldman Sachs International

LORD TURNER ................... Chairman, UK Pensions Commission and Vice Chairman, Merrill Lynch Holdings Ltd

ANTÓNIO VITORINO....................................................................................... Former European Commissioner

The EU’s new financial servicesagenda

Alasdair Murray and Aurore Wanlin

Contents

About the authors

Authors’ acknowledgements

1 Introduction 1

2 A ‘tidying-up’ exercise? 5

3 A retail financial services action plan? 15

4 Improving the Lamfalussy process 25

ABOUT THE AUTHORS

Alasdair Murr a y is director of Centre F o rum. Until January 2006 hewas deputy director at the Centre for European Reform. He waspreviously an economics and Brussels correspondent for the Timesand a business journalist for the Times and the Mail on Sunday.While at the CER, he wrote the third and fourth ‘LisbonScorecards’, and co-authored the fifth. His other CER publicationsinclude: ‘A fair re f e ree? The European Commission and EUcompetition policy’, October 2004; ‘An unstable house?R e c o n s t ructing the European Commission’, March 2004;‘Corporate social responsibility in the EU’, June 2003; ‘Europeaneconomic reform: Tackling the delivery deficit’, October 2002; and‘The future of European stock markets’, May 2001.

A u ro re Wa n l i n is a re s e a rch fellow at the Centre for Euro p e a nR e f o rm. She has an MSc in EU policy-making from the LondonSchool of Economics. Her other CER publications include ‘The Dohatrade round: What hope for Hong Kong?’, December 2005; ‘The EU’scommon fisheries policy: The case for re f o rm, not abolition’,December 2004; ‘The EU’s constitutional treaty: The final deal’, June2004; and (co-author) of ‘The Lisbon Score c a rd V’, M a rch 2005. Sheis the author of the forthcoming ‘Lisbon Score c a rd VI’.

AUTHORS’ ACKNOWLEDGEMENTS

A great many experts have helped with this working paper, many ofwhom would wish to remain anonymous. But we would specific a l l ylike to thank Howard Davies, Bill Eldridge, Michael McKee andRichard Kaye. Thanks are due to all CER staff for their comments,but particularly to Simon Tilford, Katinka Barysch, Hugo Bradyand Daniel Keohane for editing, and Kate Meakins for layout andproduction. Any remaining errors are the authors’ own. The viewsexpressed within do not necessarily reflect those of Barclays, whosesupport we are grateful for.

1 Introduction

A well-functioning financial services sector is vital for thecompetitiveness of the European economy. Easy access to capital isa pre-condition for the growth of new and innovative businesses,which the EU desperately needs if it is to keep pace with theeconomies of America, China and India. The integration ofE u ropean financial markets would also make the EU’s cre a k i n gpension systems more sustainable by encouraging more people toinvest in equity-based private pension funds.

London Economics, a consultancy firm, estimates that the benefitsfrom integrating Europe’s wholesale capital markets could amountto S130 billion, or 1.1 per cent of EU GDP,over the next decade.1 Increased cross-bordercompetition between banks, insurancecompanies and investment firms would alsobenefit European consumers. At present thecost and availability of retail financial serv i c e svaries hugely across the EU because nationalmarkets remain largely segmented.

At the Lisbon summit in March 2000, EU heads of government signedup to an ambitious programme designed to achieve a single market infinancial services by 2005. The financial services action plan (FSAP)was an attempt to reduce the legal obstacles which prevent businesses– whether retail banks, insurance companies or stock exchanges –f rom selling their products and services across the EU.

On paper, at least, the FSAP has been a success. The EU deservesc redit for reaching agreement on virtually all of the plan’s 42measures, opening the way for businesses to provide cross-border

1 London Economics, inassociation withPricewaterhouseCoopersand Oxford EconomicForecasting, ‘Quantificationof the macro-economicimpact of integration of EUfinancial markets’,November 2002.

financial services across Europe. A single market in financial serv i c e sis still far from realisation, however. Many countries still have toimplement the majority of the FSAP measures. Businesses need timeto adapt to the new rules. While the EU has made good progress inestablishing a cro s s - b o rder legal framework for the wholesalemarkets, such as securities, the retail market – which includesproducts such as bank accounts and mortgages – remains highlyfragmented. Also, national re g u l a t o ry authorities adopt widelydiffering approaches to the supervision of financial services firms,thus hampering the development of a smoothly functioningEuropean market.

Many criticise FSAP legislation for being too heavy-handed, withoverly detailed and excessively prescriptive rules. London-basedinvestment banks in particular are increasingly critical of the qualityof the legislation. They worry that cumbersome regulation couldpose risks to the competitiveness of London as a global financialc e n t re. All financial services companies across the EU – and not onlyLondon investment banks – want the drive to force open re t a i lmarkets to avoid excessive red tape, and they hope for a moreconsultative approach.

The Commission appears to have taken some of these concerns onboard. In its recent white paper on financial services, it sets out farm o re modest legislative ambitions. It also promises to consultextensively and conduct impact assessments before proceeding withany new measure s .2 The paper emphasises that it will only take

action on a “carefully targeted, evidence-based,bottom-up” basis. This is surely correct as itwill take time for member-states and businessesto implement previously agreed measures.

Financial services are not about to slip down the EU’s agenda,h o w e v e r. The white paper shows that the Commission still has tou n d e rtake a substantial ‘tidying-up’ exercise, including import a n tnew measures in areas such as cro s s - b o rder payments, and clearing

2 TheEU’snewfinancialservicesagenda Introduction 3

and settlement services. It has also launched an investigation intoretail financial services, which could lead to action to re m o v eb a rriers to competition in the medium term. In the longer term, theCommission is likely to face pre s s u re to take more radical action toopen up Euro p e ’s retail financial services markets. Finally, the EUhas much work still to do to encourage greater converg e n c ebetween regulators.

2 European Commission,‘White paper, financial services policy 2005-2010’,December 1st 2005.

2 A ‘tidying-up’ exercise?

The Commission, the European Parliament and EU governmentshave shown unprecedented determination in reaching agreement onthe FSAP’s 42 measures (virtually) on time. Member-states adoptedthe last substantial piece of legislation, the ‘capital re q u i re m e n tdirective’, in October 2005. This key directive sets out how muchcapital a bank or investment firm must maintain in re s e rve tocushion against shocks.

H o w e v e r, businesses and some national administrations havecomplained that the fast pace of financial services re f o rm is leadingto ‘legislative fatigue’. They argue that the EU needs time to absorbthe existing programme – and check that it works – beforeembarking on any new ambitious agenda. There have cert a i n l ybeen less than satisfactory compromises on a number of keyd i rectives. For example, the member-states only managed to re a c ha g reement on the ‘takeover directive’ in April 2004, after morethan a decade of trying, by introducing several opt-outs. Thesemean that there is little chance the directive will achieve its originalaim of encouraging more cro s s - b o rder mergers and takeoverswithin the EU.

Commission officials privately admit that the demanding FSAPtimetable resulted in some directives being pushed through tooq u i c k l y. For example, in 2001 the Commission failed to consults u fficiently before issuing a draft ‘prospectus directive’, whichestablishes common rules for companies wishing to raise capitala c ross the EU. Businesses complained bitterly about the originalp roposal, which was subsequently heavily amended in theE u ropean Parliament. The Commission has now promised tomodify or scrap any measures which turn out to have unexpected

financial centre, ranking only thirteenth for its transposition rate.The Commission has promised to take firm action against member-states that fail to implement financial services legislation in a timelyand effective manner. For example, it has begun infringementp ro c e d u res against no fewer than 16 member-states for their failureto implement fully the ‘market abuse directive’. This directive seeksto ensure that EU countries have common rules against illegalpractices such as insider trading.

The current focus on implementation does not mean theCommission will not propose any new financial services legislationin the coming years. Subsequent chapters of this paper will look atthe key issues of superv i s o ry convergence and retail financials e rvices integration. However, the Commission’s white paper alsooutlines a series of ‘tidying up’ measures, tackling specific pro b l e m sthat were not fully resolved by the action plan. In part i c u l a r, theCommission has proposed further work in the areas of clearing andsettlement, the creation of a single payments area, and the re t a i linvestment fund market:

★ Clearing and settlement

The EU has not always resorted to legislation to create a viablesingle market in financial services. It has sometimes encouraged theprivate sector to find solutions. In part i c u l a r, the Commission has sofar resisted the temptation to legislate on cross-border clearing andsettlement (C&S) – the costly ‘back office’ tasks of paying for share sand transferring the necessary paperwork.

National C&S systems in Europe require share traders to negotiatea raft of diff e rent practices, taxes and regulations when makingc ro s s - b o rder purchases. The Giovanni group, a panel of expert sadvising the Commission on financial services, has identified 15significant barriers ranging from different opening times to legal ortechnical diff e rences in settling share trades. The cost of cro s s - b o rd e rC&S in the EU is estimated to be between S1.6 billion and S5

or damaging effects, and to complete a thorough economic andlegal assessment of all FSAP legislation by 2009.

The Commission’s recent white paper on financial services isdesigned to address these criticisms of the FSAP. The Commissionhas strengthened its commitment to consult widely and conductproper impact assessments before proposing any new legislation.This is welcome. The frustration of some in the City of London overtheir lack of input into the drafting of legislation is pro b a b l yj u s t i fied. The need to ensure consistent regulation of capital marketshas to be balanced against the risk that excessive or unnecessaryregulation could drive business out of the EU.

Charlie McCre e v y, the internal market commissioner, hasresponded to such concerns by saying that the Commission willfocus on the essential, but less glamourous, task of fullyimplementing the existing FSAP measures. Indeed, the re m a i n i n gobstacles to a fully functioning single market in financial serv i c e sa re as likely to arise from improper implementation or enforc e m e n tof FSAP measures as from the absence of appropriate rules. TheCommission needs to ensure that governments implement theF S A P ’s measures on time and without adding national re q u i re m e n t s(a practice known as ‘gold-plating’). Additional member-state ru l e sand regulations would lead to new distortions in the single market,adding extra costs for businesses and making them less competitivethan their international counterpart s .

The Commission’s most recent implementations c o re c a rd shows that most member-states aremissing key deadlines for turning FSAPd i rectives into national law. In December

2005, only six member-states – Austria, Denmark, Estonia, Ire l a n d ,Latvia and Poland – had implemented all the directives on time.3 A tthe other end of the scale, Greece, the Netherlands, Luxembourgand Sweden still had five or six directives to implement.S u r p r i s i n g l y, the UK had a relatively poor re c o rd for a major

A‘tidying-up’exercise? 76 TheEU’snewfinancialservicesagenda

3 http://europa.eu.int/comm/internal_market/finances/actionplan/index_en.htm#transposition.

operations. Most notably Deutsche Börse, which owns Eure xClearing, has little incentive to give up this lucrative business.Exchanges may keep C&S prices high, or make it difficult forcompetitors to access the market, to maximise their pro fits. In 2004,the Commission proposed bringing forward a framework directivedesigned to remove the remaining C&S barr i e r s .6 H o w e v e r, thefinancial services industry is opposed to any new EU legislation.Banks fear that the member-states will add national re q u i rements orget bogged down in endless rows, so it couldtake them years to agree on a new directive.In the meantime, the ensuing uncert a i n t yreduces the incentives for businesses todevelop common standards.

H o w e v e r, businesses need to re i n f o rce their eff o rts to integrate C&So rganisations. Governments should also use competition law toe n s u re that companies have unrestricted access to C&S systemsa c ross Europe. Competition authorities in some member- s t a t e s ,such as Italy, and the European Commission have already started toinvestigate ‘vertical’ organisations, which bring together trading,clearing and settlement under a common ownership. If pro g re s sremains disappointing, the Commission will need to consider anew directive.

The Commission should also start a debate on the curre n ts t ru c t u res of the C&S system. A 2005 City of London re p o rta rgued that the EU needs a single pan-European central clearingc o u n t e r p a rty (CCP) that would bring together the two biggestE u ropean clearing organisations, LCH Clearnet and Eure xClearing. A CCP would act as “the buyer for all sellers and a sellerfor all buyers”, consequently assuming the risk for all payments. Itwould also allow institutions to ‘net’ their trades. This means thatrather than transferring sums for each individual trade, a fin a n c i a lcompany would settle the outstanding balance at the end of the day,g reatly reducing the number of transactions and the amount ofcapital that needs to flow through the settlement system. Although

billion a year higher than in the US (whichuses just one company to carry out allC & S ) .4 A c c o rding to the Commission:“ c ro s s - b o rder clearing and settlement costscan still be up to six times more thandomestic settlements”.5

The European Commission has becomeincreasingly frustrated with the slow paceof progress in reducing the costs of C&S

services in Europe. In September 2005, Commissioner McCreevyt h reatened to take action if Euro p e ’s financial services industry failedto cut the costs of cro s s - b o rder trading within six months. Businesseshave made some pro g ress in agreeing common standards. Forinstance, the Society for Worldwide Interbank FinancialTelecommunication, a financial industry-owned co-operative,published in October 2005 a draft communication defining commons t a n d a rds for opening hours and settlement deadlines. The membersof this organisation are due to adopt this communication in March2006. Euro c l e a r, one of the two principal clearing houses forsecurities traded in the EU, has also started to define commonmarket practices.

H o w e v e r, creating common standards is only a first step. Allbusinesses across Europe need to follow them consistently.Furthermore, only governments can remove some of the barriersidentified by the Giovanni group, and so far many have failed to doso. For instance, the French government has not overturned rulesthat re q u i re non-French investors to appoint a French agent tocollect tax on securities in France. Reclaiming withholding tax inItaly is still a problem for foreign investors, while calculating andcollecting stamp duty in the UK is so complex that retail investorscannot easily access that market.

Another obstacle to a more integrated C&S system is the ownershipstructure of the industry. Some exchanges continue to own C&S

8 TheEU’snewfinancialservicesagenda A‘tidying-up’exercise? 9

4 Jacques de Larosière,‘Good news and bad news onEurope’s financial markets integration’, Europe’s World,Autumn 2005.

5 Speech by Charlie McCreevy,‘Fund management – regulation tofacilitate competitiveness, growthand change’, Luxembourg,September 13th 2005. 6 European Commission,

‘Clearing and settlement in theEuropean Union – the way forward’, April 2004.

The slow pace of progress prompted the Commission to publish adraft proposal in December 2005 to establish a common legalframework for all electronic payments. The directive would apply toall member-states (not just the eurozone) and is designed to providethe legal foundations for a single payment area. For example, thed i rective stipulates that payments must be credited by the end of thenext working day at the latest. It would also ensure that businessesother than banks have access to the new cro s s - b o rder paymentssystem and can compete for consumers. Commissioner McCreevyhas added that if the financial industry does not speed up progresshe might need to introduce further ‘incentives’ for the bankingindustry, although he has not specified what form these might take.

Some industries have expressed concerns about the scope of this draftd i rective. For example, the directive will apply to any payments madeto, or from, any bank based in the EU. There f o re, it would apply toi n t e rnational transfers between EU and non-EU banks. Somebusinesses fear that such a re q u i rement could make EU banks lesscompetitive. Despite these concerns, there is no doubt that the dire c t i v eis a step in the right direction. The impact assessment conducted by theCommission shows that a more efficient EU-wide payments systemcould save between S50 and S100 billion per year for businesses.

★ Investment funds

The Commission has also recently begun areview of the Union’s framework for retailinvestment funds – known in EU jargon asUCITS. Estimates from the Commissionshow that there are nearly 29,000 funds inEurope, managing some S4 trillion of assets.7 Investment funds arean increasingly important element of European financial markets,helping to mobilise household savings and channelling them toward sproductive investments. Investment funds are likely to play an evenm o re important role in the future as EU member-states look toincrease private pension provision.

such a merger would reduce competition across the EU, the City ofLondon argues that the creation of a single organisation would bethe best way to reduce costs and increase the efficiency of clearingoperations: “the more extensive the network of users and the morebusiness they put through a single service the more effective thes e rvice becomes”.

★ Single payments area

At present, there are wide differences between EU member-states’payments systems in terms of legislation, technical standard s ,business practices and payment instruments. As a result, consumersface many extra costs and obstacles to cross-border payments. Forexample, EU citizens cannot use direct debits across borders. TheCommission estimates that payment charges cost consumers theequivalent of up to 3 per cent of EU GDP each year.

C o n s e q u e n t l y, there is an urgent need to establish a ‘single paymentsa rea’. This would make cro s s - b o rder banking transfers and paymentsas cheap and easy as domestic transactions. In 2002, the bankingi n d u s t ry – facing the threat of Commission intervention – promised todevelop a Europe-wide payments infrastru c t u re with commons t a n d a rds and products by 2010. The European Payments Council(EPC) has begun designing pan-European standards and infrastru c t u refor cro s s - b o rder euro payments and has devised a roadmap for theirimplementation. However, knitting together the various nationalpayments systems is proving far from straightforw a rd .

Not enough banks are applying the EPC’s standards, in part becausethey remain voluntary. Banks fear that they will not recoup the highinitial investment costs if competitors do not adopt the sames t a n d a rds. More o v e r, banks often package payments with otherm o re lucrative services, such as cash management or fore i g nexchange. Understandably, they are reluctant to see paymentsstripped out as a portable, and cheap, stand-alone service. Thusprogress is slow, and the 2010 target is likely to be missed.

10 TheEU’snewfinancialservicesagenda A‘tidying-up’exercise? 11

7 European commission,‘Green paper on the enhancement of the EU framework for investmentfunds’, July 12th 2005.

of the London-based hedge fund which helped orchestrate theresignation of the chairman and chief executive of Deutsche Börse in2005. Franz Müntefering, then chairman of the German SocialDemocratic Party (SPD), described such funds as “locusts” intent onstripping German companies bare.

T h e re is no doubt that hedge funds have become incre a s i n g l yi m p o rtant players in the financial markets. They manage assets wort h$1 trillion and account for between a third and half of all trading onthe New York and London stock exchanges, and are there f o rebecoming essential to the liquidity of international markets.1 0

H o w e v e r, the Commission says that it does not favour an EU re g i m efor hedge funds, arguing that they make up too small a part of themarket to be a source of systemic risk.1 1 B u tit has set up a working group to investigatewhether a common re g u l a t o ry frameworkwould help develop a pan-European marketfor hedge funds. The group will also explorehow retail investors, who might not have ap roper understanding of the risks, shouldbe protected. This is the right approach.

A rush to introduce EU regulation could unnecessarily constrain theability of hedge funds to innovate, and also drive some funds off-s h o re beyond the reach of any financial authorities. But theCommission and national regulators should watch hedge funds withspecial care, and in particular ensure that consumers are adequatelyprotected. Hedge funds were initially sold only to the very wealthyand financially aware, such as fund managers. But they areincreasingly touted as safe for relatively unsophisticated investors.Hedge funds are also becoming increasingly popular with banks orinvestment funds, which in turn exposes their own consumers torisk. If a big hedge fund collapses or if some hedge fund scandalh u rts small investors, it is sure to provoke a fie rce political backlash.This could then force the EU to rush forw a rd inappro p r i a t elegislation, damaging the competitiveness of EU markets.

The EU’s current framework, which dates back to 1985 and wasamended in 2001 and 2002, was intended to encourage thedevelopment of cross-border retail investment funds. But financials e rvices firms complain that the existing legislation has failed tocreate a single market. Funds still need to be registered in everymember-state where they are sold, while national tax rules oftenp revent the cro s s - b o rder mergers of funds, which would help achieve

g reater economies of scale and cutmanagement costs. European funds are just afifth as large as their US counterparts, andthe European Commission calculated thatretail investors could save as much as S5billion a year if EU funds were, on average,the same size as in the US.8 Assets managedby EU funds amount to 45 per cent of GDP,compared with 70 per cent in US.9

The Commission issued a green paper on investment funds in July2005, proposing several steps to improve the current framework, suchas clarifying the definition of the assets acquired by UCITS andsimplifying the notification pro c e d u re for transferring funds acro s sb o rders. It is also working closely with the Committee of Euro p e a nSecurities Regulators (CESR) to forge a consensus on commone n f o rcement practices to improve transparency in the market. Financials e rvices firms have broadly welcomed these ideas. The Commissionnow needs to bring forw a rd concrete measures which will foster acompetitive and stable environment for European investment funds.

★ Hedge funds

Hedge funds – fast growing, lightly regulated investment vehicles –have become a major political concern in the last few years. SomeE u ropean politicians have portrayed hedge funds as theunacceptable face of financial markets, claiming that theiru n o rthodox investment techniques pose a threat to financials t a b i l i t y. German politicians were especially critical of the behaviour

12 TheEU’snewfinancialservicesagenda A‘tidying-up’exercise? 13

8 European Commission,‘Green paper on the enhancement of the EU framework for investmentfunds’, July 12th 2005.

9 Speech by Charlie McCreevy,‘The EU framework for investment funds: a facilitator– not a straitjacket’, Brussels,October 13th 2005.

10 ‘Looking for trouble’, TheEconomist, June 30th 2005.

11 Speech by Charlie McCreevy,‘Pension funds and asset managements: a European perspective’, Dublin,September 22nd 2005.

3 A retail financial services actionplan?

The EU has made good progress towards creating a viable singlemarket in wholesale financial services, such as securities trading. Butso far it has secured only limited integration within the re t a i lfinancial services sector. In theory, existing EU legislation, such as thesecond ‘banking directive’ agreed in 1993, should permit financialretail companies to compete across borders. In practice, substantialobstacles remain. For example, firms find it difficult to offer similarp roducts, such as bank accounts or mortgages, in diff e rent countriesbecause of incompatible consumer protection legislation. The taxtreatment of financial products also varies widely.

Most notoriously, some member-states have used consumerp rotection or prudential banking rules to obstruct foreign takeoversor competition. Prudential banking rules are supposed to allowregulators to stop financially risky firms undermining the health ofa country ’s banking system – not halt unwanted mergers oracquisitions. But firms complain that some national re g u l a t o r ssuddenly dust off obscure regulations, or carry out ‘midnight’inspections, in an effort to scare off unwanted foreign competition.

In 2005 the Italian central bank, and its then governor AntonioFazio, came under intense scrutiny for apparently trying to blocktwo foreign takeovers of Italian banks. In both cases – Dutch firmABN Amro’s bid for Banca Antonveneta and Spanish group BBVA’so ffer for Banca Nazionale del Lavoro – Italian firms emerg e d ,initially at least, victorious.

accounts in different ways. For example, over half of Italians sharetheir current accounts, greatly reducing the real cost. Allowing forthis, the re p o rt estimates that Italians pay an average of S113 a yearin banking charges. Similarly, British and Dutch banks offer cost-fre ecurrent accounts in an effort to sell more lucrative products such asloans and mortgages.

Businesses and some national regulators argue that many of theobstacles to a single market in retail financial services, such aslanguage, culture or spending and saving patterns, cannot beresolved through legislative action. Some fear that well-meaning EUaction, such as common consumer protection standards for retailservices, could lead to higher costs or force them to withdraw somelong-standing products. Thus the Commission needs to conduct at h o rough analysis of the obstacles to, and potential economicbenefits from, the integration of retail services before taking anyfurther action.

How to integrate

Even when the Commission has established a clear case for actionin the area of retail finance services, it faces a dilemma about howit should proceed. The EU’s usual method is to use legislation tof o rce open markets: a directive lays out common minimums t a n d a rds, and firms that meet these can operate anywhere acro s sthe single market. However, such is the huge diversity – andpolitical sensitivity – of retail financial services that the Commissionis rightly wary of using ‘one size fits all’ directives. The EU’s fewattempts to use legislation for retail financial services were notespecially successful. For example, the ‘consumer credit directive’ –which seeks to establish common rules for firms offering fin a n c i a lloans across the EU – was agreed as far back as 1987 but has failedto create a cro s s - b o rder market in loans and credit cards. The EUhas now spent three years trying to revise the directive in an eff o rtto make it simpler and more effective (the Commission published itslatest proposals in October 2005).

The Commission took a robust line, warning Fazio that he wouldalmost certainly breach EU law if he blocked the bids. It launched aformal infringement procedure against the Italian government, onthe grounds that its banking laws were in breach of single marketrules, because they failed to set out clear and transparent pro c e d u re sfor approving or blocking mergers.

Meanwhile, Fazio’s position was further undermined byrevelations of his close relationship with the chief executive of oneof the successful Italian banks, Banco Popolare Italiano (BPI),which trumped ABN Amro ’s bid for Banca Antonveneta. Fazio(who had been appointed for life) finally resigned in December2005, after coming under intense political pre s s u re to step downfollowing the arrest of BPI’s chief executive for marketmanipulation. ABN Amro was able to take control ofAntonveneta after BPI’s bid collapsed – the first time a fore i g nbank has acquired an Italian rival.

Making the case for action

The European retail services sector is both large and highlyfragmented, so there should be substantial economic gains fro mfurther integration. A more competitive single market should alsobenefit consumers through cheaper prices and greater choice.

However, there is at present a dearth of reliable evidence about thecosts and benefits of retail financial services integration. The limiteddata available reveals much about the diversity of retail serv i c e sacross the EU, but does little to provide a clear basis for EU action.For example, the 2005 World Retail Banking report found in itssurvey of 19 countries that Italy was the most expensive place tohold a current account, with charges of an average of S252 a year.At the other end of scale, the UK, Netherlands and Belgium all havebanking costs of less than S70 a year, with accounts in theNetherlands costing just S34 a year. However, the report cautionsthat such comparisons are crude because consumers use curre n t

16 TheEU’snewfinancialservicesagenda Aretailfinancialservicesactionplan? 17

The Commission established the principle that prudential ru l e scannot be used to block foreign takeovers during the ABNAmro/Banca Antoneveneta bid battle. It is now setting out to endany ambiguity by revising the relevant article (16) of the bankingdirective (and the equivalent article in the insurance directive). TheEU should ensure that banking regulators in future make use ofp rudential rules in a fully transparent manner. For their part ,regulators should state explicitly when and why they have turned toprudential rules, for example to block a bid.

Many financial services firms show no interest in acquiring atoehold in another European market by purchasing a rival. Thusthe EU also needs to explore whether there are other obstacles tocompetition between financial services firms than those dire c t l yrelated to takeovers and mergers. The Commission re c e n t l ylaunched a competition investigation into the sector. This shouldshow whether re g u l a t o ry obstacles, or even collusive behaviour,p revent new entrants from competing effectively for retail business.For example, financial services firms frequently complain that theydo not have equal access to credit data – making it difficult toassess properly the risks of lending to customers. The Commissionshould focus on forcing member-states to revise any national ru l e sand regulations that are unfairly preventing new entrants fro mcompeting for products such as credit cards and savings pro d u c t s .Such an approach should steadily reduce the obstacles to afunctioning single market, without the need to use cru d eh a rmonising legislation.

★ The 26th regime

The Commission has promised to take a closer look atestablishing common rules for certain products, such as loans andm o rtgages. The so-called 26t h regime would sit alongside, ratherthan replace, the existing rules in the 25 member-states. Firm swhich choose to offer a product under 26t h regime rules could thensell anywhere in the EU without also having to meet national

Commissioner McCreevy has said that he would prefer to find non-legislative solutions. In part i c u l a r, the EU is examining the possibilityof using its competition powers and the so-called 26t h regime (seebelow) to encourage greater integration. However, some firms arelikely to maintain pre s s u re for the EU to use directives and re g u l a t i o n s ,a rguing that the tried and tested legislative route offers benefits, suchas legal cert a i n t y, which outweigh the extra costs of harm o n i s a t i o n .

★ Making greater use of competition powers

The Commission has begun to use its broad-ranging competitionpowers to force open national financial retail markets, especially byremoving obstacles to cro s s - b o rder mergers and takeovers.Compared to other sectors, there have been few major cross-bordermergers or takeovers in banking (with the notable exception of thenew member-states, where large parts of the banking sector are nowforeign owned). A recent Commission paper found that between1999 and 2004, cross-border tie-ups amounted to around 20 percent of all financial services mergers and acquisitions.1 2 T h i scompares with a figure of 45 per cent for other business sectors.M o re o v e r, the majority of financial services deals were betweensecurities firms, rather than banks or insurance companies. The

l a rgest cro s s - b o rder banking deal to date hasbeen Banco Santander Central Hispano’sS12.5 billion purchase of Abbey National,the UK’s sixth largest bank, in 2004.

Cross-border tie-ups may be attractive because they provide firmswith a short cut into a new market, avoiding the costs andre g u l a t o ry difficulties of trying to start from scratch. However,buying abroad often proves less financially attractive than adomestic merg e r, where cutting branches or merging back offices canallow substantial cost savings. Moreover, many of Europe’s mostsuccessful financial services companies are looking to expand infast-growing economies such as China, rather than investing in theEU’s mature and sluggish markets.

18 TheEU’snewfinancialservicesagenda Aretailfinancialservicesactionplan? 19

12 European Commission,‘Cross-border consolidation inthe EU financial sector’,October 26th 2005.

their housing assets to fund, for example,l o n g - t e rm care in their later years.1 4

A re p o rt published by London Economics estimates that anintegrated mortgage market could raise EU GDP by 0.7 per centand reduce the average cost of servicing a S100,000 mortgage byS470 a year.1 5 The re p o rt does not deny there would be substantialcosts to introducing EU-wide mortgage ru l e s– around S2.5 billion a year for businesses –but argues that they would be dwarfed bythe overall gains to the market of aro u n dS85 billion.

However, the obstacles to creating an integrated mortgage marketremain considerable. The size of the private housing market isdictated by a broad array of national regulations, such as taxincentives for home ownership, restrictions on lenders and supportfor the rental sector. As a result, the stock of mortgage debt rangeshugely across Europe – from 70 per cent of GDP in the UK to just13 per cent in Italy. The EU average is 44 per cent.

The Commission’s green paper suggests that the creation of a‘euromortgage’ – a legal framework for a housing loan which isapplicable across the entire EU – would be one possible way ofencouraging a pan-European mortgage market. However, it is farfrom clear that demand for such a product exists. Understandably,consumers prefer to hold a mortgage, invariably their larg e s tfinancial commitment, with well-established firms they know. Onlya few foreign lenders have penetrated even the very liberal UKm o rtgage market, and cro s s - b o rder mortgages – mainly for thepurchase of second homes elsewhere in the EU – amount to just 1per cent of all mortgage transactions.

Moreover, the establishment of a euromortgage would only make itmarginally easier for lenders to offer their products across the EU.The cost and stru c t u re of a mortgage is dependent on an assessment

rules and regulations. Some firms favour the establishment of 26t h

regime rules, because take-up would be entirely voluntary andthey would not force harmonisation on existing products. Thus afirm could offer a personal loan which meets 26t h regime ru l e sa c ross the EU, but also continue to offer successful specialisednational loan products in key markets. In theory, many re g u l a t o r salso support the creation of such rules as they would iron outc ro s s - b o rder legal diffic u l t i e s .

H o w e v e r, the EU’s existing attempts at establishing voluntaryproduct rules have not proven very successful. The EU has yet todesign a 26th regime which clearly meets an outstanding demand,whether from businesses or consumers. For example, few businesseshave taken advantage of the EU’s company statute, which wassupposed to provide firms with the option of registering as aEuropean company, rather than meeting the company rules of anindividual member-state. Moreover, there is a risk that such rulescould stifle innovation by too tightly defining what products can beoffered on a cross-border basis. The onus is on the Commission toprove that a financial services product offered under the 26th regimegenuinely meets an unfulfilled need. In the meantime, the EU shouldconcentrate on removing the obstacles to fair competition inEuropean markets.

Mortgages: A test case for action?

The mortgage market provides an economically and politicallytempting focus for the EU’s work on retail financial services. Forexample, in 2004 a high-level group led by Wim Kok, conducteda review of the EU’s economic re f o rm (‘Lisbon’) strategy. Itsuggested that measures to boost the private housing sector could

play an important ro l e .1 3 The Commission’sg reen paper on mortgage credit argues thata more efficient mortgage market wouldcontribute to economic growth, aid labourmobility and help EU consumers to tap into

20 TheEU’snewfinancialservicesagenda Aretailfinancialservicesactionplan? 21

13 High-level group chaired byWim Kok, ‘Facing the challenge – the Lisbon strategyfor growth and employment’,November 2004.

14 European Commission,‘Green paper: mortgage creditin the EU’, June 17th 2005.

15 London Economics, ‘Thecosts and benefits of integration of EU mortgagemarkets’, August 2005.

This approach should slowly encourage greater cro s s - b o rder activity,which in itself should further reveal barriers to a single market. Atp resent, cro s s - b o rder activity is so limited that many obstacles to faircompetition remain invisible. In the longer term, the Commissionmay find that there is a compelling case for using EU legislation tofurther open retail financial markets. But such action will only beeffective when there is a much greater degree of integration thanexists at present.

of the risks of payment default, which include factors such as theease of repossessing (and reselling) a property. For example, it cantake up to seven years to repossess a home in Italy, compared withan average of around two years elsewhere in the EU.

The EU should thus focus first on tackling specific obstacles tog reater competition and innovation within markets, rather thanrushing to try and create a common European mortgage. A 2005report by Mercer Oliver Wyman, a financial services consultancy,argues that the real weakness of many EU mortgage markets is thepoor availability, especially in Germany and Italy, of non-traditionalmortgages, such as low equity loans or those aimed at higher riskc o n s u m e r s .1 6 The EU should try to remove obstacles to lendersentering EU mortgage markets and developing new pro d u c t s .M o re o v e r, many EU countries also restrict the sharing of cre d i ti n f o rmation to mainstream domestic financial institutions, making itdifficult for niche or foreign players to tap into new segments of themarket. The EU should follow up the recommendation of its expertgroup on mortgage credit and encourage member-states to sign a

memorandum of understanding on accessto credit information.This action wouldhelp ensure that lenders have equal access tokey information on risks.

T h e re is no magic formula for forcing open the mortgage market – orany other aspect of retail financial services. Euro p e ’s retail fin a n c i a ls e rvices markets are complex and diverse. Before taking action inthis sector, the EU has to be certain that legislation will not damageconsumer confidence, stifle innovation or inadvertently re d u c ecompetition by outlawing long-established products. Thus the EUshould adopt a cautious strategy. The EU should focus on re m o v i n gthe most blatant obstacles to fair competition. The Commission’scompetition investigation should aim to unearth many national ru l e sand regulations that breach the spirit – if not the law – of existing EUrules and regulations. It should then ensure that member-states swiftlyremove or revise the offending rules from their national statute books.

Aretailfinancialservicesactionplan? 2322 TheEU’snewfinancialservicesagenda

16 Mercer Oliver Wyman, ‘Riskand funding in European resi-dential mortgages’, April 2005.

4 Improving the Lamfalussy process

I n c re a s i n g l y, financial services companies do business on a cro s s -b o rder basis, yet each EU member-state retains its own system ofregulation and supervision. Financial services firms there f o re find itcomplex and expensive to overcome re g u l a t o ry diff e rences.

A l e x a n d re Lamfalussy, former head of the Belgian central bank, hasdescribed Europe’s regulatory system as “a remarkable cocktail ofKafkaesque inefficiency that serves no one”. Lamfalussy chaired aninfluential EU expert committee, which in 2001 made a series ofi m p o rtant proposals to speed up EU financial services decision-making and improve co-operation between regulators. TheLamfalussy re p o rt sought to accelerate the passage of fin a n c i a ls e rvices directives by reducing the volume of legislation whichneeded to pass through the EU’s long-winded co-decision pro c e d u re– where the Commission proposes draft legislation and the Councilof Ministers and European Parliament jointly decide. Now theCouncil and the European Parliament are supposed to concentrateon reaching agreement only on the broad principles of newlegislation. In parallel, the Commission pre p a res the detailedtechnical rules necessary to implement the new directives, assisted byfour specialist committees of national regulators. These regulatorsare drawn from various national authorities dealing with securities,banking, insurance, and pensions and asset management.

This system aims to ensure the EU can respond swiftly toinnovations in the financial services sector, such as new products, orresolve minor problems with rules and regulations. The newcommittees are also designed to ensure that national re g u l a t o r simplement EU rules consistently – and supervise cro s s - b o rder gro u p sefficiently and fairly. Now that the EU has completed the legislative

by the Commission and the Lamfalussy committees. MEPs onlygave their assent to the Lamfalussy process on the basis that theywould have this power to scrutinise legislation. However, the curre n tinter-institutional agreement is subject to a ‘sunset’ clause, whichmeans it expires in 2007. The draft EU constitutional treaty wouldhave resolved this issue by permanently confirming the EuropeanParliament’s right of call-back. However, the ratification process isnow frozen, following the rejection of the treaty in the French andDutch re f e rendums. The call-back pro c e d u re is needed to secure theP a r l i a m e n t ’s support and ensure the whole Lamfalussy systemremains politically legitimate. Thus the EU urgently needs to extendthe call-back powers to prevent the new system of financial servicesdecision-making and regulation from grinding to a halt.

Businesses have largely supported the Commission’s commitment tog reater consultation on financial services issues. Similarly, theLamfalussy regulatory committees are seeking to ensure that firmsaffected by their decisions have an opportunity to comment on newp roposals. However, some businesses argue that consultationsshould take place earlier in the legislative process, and last at leastt h ree months. MEPs have rightly stressed that consumers arei n s u fficiently involved in the legislative process. In a draft re p o rt, theP a r l i a m e n t ’s committee on economic and monetary affairs madeclear that it “regrets the lack of input from consumers” and “asksthe Commission and the member-states top romote and support consumer aware n e s sp rogrammes and education initiatives as wellas the creation of specialised consumerinitiatives in the financial sector”.19

★ Better co-ordination

Financial services firms have repeatedly complained that nationalgovernments and regulators too often add extra provisions to, orsimply incorrectly transpose EU, legislation, creating costly newdistortions in the single market. The Lamfalussy committees were

phase of the FSAP, attention is increasingly focusing on whether theLamfalussy arrangements are sufficient to ensure effective cro s s -border supervision.

Businesses and regulators have generally given their backing to thenew arrangements. For example, a review of the Lamfalussy pro c e s sconcluded that the new procedures had improved the quality of EUlegislation and speeded up decision-making.17 However, the EU stillneeds to address certain shortcomings such as the lack of a clear

division of responsibilities between theCouncil and the Lamfalussy committees, therole of the European Parliament, and theinsufficient involvement of consumers.

The EU charged the specialist Lamfalussy committees with filling inthe details of EU financial legislation, leaving governments to makethe broad-brush political decisions. But the EU has so far found itdifficult in practice to draw the line between the technical and thepolitical. According to Nic Stuchfield, from the London StockExchange, member-states are leaving a number of “almostimpossible” questions for the CESR (the Committee of EuropeanSecurities Regulators). “Many of these decisions are political and theCESR is having to do the job politicians couldn’t do.”18 That wasthe case in particular when CESR was in charge of framing thed i rective on financial instruments (known as MiFiD), which pro v i d e sthe legal framework for stock exchanges and investment banks

conducting cross-border business. Member-states left the CESR to define whether asecurities transaction is ‘large’ or not. Thisd e finition is important as it sets out howmuch supervision a firm must submit to.

The European Parliament’s legally ambiguous role in the Lamfalussyprocedures poses a further problem. The Council, the Parliamentand the Commission had agreed that the Parliament should have theright of ‘call-back’, that is the power to re-examine measures agre e d

26 TheEU’snewfinancialservicesagenda ImprovingtheLamfalussyprocess 27

17 European Commission,‘Inter-institutional monitoringgroup, third report monitoringthe Lamfalussy process’,November 17th 2004.

18 Peter Norman and TobiasBuck, ‘Europe to slow the paceof financial services reform’, Financial Times,January 17th 2005.

19 European Parliament, ‘Draft report on current stateof integration of EU financialmarkets’, committee on economic and monetary affairs,rapporteur: Ieke van den Burg,January 2005.

its headquarters, the ‘home’ country, and other member-states wherethe firm may be active, the ‘host’ countries. Under existing EUrules, the home country is responsible for the activities of a ‘branch’,while the host country oversees the activities of a ‘subsidiary’. Thismeans that depending on whether a company is doing businessthrough a branch system or a subsidiary, it will submit to differentcontrols and procedures.

Home and host country regulators must co-operate closely to ensurea cro s s - b o rder firm is supervised eff e c t i v e l y. Duplicating superv i s o ryfunction risks insufficient or excessive control by nationalregulators, because of gaps or overlaps in their re s p o n s i b i l i t i e s .However, it also requires mutual trust, which is often missing, withnational regulators fearing that their counterparts will not do theirjob properly.

★ A single European regulator?

Such difficulties and ambiguities have ledsome businesses to propose the creation of am o re centralised re g u l a t o ry system withinE u rope. For example, in 2004 the European Financial Serv i c e sRoundtable (EFR) suggested establishing not a single but a ‘leads u p e rv i s o r’ to address these pro b l e m s .2 1 The current bankinglegislation allows regulators to delegate their responsibilities to thes u p e rvisor of the parent company. However, in practice, member-state regulators have rarely used this power. The EFR is pro p o s i n ginstead to go one step further and give the responsibility ofs u p e rvising all the EU operations of a financial services firm to justone nominated superv i s o r. A ‘college’ made up of organisations fro me v e ry EU member-state where the firm operated would in turn assistthis lead superv i s o r. The college would carry out local inspectionsand provide information on the firm ’s overseas operations.

One of the Lamfalussy committees, CESR, also proposed analternative solution in the so-called Himalaya report published in

28 TheEU’snewfinancialservicesagenda

designed to help rectify this problem. They provide a forum fornational regulators to agree a common approach to the technicalimplementation of new directives, and are also supposed to reviewalready implemented legislation to iron out any glitches. Thus, int h e o ry at least, the committees should encourage greater superv i s o ryconvergence across the EU.

In practice, the EU still has a long way to go to achieve re a lc o n v e rgence among national supervisors. The powers and re s o u rc e sof national regulators differ widely from one member-state to theother. Bulgaria, Denmark, Hungary, Ireland, Luxembourg and theUK, for example, have a single regulator for all financial servicesfirms, but most member-states charge several different bodies withthe task of supervision. National regulators also appro a c hsupervision with widely different philosophies: some place a greateremphasis on rules to protect consumers in the market, others

emphasise the need to stimulatecompetition. As McCreevy has put it,“ t h e re can be as many superv i s o ry practicesas there are supervisors in the Union”.20

As a result, national regulators find it difficult to co-ordinate theiractions and monitor the cro s s - b o rder activities of financialcompanies effectively. This means financial services firms face extracosts – due to the need to duplicate information for diff e re n ts u p e rvisors – and are also exposed to greater re g u l a t o ry risks.Meanwhile, some financial authorities, and in particular theE u ropean Central Bank, worry that the complexity of the EU’sre g u l a t o ry system would make it difficult for the EU to re a c tefficiently and quickly to a Europe-wide financial crisis. The fear isthat the lack of effective supervisory co-ordination could result inpoor scrutiny of cross-border firms, and hamper an effective pan-European response to any crisis.

At the root of the uncertainty in the current system is the legaldivision of responsibility between the country where a company has

ImprovingtheLamfalussyprocess 29

20 Speech by Charlie McCreevy,‘Regulatory and supervisorychallenges of financial integration’, London,June 28th 2005.

21 EFR, ‘On the lead supervisormodel and the future of thefinancial supervision in the EU’,June 2005.

pragmatic steps to improve the current framework of co-operationamong national supervisors:

★ National supervisors need to strengthen the level of mutualt rust by making more information available to each other. Theyshould also publish national rulebooks explaining theirrespective practices and competences. To reduce the costs forfirms, the EU should encourage national regulators to developcommon data re q u i rements and ideally use fewer languages. Inf u t u re, firms should be able to supply data about their activitiesin a single form to only one superv i s o ry authority, which wouldthen share this data with other supervisors.

★ EU governments should strive to give comparable powers tonational supervisors across the EU, or at least give them themeans, financially or legally, to do their job effic i e n t l y. Forinstance, this could mean greater powers to conductinvestigations or, in some member-states, more spending ontraining regulators.

★ Regulators should undertake frequent crisis managementexercises, at both the national and EU level, to make sure thatthey are capable of responding in a co-ordinated and efficientmanner. They should also develop joint teams ready to react toa major cross-border financial crisis. The EU should also co-operate more closely with non-EU countries, particularly theUnited States. In the long run, the European Central Bankshould have a more clearly defined role in crisis management.A c c o rding to Jacques de Laro s i è re, former managing director ofthe IMF and governor of the Banque de France: “given thegrowing interlinkage between all segmentsof the securities markets and their fin a n c i a li n t e rmediaries, systemic risk can only bedealt with at EU level with the involvementof the European Central Bank”.25

ImprovingtheLamfalussyprocess 31

2 0 0 4 .2 2 This suggested that EUgovernments give the committee power toset standards applicable to every nationalregulator across the EU, in cases where

voluntary co-operation has failed to achieve the necessary level ofconvergence. Such a step would go beyond the mere voluntary co-operation that CESR was designed to encourage and would cert a i n l yimprove the convergence between national regulators. However, itraises the question whether the committee should have the capacityto legislate while subject to only limited control from the EUinstitutions and governments.

Some observers think that, while a leads u p e rvisor would be a useful interimsolution, ultimately the EU needs to create atrue European supervisory authority, on themodel of the powerful Securities andExchange Commission (SEC) in the US.2 3

The logic of a single institution to monitor and regulate Europe’ssecurities markets is seductive. A EuroSEC could iron out diff e re n c e sin conduct of business rules, ensure a more uniform implementationof regulations, and provide investors with more equal protectiona c ross Europe. Such an idea has gained some support within the EU.

For instance, Pervenche Berès, chair of theeconomics and monetary affairs committeeof the European Parliament, called for thec reation of a pan-European securitiesmarket regulator, saying: “You can’t have asingle market without a lead re g u l a t o roverseeing it”. 24

H o w e v e r, most financial services firms and regulators still arg u ethat such centralisation could only take place in the distant future.T h e re is a danger of putting the cart before the horse andstraitjacketing diverse national financial services markets into asingle model. Thus in the short - t e rm the EU should focus on

30 TheEU’snewfinancialservicesagenda

22 CESR, ‘Preliminary progressreport: which supervisory toolsfor the EU securities markets?’,October 2004.

23 Deutsche Bank Research,EU Monitor, ‘Post-FSAP agenda: window of opportunity to completefinancial market integration’,May 6th 2005.

24 Ruben Lee, ‘Politics and thecreation of a European SEC:the optimal UK strategy – constructive inconsistency’,policy discussion paper,German Marshall Fund,Sciences-Po, July 2005.

25 Jacques de Larosière, ‘Good news and bad news onEurope’s financial marketsintegration’, Europe’s World,Autumn 2005.

question of whether the EU can create a true single market infinancial services without addressing diff e rences in consumerprotection and taxation.

★

ImprovingtheLamfalussyprocess 33

★ EU governments should launch a debate on the changing natureof systemic risk – that is risks which could affect the entirefinancial system. National regulators have tended to focus onthe stability of the banking sector and have not taken suffic i e n taccount of the growing risks in other parts of the market, suchas insurance companies and pension fund.

★ The member-states need to make greater efforts to co-ordinatethe implementation of EU financial measures. For instance, toimprove co-ordinated enforcement of EU legislation, nationalsupervisors should conduct more joint investigations and keepcommon databases of the sanctions they apply.

★ The member-states should make sure that EU citizens re c e i v ea minimum education in personal finance, and that banks andother financial institutions provide households with pro p e rfinancial advice. National regulators should take betteraccount of the interests of consumers in their assessment ofbanks’ activities.

It is too early to provide a definitive assessment of the EU’s fin a n c i a ls e rvices action plan. Though EU governments have re a c h e da g reement on almost all of the 42 measures, a fully integrated singlemarket in financial services is still far from becoming a reality. TheEU will need to make significant eff o rts to ensure the pro p e rimplementation of the existing measures. Better co-ord i n a t i o namong national regulators is crucial. At present, there are severalareas, from cross-border payments to retail markets, where the EUmay have to take further action. However, the EU should proceedcautiously, and employ non-legislative solutions whenever possible.A rush to introduce new legislation, especially in the retail financials e rvices sector, could damage competitiveness and underm i n econsumer confidence – rather than stimulating the development of asingle market. The EU and national governments should alsocommit to a regular assessment of the measures introduced in re c e n tyears. In the longer term, member-states cannot avoid the thorny

32 TheEU’snewfinancialservicesagenda

★ East versus West? The EU economy after enlargementEssay by Katinka Barysch (January 2006)

★ Why Europe deserves a better farm policyPolicy brief by Jack Thurston (December 2005)

★ Can EU diplomacy stop Iran’s nuclear programme?Working paper by Mark Leonard (November 2005)

★ Georgia and the EU: Can Europe’s neighbourhood policy deliver?Policy brief by Mark Leonard and Charles Grant (October 2005)

★ Why Europe should embrace TurkeyPamphlet by Katinka Barysch, Steven Everts and Heather Grabbe (September 2005)

★ The EU budget: A way forwardPolicy brief by John Peet (September 2005)

★ Russia, the EU and the common neighbourhoodEssay by Dmitri Trenin (September 2005)

★ Consumers and EU competition policyPolicy brief by Alasdair Murray (September 2005)

★ Crunch time on Iran: Five ways out of a nuclear crisisPolicy brief by Mark Leonard (August 2005)

★ Embracing the dragon: The EU’s partnership with ChinaPamphlet by Katinka Barysch, with Charles Grant and Mark Leonard (May 2005)

★ The EU and counter-terrorismWorking paper by Daniel Keohane (May 2005)

★ The EU’s common fisheries policy: The case for reform, not abolitionPolicy brief by Aurore Wanlin (April 2005)

★ The Lisbon scorecard V: Can Europe compete?Pamphlet by Alasdair Murray and Aurore Wanlin (March 2005)

★ What happens if Britain votes No? Ten ways out of a constitutional crisisPamphlet by Charles Grant (March 2005)

★ Ukraine after the orange revolutionPolicy brief by Kataryna Wolczuk (February 2005) web only

Available from the Centre for European Reform (CER), 29 Tufton Street, London, SW1P 3QLTelephone +44 20 7233 1199, Facsimile +44 20 7233 1117, kate@cer.org.uk, www. c e r. o r g . u k

February 2006ISBN 1 901 229 65 3 ★ £5/S8

After five years of intense law-making,the European Commission promisesfewer financial services laws for theremainder of the decade. But there isstill no fully integrated single Europeanm a r ket in financial services. The EU willhave to undertake a substantial ‘tidying-up’ exercise, including important newmeasures in areas such as cross-borderpayments. It also needs to ensure thatEurope’s financial regulators worktogether more effectively. In the longerterm, the Commission is likely to comeunder pressure to make new legislativeproposals to open up Europe’s protectedretail financial services markets.

Alasdair Murray is director ofC e n t r e Fo r u m, and Aurore Wanlin is aresearch fellow at the Centre forEuropean Reform.