Cicero Policy Briefer

Issue 19, December 2007

EU financial market supervision—who’s in charge?

By Michael Cooper

The annual Eurofi conference in Brussels is a chance for the great and the good of the EU financial services regulatory world to come together and assess the European financial services landscape, what its achievements have been, where it could improve and, most importantly, what future measures are top of its list for attaining greater market integration. The post- Financial Services Action Plan (FSAP) EU has seen a flurry of initiatives aimed at further improving the efficiency and competitiveness of the internal market, and can boast substantial developments as highlighted elsewhere in our briefer this month.

Still, there is still much to be debated and implemented before the EU can claim to have be anywhere near the completion of the single market for financial services, and this summer’s credit crunch only acted to reinforce the sentiment that the EU cannot merely rest on its laurels and pat itself on the back for past achievements.

This is not to say that the EU Commission is taking its foot off the gas in terms of proposing new regulation. There are of course some major initiatives that are currently in the legislative pipeline and coming to the European Institutions next year which will go some way to further putting in place a ‘single market for the 21st century’, and these were debated at length during the conference.

Solvency II will shake up the risk management structures in the insurance sector and put in place capital requirement regimes that will insure against a repeat of an Equitable Life scenario. Although the proposals have been widely praised by industry, though, questions still remain over issues such as its possible negative impact on smaller players and how large cross-border groups can be best supervised. Within the insurance sector, mutuals are reaching for their soapboxes to put their case to the Commission for a statute that recognises their special nature unique from PLCs and co-operatives (both of which already enjoy their own statutes), and which would allow them the opportunity to have cross-border activities and take advantage of regrouping economies of scale.

Dossiers aimed at the greater integration of the retail financial services sector, which is still catching up with the other policy areas, will also be on the agenda in the coming year—for example:

• The development of a Commission strategy on financial capability and education. A report is expected later this month;
• The Single Euro Payments Area (SEPA), coming into force in 2008, will revolutionise cross-border card transaction processes in the EU—meaning greater competition between different forms of payment. However, much debate remains around who will be benefiting most from the proposed four-party interchange system of operation;
• The development next year of self-regulated common rules on bank accounts with a view to facilitating the switching of accounts;
• A white paper on mortgage credit due out later this year, which we already know will rule out the possibility of a Mortgage Credit Directive; and
• A Commission study on product bundling and its effects on mobility.

Despite these issues being instrumental to the future shape of the financial services single market, the main bone of contention that the EU is currently grappling with has been around a broader, overarching issue that threatens the efficiency, protection and stability of financial markets in the face of globalisation: supervision.

With greater integration of financial markets throughout Europe and the world, an increasing number of players, predominantly in the banking and insurance sectors, now operate cross-border. There is therefore a growing realisation at the European level that a national-centric mindset towards supervision cannot continue, and that concrete rules must be laid down which are applicable to the supervision of cross-border players and increase the cooperation and convergence between national supervisors.

To this end, the Lamfalussy Process (and more specifically, the level 3 committees of CEIOPS, CESR and CEBS) was put under the spotlight at the December Ecofin council meeting, where a review of its functions was debated. It is largely accepted that the relatively young supervisory committees have been a major success and play an instrumental role in creating and implementing the detailed technical measures which ultimately decide the success or failure of financial services legislation. The Commission communication on reforming these committees includes proposals to enhance cooperation and convergence between the three, and in terms of enforcement to demand that member state supervisors either comply or, in cases of non-compliance, be forced to publicly explain to the committees their reasons. Other initiatives include introducing qualified majority voting (QMV) to the Committee’s decision-making process so as to improve efficiency. All are in agreement that these committees need to receive greater responsibilities but the Commission, as ultimate guarantor of the Treaties, is unlikely to concede more compliance powers to the Committees than is absolutely necessary.

The issue of the lead supervisor model assisted by a college of national supervisors, and how all actors in this scenario would communicate and cooperate, was debated at length with speakers generally accepting that such a role was necessary despite concerns from left-leaning officials that it does not offer smaller host states adequate powers of opposition. Whatever the shape of the lead supervisor issue takes, though, central to it is the need for a much improved structure of information sharing. To this end, Italian Minister of Economy and Finance Tommaso Padoa-Schioppa’s call for a single manual of rules accepted by all national supervisors has been well received.

The ECB has won many plaudits for the way in which it handled the recent market turmoil, particularly when compared to its international counterparts. As Commissioner McCreevy highlighted however, in a speech that left no one in any doubt that he believes supervisors need to pull their fingers out, it did have the luxury of not being faced with a cross-border bank operating in its jurisdiction needing to be bailed out. He quite rightly questioned what levels of cooperation would have been achieved between national supervisors had Northern Rock been operating in a number of member states and whether consistent messages to depositors in all affected members states would have been given. He has also championed the concept of a college of supervisors for every cross-border player and played down the chances of Member States agreeing to the proposed EU Supervisory Agency, much to the dissatisfaction of leading socialist MEPs, including Pervenche Berès, the Chair of the Committee on Economic and Monetary Affairs in the European Parliament.

What is clear is that the issue of cross-border supervision desperately needs to move to the top of member state priorities when discussing financial markets. The pace of financial market integration has been unprecedented since 1999 in the quest for a truly single market and the EU’s efforts to this end must be applauded. Despite setting off at such a pace, however, it may have left the supervisory arrangements that govern its implementation trailing in its wake. It is all very well to look ahead but present day challenges must take precedent.

Michael Cooper can be contacted on +44 (0)20 7665 9530 or click here to email.

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