Cicero Policy Briefer

Issue 19, December 2007

The Single Market Review and its impact on financial services

By James Allen

The creation of the Single Market has arguably been the greatest achievement of the European Union. It is the largest market in the world, with a population of nearly 500 million people accounting for over 20 per cent of global trade. It is estimated that the Single Market is responsible for the creation of 2.75 million jobs across the Union and that it accounted for increased productivity of €225bn in 20061. It brings benefits across the board. Business gains by access to such a large market, while the consumer is protected by better regulation and benefits from lower prices, a result of liberalised trade and rigorous competition policy. Meanwhile, there are social advantages in that citizens of member states possess the right to live, work, study and retire anywhere across the Union. However, a consensus that progress in the Single Market has slowed is emerging.

There remain considerable anomalies within the Market, particularly in relation to liberalised energy markets. In financial services, many products (such as motor insurance) are not available on a cross-border basis. To this end, the European Commission issued a call for evidence in early 2007 to discuss how best to get the Single Market project back on track, shadowed by a DTI (now DBERR) paper issued by the UK government.

The Commission issued its Communication on the subject in November 2007. The thrust of this document is “putting consumers and small business first”, and it focuses on four key themes:

• Delivering more results for citizens, consumers and SMEs
• Taking better advantage of globalisation
• Opening new frontiers of knowledge and innovation
• Encompassing a strong social and environmental dimension

There are clear implications for the financial services industry. Financial services are singled out due to the enormous strategic significance of the industry and its interaction with and impact upon the consumer on a daily basis. Alongside the Communication, an additional working paper has been issued by the Commission with proposals on how best to educate the consumer to engage with the full range of financial services and products to achieve optimum outcomes.

Much of this work is likely to correlate with the thrust of financial activity in the UK around the Retail Distribution Review, the Thoresen Review of Generic Financial Advice and the FSA’s broader financial capability strategy. The consumer is going to be better educated about finance, whether or not they know about it yet. The argument, at both a UK and Single European Market level, appears to be that this benefits not only the consumer but the market; consumers will be more likely to buy more products (not only more suitable products), particularly in protection.

In retail financial services specifically, the Commission is increasing efforts to improve consumer choice and mobility. This will cover the full range of products, including mortgages, bank accounts, credit cards, credit data and savings, to ensure that the full benefits in cost, protection and choice are realised for consumers of financial products. The European Commission wants to establish a new baseline in financial inclusion, where there are no exclusions from basic banking.

The challenge is being laid down to the retail financial services industry at both the national and European level. The opportunity to self-regulate is still on the table, particularly in the case of bank accounts and the role of credit intermediaries. However, the movement toward a genuine Single Market allowing the consumer to derive the full benefits in retail financial services will require the industry to collectively raise its game.

1. DTI (now DBERR) January 2007: The Single Market: A Vision for the 21st century

James Allen can be contacted on +44 (0)20 7665 9540 or click here to email.

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