Slide 1 European Integration in Financial Services - Progress and Prospects Internal Market Week Budapest November 2004 Irmfried Schwimann European Commission/DG Internal Market

Slide 2 Outline of presentation Financial Integration in Europe: why and how? Financial Services Action Plan: state of play Lessons learned – Challenges ahead Beyond the FSAP

Slide 3 What is a Single Financial Market? Investors free to invest in instruments issued/ traded in other Member States ▪Intermediaries free to transact freely with clients in other Member States ▪Issuers free to tap a deeper and more liquid market ▪Infrastructure suppliers can make their facilities available to market participants/users in EU ▪Enforcement authorities able to prosecute cross- border infringements

Slide 4 Why do we need an Integrated Financial Services Market? long term economic benefits: greater market liquidity; more efficient allocation of investment resources; greater freedom for investors + consumers lower cost of capital = increased investment; better return on private savings for ordinary investors and funds will help defuse pension "time-bomb"; more venture capital and finance for higher-risk segments; increased growth, employment

Slide 5 Why do we need an Integrated Financial Services Market? Studies quantify effects of European financial integration: – London Economics: pooling national bond & equity markets would raise EU GDP by 1.1%, employment by 0.5%, business investment would grow by 6% (over 10 years) – CEPR: increase of annual growth of manufacturing sector by 0.8% to 0.9%, if financial development at US level;  permanent increase annual GDP rate of ~0.2% – ERT: in case of integration of financial retail markets, annual GDP growth would increase % annually – All studies confirm positive link between financial integration, growth and employment

Slide 6 Building blocks of the Single Market Home country/country of origin authorisation and supervision. ▪Mutual recognition of equivalence of partner country authorisation/supervision ▪Harmonisation of key regulatory protections/rules ▪Close co-operation between host State and home State authorities

Slide 7 Financial Services Action Plan adopted legislative and "soft law" measures on four broad objectives: – single EU wholesale market – open and secure retail markets – state of the art prudential rules – wider conditions for an optimal single financial market updates/additions over time to reflect developments and new challenges

Slide 8 Overview FSAP progress (December 2004)

Slide 9 Financial Services Action Plan What has been achieved? Significant enhancements of the EU legislative framework: – Common EU rule-book for securities – Single set of financial reporting standards – Common initial and regular disclosure documents; – First steps towards EU framework for occupational pension funds – Secure and transparent environment for cross-border restructuring of companies – Strengthening of supervision of companies and markets – Internal Market for retail customers

Slide 10 FSAP – what remains to be done? Commission work programme 2004/2005 Issue: Corporate scandals, money laundering and fight against terrorism – Follow up to the Action Plan on Company Law & Corporate Governance – Modernisation of 8th company law directive (statutory audit) – 3rd money laundering directive – Transposition of FATF recommendation No. 7

Slide 11 FSAP – what remains to be done? Commission work programme 2004/2005 Issue: Modernisation of capital adequacy rules – Basel II/CAD III – Solvency II Payment systems / Infrastructure – Legal framework for payments in the Internal Market – Clearing & Settlement

Slide 12 How to achieve goal of integrated financial markets EU financial services law-making, traditionally: too slow too rigid results divorced from market reality/practice insufficient legal certainty/uniformity to sustain home country principle: Response: Lamfalussy blue-print for reform of EU legislative process

Slide 13 How to achieve goal of integrated financial markets “ Lamfalussy Model” for a reformed EU- legislative process Consultation and Transparency Efficient and flexible regulatory system Regulatory convergence and co-operation Common implementation and enforcement

Slide 14 Lamfalussy Regulatory Structure Level 1: Broad Framework Principles in Directive/Regulation (Co-legislation Council – Parliament) Level 2: Implementing Rules delegated to Commission (assisted by national Regulators; sectoral committees) ESC – EBC - EIOPC Level 3: Strengthened Co-operation between Regulators (advice to level 2 and to improve implementation) CESR – CEBS - CEIOPS Level 4: Strengthened Enforcement of Community Law

Slide 15 Why the need for further work on integration We are not there yet: Markets remain fragmented Obstacles remain Developments and changes in the markets call for appropriate responses

Slide 16 Did the FSAP work? “Financial Integration Monitor 2004”: First annual Commission Services report – describes headline trends Financial integration is progressing; Progress is not the same in all market segments; Access to intra-EU financial markets takes place in direct and indirect ways. Cross-border provision of services takes place, but at different intensity according to markets, products, end- use Establishment-based trade is widespread

Slide 17 Where are we in the process State of EU financial integration

Slide 18 Did the FSAP work? Stocktaking and assessment of FSAP – 4 working groups, publication of reports beginning of May High level Conference mid June 2004 Wide ranging consultation: FSC, FIN-USE, EP – until mid September 2004 Synthesis of consultation exercise: Commission paper in late autumn 2004 Follow up/proposals for further action: Communication first half 2005

Slide 19 Did the FSAP work? Assessment of the experts Reports show broad consensus … but shades of opinion between segments and categories: – Large multi-state groups more open to steps to reduce legal/supervisory complexity; – Locally oriented actors more concerned with adjustment costs for which they reap no reward; – Securities industry coping with greater FSAP adjustment.

Slide 20 Did the FSAP work? Assessment of the experts Too early to assess effectiveness of FSAP measures Improvements for trading and capital-raising for traditional instruments EU rules facilitate cross-border presence X-border distribution of retail products marginal Changes in business environment are apparent; – local consolidation – single market rules facilitate structural change

Slide 21 Did the FSAP work? Assessment of the experts EstablishmentDirect B2BDirect B2C Local dist. Network Insurance √√ √ (large risks, reinsurance) -- √√ Banking √ (some take-over obstacles) √ (some X-border lending to corporates, limits to e.g. cash pooling) ₋ √√ Securities √√ √ (inter-professional trading OK; corporates some impediments √ √√ Asset Management ₋ (impossible to merge funds) √ (limits to delegation, competition for mandates) √ √ (access to local bank networks)

Slide 22 Beyond the FSAP: the experts’ ”wish list” Core messages from the four groups : Regulatory pause Focus should shift from rule-making to implementation/enforcement; Better prioritisation of EU level action Impact assessments – cost benefit analysis Importance of supervisory convergence and cooperation Minority view in 3 groups in favour of opening debate on single supervisor Consultation !!!

Slide 23 Lessons learned Broad and comprehensive consultation Thorough impact assessments of Commission proposals Necessity of improved regulatory and supervisory structures Monitoring and control of transposition and implementation

Slide 24 Challenges of integration Enlargement: since 1/5/2004 with 25 Member States: can we cope? Financial Stability: big pan European groups are potential danger Costs of integration – integration at all costs? Beyond the European borders: relationship with biggest partner & competitor USA

Slide 25 How to ensure the long term benefits of EU membership Fully participate from day one Implement and enforce the acquis Optimise the new links to enhance prosperity Use the possibilities of the Lamfalussy structure to consult and exchange best practices with counterparts in other Member States

Slide 26 Beyond the FSAP Stocktaking and assessment of present situation Emphasis on common enforcement and implementation Need for thorough impact assessments, cost-benefit analysis, evidence based policy making Subsidiarity principle!

Slide 27 Beyond the FSAP Identifying and resolving new challenges – Supervisory issues Addressing market failures and/or regulatory gaps – Clearing & Settlement – Retail Financial Services – Asset Management Handling the global dimension of a single financial market

Slide 28 Conclusion Huge potential benefits from integrated financial market Legislative phase nearly complete Immediate focus now on implementation and enforcement Need to have flexible system which allows to adapt quickly Need for strong involvement of stakeholders to be successful

Slide 29 Check our web-site de/index.htm de/finances/actionplan/index.htm