EU Financial Market Regulation Issues – Impact – Assessment World Bank 4/11/05 Karel Lannoo...
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![Page 1: EU Financial Market Regulation Issues – Impact – Assessment World Bank 4/11/05 Karel Lannoo Centre for European Policy Studies (CEPS) .](https://reader035.fdocuments.us/reader035/viewer/2022081502/5697c02c1a28abf838cd9021/html5/thumbnails/1.jpg)
EU Financial Market RegulationIssues – Impact – Assessment
World Bank 4/11/05
Karel Lannoo
Centre for European Policy Studies (CEPS)
www.ceps.be
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22/04/23
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
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3 www.ceps.be
The European Financial System
Bond, Equity and Bank Assets Markets in EU-15 and the USEnd 2003; in bns of euros and % of GDP
142 %
169 %
64 %
116 %
237 %
73 %
0
5,000
10,000
15,000
20,000
25,000
EU-15 US
Bond Markets Equity Markets Bank Assets
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4 www.ceps.be
Strongly bank-basedBank Assets in EU-15, US and Japan 1995-2003
in % of GDP
0%
50%
100%
150%
200%
250%
1995 1996 1997 1998 1999 2000 2001 2002 2003
EU-15 US Japan
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But elements of more market-based system emerging in bond market
Bond Markets in EU-15, US and Japan, 1992-2003in % of GDP
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
EU-15 US Japan
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Fund market fragmented
21.200
7.791
3.444
348
24.490
8.155
2.793
368
25.785
8.305
2.867
313
27.338
8.244
2.718
512
26.379
8.126
2.617
441
0
1000
2000
3000
4000
5000
6000
7000
8000
1999 2000 2001 2002 2003
World Investment Funds
Total assets EU15 Total assets US Total assets JP
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7 www.ceps.be
With diverse investor preferences
UCITS Asset Allocation by country in 2004
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Bonds Balanced/Mixed Money Market Other
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8 www.ceps.be
Financial Services Action Programme (FSAP)
Achievements - DrawbacksAchievements• 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
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9 www.ceps.be
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
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10 www.ceps.be
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
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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
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12 www.ceps.be
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
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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)?
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FSAP transpositions I
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FSAP transpositions II
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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
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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
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The New Regulatory Structure
Level 1(co-
decision)Commission Council
EuropeanParliament
Level 2
European Commission
Securities(incl. UCITS)
Banking Insurance(incl. pensions)
Financialconglomerates
Level 3
ESC EFCCEIOPCEBC
?CEIOPSCEBSCESR
EFC
FSPG(FSC)