Brussels, Thursday 8 April 1999
Howard Davies
Chairman, Financial Services Authority

Introduction

1 January 1999 marked the culmination of a 30-year dream to create a common currency in Europe resulting in a single monetary policy with a unified structure of interest rates run by an independent central bank. Of course in the UK there are those for whom this dream remains a nightmare. But it is not my aim here to debate the merits and demerits of the euro, rather to look beyond EMU to the evolving structure of Europe’s financial markets, and their future regulation. And from my point of view, as a regulator in London, the euro is as much of a day-to-day reality as it is for anyone in the eurozone. The overnight euro market in London regularly clears E40bn, 80% of euro short term interest rate contracts are traded on LIFFE, and 40% of the Stock Exchange’s business is in euro-area stocks.

The revolution in the conduct of economic policy has been accompanied by the clear separation, in most countries in the euro-zone, of the functions of banking and market supervision from the conduct of monetary policy and its implementation. And the last decade has seen the gradual evolution of the single market in financial services across the EU. The architecture of that single market is now largely in place, with a comprehensive set of directives acting as the foundation stones.

So are we now moving into calmer waters? (The Channel excepted, it goes without saying). Can Europe’s financial authorities now sit back and watch their magnificent creation develop and flourish?

I do not think so. Indeed my view is that we will continue to see major changes in Europe’s financial markets over the next few years, changes which will require imaginative and innovative responses from the authorities. The impetus for some of these changes can be sourced to EMU or to the working out of the implications of the single market. But there are other powerful forces at work too: technological change, and new competitive dynamics.

My aim in this lecture is to sketch out some of these changes, and offer some speculative thoughts on what they may mean for national supervisory authorities, and for the Commission.

Structure of the financial services industry: consolidation and conglomeration

The task of financial supervision is very different now from what it was a decade or so ago. The speed of change, and the complexity of the changes under way, are calling into question traditional methods of supervision and the traditional structures within which supervision is effected. Technological change is perhaps the most pervasive factor. It has led directly to internationalisation, disintermediation, excess capacity in some areas, diversification, design of new products, increased competition, and above all to pressures on overall profitability of existing firms, pressure only temporarily obscured when markets are rising.

Developments in the storage, transmission and processing of data, combined with remote banking and e-money, are globalising domestic players and bringing formerly distinct markets together, challenging the sovereign protection sometimes granted to hitherto domestic markets and rendering physical location far less important. As well as causing institutions to rethink their geographical structure, to move bulk processing to lower cost centres and to outsource, they also oblige them to adjust their management structures to manage products on global lines, undermining the traditional structure of firms based on location and regional geography.

Against this background, there has been increasing consolidation of firms in the same line of business and moves towards conglomeration, the offering of a wider range of financial services in more complex group structures. In some countries, the question of who is dating whom and whether and when they will tie the knot is a matter of daily speculation. There are also ménages à trois, in countries where such alliances are part of the national tradition.

We now see trends to consolidation among banks and insurance companies in many European countries. The current excitements within France, Italy and Spain are only the most recent examples. We have also seen consolidation cross-border within Europe, particularly in Scandinavia and in the Low Countries, and a continuing acceleration in minority cross-share holdings, particularly involving banks in Germany, France, Italy and Spain. In the UK Commercial Union and General Accident have merged; Axa now own Sun Life and (nearly) Guardian Royal Exchange. We have also seen take-overs crossing the EU border. There is Deutsche’s current purchase of Bankers Trust, ABN Amro’s earlier rise to be the largest foreign bank in the US, and HSBC’s equivalent position in Canada.

Alongside those mergers of commercial or universal banks we have seen the continued construction of groups offering a wide range of financial services. This has included the addition of investment banking operations to commercial banking groups, particularly through purchases over an extended period by European and North American banks of firms in London designed to facilitate participation in global capital markets. At the same time, there has been an increasing tendency to create groups combining banking, capital markets, investment management and insurance businesses. Sometimes, as in Nordic countries and the Netherlands, significant domestic operations in two or more disciplines are combined in a single group. The same can happen cross-border with financial institutions of varying relative sizes, with Generali acquiring BSI, ING Group acquiring BBL and Private Kas, AXA acquiring Anhyp or Fortis acquiring Generale Bank. More frequently, there are sometimes complex minority shareholdings affiliating banks and insurance companies, often in highly elaborate shareholding structures: the examples of Allianz of Germany, AXA of France and Generali of Italy spring readily to mind. Such minority shareholdings are often designed to facilitate cross-selling of products so that an insurance company might sell investment products or a bank may sell insurance products generated by affiliates.

In the UK there have been successive periods of consolidation over many years leading to complex groups such as National Westminster or Lloyds TSB. Most recent developments point less to traditional mergers, whether domestic or cross-border (where the UK banks have not participated in the latest round of marriages) than to the creation of different channels of delivery, partly engendered by the wholly fresh entry into retail financial services of non-financial retail firms such as Marks and Spencer, Tesco or Virgin, who have in turn provoked a competitive response from existing firms like Lloyds TSB or through the creation of new combined groups such as Prudential and M&G. These groups have the potential to become financial hypermarkets, offering a huge range of their own complementary financial products and services. So far these hypermarkets are primarily domestic, but cross-border hypermarkets may represent the next phase of development.

From a regulatory perspective all this means that, in an increasing number of cases, groups will find themselves subject to regulation, both at home and abroad, under each of banking, investment business, insurance and markets regulation, in a broad range of countries with different régimes. As a regulator myself, perhaps I should welcome this cornucopia of supervision. But even I can be brought to acknowledge that you can have too much of a good thing.

Structure of financial services regulation: response by the legislator

It is in response to these developments in the market that there have been moves to create single or at least fewer national regulators in order adequately to supervise groups of growing size and complexity. Within Europe, Sweden, Denmark, Norway and, de facto, the UK already have single regulators, with a prominent example outside Europe in Japan, and there are many more cases where banking and investment business supervision have been combined. That has happened recently in Luxembourg, for example. Less frequently, insurance and banking is brought together. That is so in Canada. In Ireland, Greece, Austria and the Netherlands the supervisory structure is known to be under review and the case for a single regulator is being evaluated. In most other EU countries the issue is under unofficial or informal debate.

Rationale for creating a single regulator in the UK

In the UK, of course, in our impulsive Latin way we jumped straight from a complex, multi-regulator system to a single regulator, in one bound. Why did we do so, in a market whose size meant that even the sectoral regulators were quite large by international standards? Briefly, we think a single regulator can deliver advantages for financial institutions and for consumers. The move to a single regulator matches the evolution of both markets and institutions. And, though the parallel with hypermarkets can be overdone, a single regulator allows us to offer a one-stop shop for institutions. Financial institutions have told us that they do not like dealing with a multiplicity of regulators as they have had to do in the past. They find that confusing and expensive. They frequently have to answer similar questions or, indeed, in some cases, precisely the same questions from different regulators. A whole range of separate regulators make their own assessments of their capital adequacy, of their management and of their systems and controls.

A single regulator can make one overall assessment of those underlying factors relating to the health of an institution, but then specialise within an institution on different business lines.

A single regulator also facilitates international regulatory co-operation. It greatly simplifies our links with other regulators and our ability to look at the global risks being run by British-based institutions. There is no doubt in the UK who the co-ordinating supervisor or lead regulator for any UK institution is. It allows us, also, to simplify procedures. We are in the course of consolidating into one rulebook 14 different conduct of business rulebooks in operation in the retail sector in the United Kingdom, including the different rulebooks of recognised professional bodies. Our aim is that the new rulebook should be significantly shorter than any of the individual components.

These efficiency improvements mean that a single regulator can reduce the direct costs of regulation, even though the numbers of people involved in regulation in the UK are already low by European standards. By way of example, the combined staff numbers of the regulator and central bank in the UK amount to around 4,500 people, while the numbers employed in the central banks and banking supervisor alone, excluding other regulators, in each of the other three largest EU countries range between roughly 9,000 and 16,000 people each. Work done for the Wallis Commission in Australia showed the direct cost of regulation in London as the equivalent of 51 basis points on assets, compared to 69 in France, and 99 in the US. This is part (though by no means all) of the reason for the concentration of financial business in London. Simplified rules in the future will not only allow us further to reduce the direct costs of regulation but also the costs within institutions, which are usually considerably greater than the out-of-pocket costs of regulation.

But regulation, while it must be sensitive to the needs of financial institutions and markets, is not for those institutions. It is there, ultimately, to protect consumers. We also believe that a single regulator is better for consumers, who were confused about the previous system. In future, there will be a one-stop shop for them too in the form of one place to come for complaints, one ombudsman scheme, one compensation scheme, all underpinned by two new statutory objectives, to promote consumer understanding of the financial system and to protect consumers.

Lastly, we believe that the system will introduce a clearer system of accountability. Both Parliament and the public have sometimes found it hard to understand precisely who is accountable for the regulation of the many different parts of the financial system. There will be no doubt in future who is accountable for the regulatory regime, for its cost, and the need for the enforcement policies it operates. Clarity of our accountability in respect of institutional or market failure has also been improved with a Memorandum of Understanding between the FSA, the Bank of England and the Treasury which sets out very clearly to which institution Parliament and the public can look for an assessment of the reasons why an institution has failed and the case for rescuing it if there is such a case.

Finally, statutory objectives in our new legislation will set out a clear basis to Parliament and the public on which they can assess the effectiveness of what we are doing.

The future supervisory and regulatory regime in Europe

You would expect me to be enthusiastic about the advantages of a single regulator, and indeed I am. I am not, however, so enthusiastic as to think that it is the only possible model of regulation. It can work particularly well in a very open, yet concentrated market like London’s; elsewhere other structures may be more appropriate. But I am quite sure that we will see more consolidation of regulatory structures within EU member states in the next few years.

Domestic consolidation is, though, not the only response needed to change in Europe. There are other changes needed too, if the single market, especially with a single currency, is to work effectively in the service of Europe’s peoples.

Many of you will have read Tommaso Padoa-Schioppa’s important speech at the London School of Economics in February, when he discussed the supervisory regime in Europe and its relationship with the European Central Bank. I found myself in very broad agreement with the bulk of his analysis, on both the lender of last resort issue, and on supervision.

On the lender of the last resort, Padoa-Schioppa helpfully cleared away some of the mists of confusion surrounding this fraught subject. Academics seem to have been rather more exercised by the question of whether the division of banking supervision in Europe from the ECB raises new problems in this area than have market participants.

For me the principal question is whether, in the euro-zone, banking supervisors will be able to make sufficient information available promptly to enable those in a position to provide support to make a judgement on whether to do so or not. I do not believe that this should be any more of a problem in the relationship between the banking supervisors of the euro-zone and the responsible authorities than we believe it is in the UK between the FSA, the Bank of England and the Treasury.

A second concern is whether cross-border banking groups raise fresh problems, both in deciding who should be responsible for support and in relation to the magnitude of the support needed. Up to this point, and for the immediately foreseeable future, I remain unpersuaded that this is a serious issue either.

The current system of directives requires that each bank has its mind and management and registered office in the same location, so that each bank retains a distinct national base. Even where banking groups may be divided roughly equally in size between countries, the supervisors concerned have put in arrangements to ensure full collaboration between them and an appropriate division of responsibility so that there are clear arrangements for working together and establishing who is the consolidating supervisor for the banking group. So we remain some way off from the coming into being of "stateless" banking groups in Europe. Even where these groups extend beyond banking a single supervisor is likely to have a much readier grasp of the condition of the whole group at a moment’s notice than a widespread college of individual supervisors.

The last issue relates as to who in the Eurosystem should provide the actual support. Padoa-Schioppa reminds us that the provision of central bank money is only one category of emergency action and that, as has in practice been most frequently the case in recent years, there are other categories, namely taxpayers’ funds and private money provided by banks or other market participants. He argues that the probability that a modern bank is solvent, but illiquid, and at the same time lacks sufficient collateral to obtain regular central bank funding, is quite small. Nevertheless, if this rare event were to occur, and to pose a systemic threat, he makes it plain that the euro-area authorities have the necessary capacity to act, and that in the circumstances various national arrangements would continue to apply, including those concerning the access of central banks to supervisors’ confidential information. To the extent that there was a generalised liquidity effect that had implications for the conduct of monetary policy, then the Eurosystem as a whole would be involved.

As for the organisation of banking supervision, his view was that, while the Maastricht Treaty provides for the possibility of greater formal centralisation through the ECB of "specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings", on unanimous approval by member states, the case for such centralisation was not made out. Padoa-Schioppa argues that the necessary co-ordination could be achieved by co-operation between national authorities.

This must be right, and indeed there is no provision for any form of "federal" enforcement procedures through "federal" courts such as the SEC or Fed possess in the US, and I very much doubt whether financial services will achieve federal status in advance of other aspects of the European constitutional arrangements. The Treaty is also silent on how and by whom such centralised policies should be implemented.

Indeed in my view it is more likely that market developments, continuing along the lines I have described, may point more strongly towards the creation of single national regulators, because of the need to deal with the pressing supervisory issues raised by such conglomerates, than towards a pan-EU supervisor of banks alone. What is certainly desirable is the creation of new informal arrangements for discussions between supervisors of different disciplines in Europe, to address the issues we face in supervising the new financial conglomerates.

So concentrating banking supervision in the ECB, or indeed anywhere else, would almost certainly be quite the wrong way to go, at a time when the boundaries between banking and other regulation are becoming blurred.

It is equally plain that on the wider international stage the same market developments suggest the need for greater international co-operation and co-ordination among supervisors, extending beyond sectoral disciplines to cover all types of financial services and, notwithstanding the special characteristics of the single market, extending beyond the EU.

This need has become crystallised in the new G7 Financial Stability Forum which meets for the first time in Washington on 14th April and will bring together the three different international organisations co-ordinating banking (the Basle Committee on Banking Supervision), capital markets (the International Organisation of Securities Commission) and insurance supervision (the International Association of Insurance Supervisors), together with the finance ministries, central banks and the leading national regulator in each of the G7 countries. It is likely that this forum will have amongst its aims the promotion of more intensive collaboration between the different supervisory disciplines.

The need for such collaboration is even more pressing in Europe, and for somewhat different reasons.

Banking supervisors in the different EU member states have well-established co-ordination arrangements between each other going back for the best part of 30 years through the informal Groupe de Contact which brings together each of the banking supervisors. There is the Banking Advisory Committee, which includes all the banking supervisors and ministries of finance, to discuss matters of EU legislation and regulation, and, most recently, there is the Banking Supervision Committee of the European Central Bank, bringing together in a single group each of the EU central banks and banking supervisors.

There are also well-established insurance committees operating both under the auspices of the Commission and co-operatively between the supervisors. The EC Insurance Committee is broadly equivalent to the Banking Advisory Committee, involving both finance ministries and supervisory authorities in discussions on insurance regulation. And the Conference of Insurance Supervisory Authorities of the EU provides a forum for the exchange of information and debate among supervisors.

Co-operation on capital markets

Europe’s securities commissions have been less active in terms of international co-operation historically than the prudential supervisors, partly because they were in general created more recently. The introduction of the euro served to concentrate minds and, in the absence of a formal EU Securities Committee, the creation of the Forum of European Securities Commissions (FESCO) in December 1997 was a response to this new environment where the arrival now of the euro has coincided with an increased political will to deepen the single market in financial services. Its activities have also been stimulated by the new alliances forming between exchanges across Europe, themselves in part a response to the same changed environment (though also to technological developments).

FESCO includes 17 securities commissions from across the European Economic Area. The EU Commission has observer status while the Secretariat is provided by the member organisations.

As examples of the work on which FESCO is engaged, I offer two issues arising out of the existing EU legal framework.

Under the Investment Services Directive, a passport is available to any exchange recognised by the home state competent authority as a regulated market. This allows an exchange to provide market facilities in other member states, say, through remote terminals. The ISD, however, is all but silent on the minimum standards for granting recognition as a Regulated Market. With the development of technology and new trading systems, a real fear exists that confidence in EEA markets might be undermined by the misuse of the Regulated Market concept by a competent authority. So what is the way forward?

One possible traditional approach would be to encourage the Commission to propose an amendment to the ISD setting out additional specific standards that need to be met before an exchange can be recognised as a Regulated Market. Alternatively, the regulators can get together and agree mutually to bind themselves to a set of standards. This is what FESCO is doing through an expert group which I chair. We believe informal co-operative action of this kind will provide a much more timely, flexible and closely targeted response to the needs for efficient and effective market regulation in the EEA than is likely to be possible through the cumbersome and lengthy process of directive amendments.

Let me mention another example of current work. Under a whole raft of directives, a framework exists for a company to raise funds in any member state on the basis of the mutual recognition of one set of documents. In practice, however, this does not happen. Many of the directives provide scope for member states to impose extra conditions. The evidence – lack of pan-EEA capital-raising exercises on the basis of a single set of documents – would suggest that use of this scope is sometimes obstructive, whether or not intentionally.

FESCO is planning a group to look at getting a better fit between theory and practice by seeking consensus on the standards needed to achieve the desired aim and the way in which new techniques might best be developed in the context of the existing directives. In this latter case, shelf registration is a technique issuers increasingly want to use. For shelf registration to work easily across a single market, it is likely that some legislative amendments might well be needed to the existing directives, to establish legal certainty as to whether shelf registration documents fall within the scope of the Listing Particulars Directive. But FESCO can play an important role in establishing the common standards that should apply.

These are two examples where greater co-operation and co-ordination can help us move towards the desired goal of a genuine single market with appropriate standards that can engender the confidence of the European investor. We should not, however, under-estimate the difficulty of reaching agreement among 15 EU jurisdictions. There is the complex pattern of regulatory responsibilities across the EEA and, perhaps more importantly, although business has become international, the legal framework remains largely national. It is against this background that the competitive skirmishes in Europe about the prime location of different pieces of the financial market should be seen.

This context calls for a careful balancing of the need, on the one hand, for greater co-operation and co-ordination between regulators and, on the other, the respective legislative and political responsibilities of the EU Commission and national governments. The work in FESCO will only be successful if the political will exists in Europe to deepen the single market in financial services.

A pan-European capital market

It can be seen that much of this work is directly relevant to the extremely powerful pressures to move towards unified capital markets given additional impetus by the introduction of the single currency. The London and Frankfurt exchanges took the lead, as we know, but other European exchanges have now been brought into the project, albeit to a lesser extent so far. The eventual outcome of this initiative is by no means clear at this stage. Will there be a single trading platform located in one jurisdiction, or an exchange with common characteristics and perhaps common technology, located in a number of different national jurisdictions? Or will both exist side-by-side, catering for different segments of the market?

Whatever the outcome, there will be tough questions posed for regulators. In the former case, what is the role for national regulators of intermediaries operating as a remote central exchange? In the latter, how can we ensure an adequate degree of harmonisation to allow one exchange to operate in a number of different countries?

Some have argued that there is a need for a pan-European capital markets regulator. I would not rule that out in the long term. But the obstacles – creating a common legal framework for enforcement, for example – are immense.

I think, therefore, that, just as with the prospect for pan-European banking supervision, the prospect of pan-European capital markets supervision is relatively remote. Nevertheless, it may well be that we shall need a step-change in the level of co-operation between securities commissions. And there could be much greater harmonisation between national markets of, say, listing conditions, prospectus requirements, trading rules and measures against market abuse which might bring us closer to the ideal of a virtually unified capital market which is one of the economic prizes which monetary union is intended to deliver.

However, in the much more complex area of the range of different banking, investment business and insurance services offered across borders in the EU, as I said earlier, EMU has brought into sharp focus material shortcomings in the single market.

The Commission review of financial services in Europe

These are being addressed here in Brussels through the Commission’s Framework for Action on financial services. At the FSA we think it is indeed the right time to undertake a health check initiative on where the EU financial services single market has got to and where we want it to go from here.

We have therefore been following the Commission’s work and the work of the Financial Services Policy Group, made up of Member States’ representatives, with great interest. The FSA provided input to the October Communication published by the Commission and since then has been working with the UK Treasury on various concrete contributions to the Group.

The review has potential to set the EU’s agenda on financial services for the next few years but if it is to do so there will have to be a far greater degree of consensus across the EU on what we are trying to achieve.

There are areas under discussion – such as creating a single market for pensions and asset management – which would be new territory for Community requirements. However, most of what the FSA would like to see is an overhaul of the existing framework so that what we do, we do better for the benefit of the EU single market and its citizens. Examples of this are:

  • timelier and more consistent implementation of legislation by member states;
  • better clarification of the meaning of legislation;
  • more active and consistent enforcement of Community requirements;
  • addressing barriers to cross border business by determining where requirements are and are not justified on  consumer protection grounds. We suspect some barriers are industry protectionism dressed in consumers’ clothing; and
  • clearer and more consistent differentiation of levels of protection for customers, based on their expertise and understanding.

There are three areas of concern to us, though, on which I would like to dwell in a little more detail:

Keeping the legislative framework up to date

It is vital to the health of the single market and the protection of consumers that EU requirements are kept up to date with market developments. We are dealing with a fast moving industry and EU requirements need to keep in step.

In many areas of financial services legislation, though, over-prescriptive drafting of existing directives, coupled with lack of swift procedures to update legislation, have meant that practitioners – by which I mean the industry and supervisors – have been saddled with out of date requirements which cannot be changed quickly enough.

To us this means that the EU needs to focus on three things:

  • Developing ways of making greater use of broad enabling legislation which has adequate clarity but avoids  excessive prescription;
  • Making better use of "comitology" mechanisms – a form of making fast-track legal amendments – so that   legislation can be updated more quickly and effectively; and
  • Consider non-legislative alternatives to, or supplements to, legislation of the kind I have described FESCO as working on.

Much of the problem with prescriptive and inappropriate drafting arises from the Commission not being able to research and consult enough on issues before they go into print on a proposal for a directive. Then the legislative process takes over and lack of consensus among member states when discussions go into Council inevitably produces horse trading.

We believe the Commission should focus more on objectives and on achieving sensible consensus. This means promoting coherence in policy making – across sectors and across proposals, assembling the interested parties to hammer out the problems, building a basis for consensus and looking for answers in genuine peer group analysis and review before going into Council. In the current UK jargon, it is a plea for joined-up government at European level.

If we can deliver more coherent and forward looking legislation, then the demands to update it regularly should diminish. However, comitology should have an important role to play in this. I am conscious that member states and Parliament are discussing the updating of current comitology arrangements and it is our hope that an appropriate agreement can be reached so that more effective use of such arrangements for financial services is made. I hope this plan is not seen as an attempt to subvert the role of the European parliament. It is vital that our processes are transparent and that accountability and the roles of both European and national parliaments are preserved.

We would also like to see better use made of alternatives to or supplements to legislation. This is not meant to be a means of avoiding legislation and legislative processes. Instead we believe that in setting requirements, the EU should look at what they are trying to achieve and how best to achieve it. That may involve using techniques such as codes of conduct or supervisory agreements. The point is that the best and most appropriate method should be used to achieve the agreed objective.

Getting the right level of consumer protection

Our second key concern is that the EU and member states need to think through what they believe should be an appropriate level of consumer protection provided within the Community framework – and who is best able to provide it. This is an important policy decision.

There has been much talk in the Framework for Action about consumer protection requirements being used as a means to protect markets. Whether and how we restrict actively what is provided to consumers is a function of how we choose to balance business freedoms against consumer protections. National approaches to setting this balance differ at present; there is no point pretending that they do not. For example, one could restrict the range of products available to consumers. Another (in our view preferable) approach is to permit a diverse range of products to be sold and to protect the consumer through the establishment of standards and requirements on disclosure, and the sales process.

To achieve more harmonisation, which we think desirable as a matter of principle, we need an idea of the nature of the basic consumer protections we believe should be provided to consumers.

To date, we have not had an opportunity to explore collectively our respective views on what these minimum protections should be. Our view is that a means needs to be found – something akin to the Financial Services Policy Group – to do this.

We need to bear in mind, though, that consumer needs in the single market vary. The pan-European firm is getting closer, but even the most cosmopolitan of us are not really pan- European consumers. Our needs are different across markets, member states and cultures. They are also changing as technology, communication and public policy evolve. So it is important to ensure consumer protection which is appropriate – both in level and nature. That means understanding how the retail markets are working and developing and what the influences on changing and continuing consumer behaviour are as well as determining what the acceptable balances between freedoms and restrictions – individual and business – are. But we also need to consider the skills people need to exercise choice in a meaningful way.

Aiming to provide total protection for consumers is both impossible and undesirable. While consumers undoubtedly need protection from fraud, exploitation and mis-selling, we all remain to some degree responsible for our own decisions. That is where information for consumers – disclosure of information essential to their making an informed decision – and education of consumers – to assist them in making the decision itself – must be key elements so that regulatory protections are complemented by reinforcement of the consumer’s ability to protect him or herself.

But if the single market in financial services is to achieve its full potential, consumers need to be confident that, if they invest across borders, their protection against fraud and malpractice is strong. At present, that is hardly the case. For most EU consumers their only route to redress if things go wrong is through the courts – which can be a slow, complex and frustrating process.

In our view all EU member states should put in place independent ombudsman-type redress mechanisms to deal with complaints against firms they regulate and those mechanisms should be accessible to consumers in other parts of the union. Consumers may wish to route their complaint through their own domestic authority – working in their own language. But that authority should pass the complaint over to the ombudsman in the state where the firm is located, and where its assets can be found so that the Ombudsman can settle the complaint and, as appropriate, ensure suitable redress.

The wholesale/retail distinction in investment business

One of FSA’s statutory objectives in the draft Financial Services and Markets Bill is to secure the appropriate degree of protection for consumers, having regard to their differing experience and expertise, the general principle that they should take responsibility for their decisions, and the varying degree of risk attached to their investments. This seems to us to provide an appropriate framework for regulatory decisions: one the Commission might usefully adopt for its own decisions.

Both the UK Government and FSA are committed to making appropriate differentiation in the regulatory treatment of professional and non-professional business, according to participants’ degrees of experience and expertise and their relative need for protection against the risks they face. This differentiation is to be achieved, though, without compromising the levels of protection required for the less expert investor.

The Investment Services Directive already makes provision for this in the application of conduct of business rules, but to date the extent to which member states have chosen to make this differentiation has differed considerably. In the UK we are used to such differentiation. It makes sense to us in terms of cost-effective regulation for authorised firms (and making regulation cost-effective is another of the new statutory obligations for the FSA), but it also facilitates innovation and allows scarce supervisory resources to be directed to where they are most needed – ensuring adequate protection for less sophisticated investors.

In the context of its Framework for Action, the European Commission has suggested that it should come forward with a Communication which will clarify the definition of professional and sophisticated investors. This may be desirable; indeed at present we are reviewing our own definitions.

But the issues are complex. Our experience suggests that investors do not fall neatly into wholesale and retail investors. For example, there are many investors who – for reasons of size or expertise which may vary from product to product – are for some purposes wholesale and for others, retail. There are others who may be big institutions, such as fund managers, but who in practice place the funds of myriad small investors.

Conclusions

This has, necessarily and intentionally, been a somewhat diffuse presentation. I make no apology for that, since the subject matter is complex, and the market background volatile. But I think one can distil a number of firm propositions:

  • First, there are powerful trends towards consolidation in European financial services: within countries and traditional sectors, and across sectors and borders. While there are no genuinely pan-European retail banks as yet, they may well develop soon, as may multi-state financial hypermarkets.
  • Second, regulatory structures in member states will need to respond. The rationale is not only in order to increase sensitivity to financial institutions and markets, but also to improve delivery of consumer protection. The trend towards regulatory consolidation is well-established throughout Europe, though the end-point may not always be a single regulator on the UK model.
  • Third, as cross-sectoral mergers develop, it would be wrong to recreate at EU level the combined central bank/supervisor model which is increasingly being abandoned in member states: different approaches to co-operation between central banks and supervisors, to provide input to monetary policy on the evolution of financial institutions and markets, and to inform lender of last resort decisions, are needed: again, the new UK arrangements provide an interesting model.
  • Fourth, there is a clear need for more pan-European co-operation between regulators, to cope with the impact of the euro and the single market. That co-operation should also be cross-sectoral, as well as within traditional sectors. For the time being, at least, this is a more practical, and promising way forward than the notion of creating new institutions at European level.
  • Fifth, this enhanced co-operation will be facilitated, and underpinned, by greater harmonisation of standards across the Union and there is a particular need to do this in relation to consumer protection. An approach to regulation based on subsidiarity and co-operation will only work with more harmonisation.
  • Sixth, if EU legislation is to keep up with fast-moving financial markets, new methods of working, perhaps involving greater use of comitology, or other more flexible legislative techniques, need to be developed. We need to help the Commission respond to change more quickly than it is currently able to do.

There is a danger of seeing change as a form of problem. I have perhaps not entirely avoided that trap here. But the prize is a financial market for Europe which better serves the needs of consumers – both corporate and individual – and does so on a basis of prudence and integrity.

More Speeches: