EU Financial Market Regulation Issues – Impact – Assessment World Bank 4/11/05 Karel Lannoo Centre for European Policy Studies (CEPS)

13/01/2016 Framework > 15 years of financial sector de- or re-regulation: single passport under home country control Perception that single financial market is not (sufficiently) working, insufficient harmonisation, too much mutual recognition Further phase of harmonisation: –Financial Services Action Plan (FSAP) –Lamfalussy report –Basel II directive –Taxation of savings –Corporate governance, etc… Dominance of banks continues to grow, market fragmentation remains, market based financing difficult, this has a cost for industry and users

3 The European Financial System

4 Strongly bank-based

5 But elements of more market-based system emerging in bond market

6 Fund market fragmented

7 With diverse investor preferences

8 Financial Services Action Programme (FSAP) Achievements - Drawbacks Achievements 40 of 42 FSAP measures adopted by October 2005 Raised awareness of issues at stake Lamfalussy approach increased transparency of regulatory process Co-opetition between supervisory authorities: high degree of regulatory cooperation, but competition remains Higher degree of regulatory harmonisation, less possibility for host country restrictions Drawbacks More detail at EU level: higher common denominator More centralisation: the European Commission is in the driving seat, role of national supervisory authorities is limited (advisory) New decision process is laborious, complex, time- consuming and resource- absorbing for the authorities as well as for the private sector Increases the opportunity for regulatory capture

9 Lamfalussy directives (prospectus, transparency, MAD, MiFID) Build on earlier single market directives But more harmonisation, clearer definitions, more detail, to allow for full home country control and truly integrated market Implementing measures (level 2) further increase level of detail Requires member states to have independent supervisory authority to approve prospectus and monitor markets Single language regime Coming years should indicate whether it works International Accounting Standards (IAS) as basis for disclosure

10 Prospectus directive Should allow for a truly single prospectus (maximum harmonisation!) composed of three different segments: –one for equity issuers (and home country control) –a second for non-equity issues with denomination of at least €1,000 (choice of home country) –a third and light for professional investors (>€50,000) Most debt issuers will go for the basic document But some markets (London, Dublin, Luxembourg) have launched alternative schemes; also competition from non-EU centres (Switzerland, Singapore) US GAAP – IAS equivalence agreement of 22 April 2005 is important achievement

11 Transparency & market abuse Covers periodic and ad-hoc disclosure Annual, semi-annual and interim management reports (~ Q reports) Material or price sensitive information must be made public as soon as possible (company website plus media/supervisory authority), and simultaneous Conflicts of interest in investment research must be prevented, member states must impose organisational structures Guidelines for information disclosure

12 MiFID (or ISD II) Abolishes concentration provision of ISD at a cost Elaborate pre- and post-trade transparency regime for exchanges (regulated markets), multilateral trading facilities (MTFs) and investment firms, (only for equity transactions) Best execution takes a full set of criteria into account (not only price), prior consent for internalisation Conduct of business rules to be worked out in level 2, fully harmonised, to avoid friction betw. home a host Rules on conflicts of interest Gone out of control in implementing measures? Calls for further delay of implementation date

13 Making it work is main challenge! Focus should now be on implementation and enforcement –Enforcement was weak point in post-1992 phase –Committee structure should improve situation (‘co-opetition’) –But still some unclarity about who is finally in charge –Can the EU Commission cope in EU-25? Supervisory convergence is new catchword –What is supervisory convergence? –Yes for objectives, no full convergence of procedures required –Need for ‘formal’ powers for the Committee of European Securities Regulators (CESR)?

14 FSAP transpositions I

15 FSAP transpositions II

16 Overregulation? Financial markets, and capital markets in particular, require a well-developped regulatory structure –Multi-layered –Important but diminishing role for self-regulation –Match needs of issuers and investors –Was certainly underdevelopped in Europe Will only work when EU law is respected, and mutual recognition allowed to work (cfr. trend to full harmonisation) But regulatory process has a bias, adapted to the needs of the big players (‘one size fits all’), but heavy or impossible for small ones

17 Future priorities Retail financial markets –New consumer credit directive (CCD) –Single European Payment Area (SEPA) –Review of deposit protection directive Asset management –Adapting UCITS directive to new structure Application of competition policy –Inquiries into retail banking, payments, cross-border M&A, clearing and settlement Regulatory dialogues –EU-US dialogue vibrant, but more may be needed Corporate governance –Big item for this Commission, but will be difficult to achieve

18 The New Regulatory Structure