Society for Advanced Legal Studies,
Financial Services Action Plan Conference, Café Royal
28 May 2003

Introduction

This is a key time for the development of the financial services regulatory framework within Europe. This month alone has seen a publication of a new Commission internal market strategy. It has seen the publication of an initial assessment of the Lamfalussy legislative process. And, it has seen the publication of a first draft of the proposed new constitutional treaty for the European Union.

The internal market strategy reports progress on achieving the strategy set at Lisbon in 2000, for achieving a single deep and liquid capital market. The intention then was that the European Community would be the ‘most competitive and dynamic knowledge-based economy in the world by 2010’. The reality is that services represent 70% of the GDP of the Member States, but only 20% of internal trade, less now than 10 years ago. The report claims that considerable differences in regulation from one Member State to the next – and the lack of confidence in each other’s regulatory systems – are the main reason why free movement of services has so far been more a legal concept than a practical reality. It makes recommendations covering the whole services market, of which the majority are focussed on different aspects of completing and possibly extending the financial services action plan.

Progress on achieving that action plan was a key focus of the report published by the Inter Institutional Monitoring Group on the success to date of the Lamfalussy process by which the financial services action plan is to be implemented. The Inter Institutional Monitoring Group, which contains representatives of all the institutions of the European Union, expressed the view that the Lamfalussy process was working well in the ‘learning by doing’ stage. While concerned about the level of detail emerging, it indicated that the Lamfalussy work would allow the financial services action plan deadlines to be met if progress could be continued at the current rate.

The work of the Convention on the future of Europe on a proposed new European constitution has been seen as a key forum in which debates on the structure of financial services regulation should take place. The report on the Lamfalussy process indicated that one key to the future of the process would be what a constitutional treaty should say about when the Commission should be able to adopt implementing measures. The Paris based Eurofi also saw it as key. They had proposed in May 2002 the creation of a system of European financial regulators, based on the European system of central banks with a central regulator at its head similar to the ECB. According to press reports, they built on this by a proposal earlier this month for two insertions in the European constitution. The first would make financial stability one of the EU’s core objectives. The second would allow for the creation in the future of a European supervisory system. London made its own proposals for the constitution, with the Wicks group publishing eight principles and practices for the creation of a single European market for financial services, emphasising that markets are created by market participants rather than rules and regulations. The Wicks report also urged that the Commission should be required to consult at all stages of the legislative process.

A single regulator for a single market

So how should these issues be resolved? Should there be, in the glib phrase, a single regulator for a single market? Or as has been proposed, a single regulatory system with a single regulator at its head? First, notwithstanding the comments made by the Commission in its internal markets strategy, it seems to me unclear that regulatory differences are the main factor in lack of growth in internal trade in services. Many large Community market participants, for example, choose to expand their international operations in third countries in the belief that they may make more profit there than in the already well serviced European markets. It is similarly unclear that a single regulatory system would improve competition or competitiveness, set to be at the heart of the Community’s economic objectives, according to the proposed new constitution. Those advocating it seem to prefer structured markets to competitive ones. And the idea of using regulatory systems to design market structures seems to be based on a fundamentally different approach to how markets succeed from that which imbues the European Union itself. Fortunately, the draft constitution published yesterday showed no sign of wanting to pick up on the idea of making financial stability one of the objectives of the European Union, or providing a mechanism for the creation of a new cross-Community regulatory structure. Instead, the promise is of proper consultation on Commission initiatives and ‘a single market where competition is free and undistorted’.

Objectives for ‘a single market where competition is free and undistorted’

What then should be the objectives for the development of such a market? First, it seems to me that the Community should recognise that London is the strongest financial market in the Union, and as such, a legitimate focus for the development of the European single market. The UK’s status outside the Euro should not affect its position. After all, London has operated for long as the main EU inter-bank centre and nearly a quarter of the total business of banks in the UK is denominated in Euro. Second, we should move the focus from regulation to competition, with a greater interest taken by DG Comp in the regulatory programme and possibly even some deregulatory mechanisms, similar to those in our own Deregulation and Contracting Out Act. Third, as part of this, the Union should continue to build on competition between market places rather than the structured market envisaged by proponents of a new regulatory structure. And finally, the Community should recognise that a strong internal market should not be achieved at the cost of competitiveness in global trade, not least in financial services. These objectives will not be achieved by regulation, but they can be impeded by it.

The role of regulation

How should regulation at Community level be structured in a way that allows competition to flourish? First, we should make sure that the Community itself does not overcomplicate the position by overlapping directives, especially those based on different jurisdictional principles. At present, for example, the investment services directive is based on a split of responsibilities between home and host Member States. But it is to be overlaid, successively, by an e.commerce directive, a distance marketing directive, a sales promotion directive, a market abuse directive, and a general duty to trade fairly, all organised on different splits of responsibility. Individually, each of these directives may achieve worthwhile goals. Together, they start to look pretty complicated. Second, if we are serious about building a single European market, we do need to consider carefully the recommendation of the inter-institutional monitoring group that more Community harmonisation should be done by regulation than by directive at any rate where standardisation promotes rather than inhibits competition. The process of directive implementation allows too much scope for member states to undermine the objectives of harmonisation in the course of implementing their obligations. Third, as the internal market strategy recommended, more use should be made of ‘screening’ procedures for requirements which Member States put in place, in the way that already applies in the context of e.commerce. Finally, the Commission should take more, and more rapid, action against barriers put up by Member States, whether under the guise of regulation or not.

Conclusion

These measures will not create a single European Capital Market. But they could allow the development of a coherent regulatory structure within which market participants can build such a market themselves.

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