1 DRAFT EU Financial Services Legislation – enlargement and regulatory convergence UNECE WORKSHOP Athens 7-8 November 2003 Dr. Alexander Spachis Adviser.

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DRAFTDRAFT

EU Financial Services Legislation – EU Financial Services Legislation –

enlargement and regulatory convergenceenlargement and regulatory convergence UNECE WORKSHOP Athens 7-8 November 2003UNECE WORKSHOP Athens 7-8 November 2003

Dr. Alexander SpachisDr. Alexander SpachisAdviser on EnlargementAdviser on Enlargement

Financial Institutions -Financial Institutions -Internal Market Directorate GeneralInternal Market Directorate General

European CommissionEuropean CommissionFax : +32-2-295 39 54Fax : +32-2-295 39 54

E-mail : E-mail : [email protected]@cec.eu.inthttp://europa.eu.int/comm/internal_market/en/index.htmhttp://europa.eu.int/comm/internal_market/en/index.htm

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Financial Services Financial Services a typical “Single Market” subjecta typical “Single Market” subject

The 4 Freedoms: in particular The 4 Freedoms: in particular establishment, services and capital: which establishment, services and capital: which is which?is which?

What are restrictions? What are What are restrictions? What are discriminations?discriminations?

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Freedom of establishment / Freedom of establishment / Freedom to provide servicesFreedom to provide services

Community law frameworkCommunity law frameworkEstablishment & services at Treaty LevelEstablishment & services at Treaty Level Freedom of establishment Arts. 43-48 EC Freedom of establishment Arts. 43-48 EC

(ex 52-58)(ex 52-58) Freedom to provide services Arts. 49-55 EC (ex Freedom to provide services Arts. 49-55 EC (ex

59-66)59-66)

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Community law frameworkCommunity law frameworkPersonal scope of applicationPersonal scope of application nationals of EU Member States and EEAnationals of EU Member States and EEA companies / firmscompanies / firms

set up under national law of an EU Member Stateset up under national law of an EU Member State registered office / head office / principal place of registered office / head office / principal place of

businessbusiness

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Community law frameworkCommunity law frameworkThe notion of ‘establishment’The notion of ‘establishment’ economic activityeconomic activity fixed infrastructurefixed infrastructure indefinite durationindefinite duration how : agency, branch, subsidiary (secondary how : agency, branch, subsidiary (secondary

establishment)establishment)

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Community law frameworkCommunity law frameworkThe notion of ‘services’The notion of ‘services’ Art. 50 EC : subsidiary notionArt. 50 EC : subsidiary notion economic realitieseconomic realities three types of provision of servicesthree types of provision of services

service provider moves to other MS to provide service (Art. 50)service provider moves to other MS to provide service (Art. 50) service receiver moves to other MS to receive service service receiver moves to other MS to receive service

(Court of Justice, application Art. 49)(Court of Justice, application Art. 49) no movement of persons, only service crosses borders no movement of persons, only service crosses borders

(Court of Justice, application Art. 49)(Court of Justice, application Art. 49)

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Role of the European CommissionRole of the European Commission

What does EU Commission do?What does EU Commission do?

Researches and drafts legislationResearches and drafts legislation Negotiates directives in Council and EPNegotiates directives in Council and EP Checks Member States follow EU rules Checks Member States follow EU rules

(infringements)(infringements)

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Financial Services DirectivesFinancial Services Directives

Home country controlHome country control= supervision by the authorities of the MS of origin= supervision by the authorities of the MS of origin

Close co-operation host State and home State Close co-operation host State and home State authoritiesauthorities

Minimum harmonisation - key measures of prudential Minimum harmonisation - key measures of prudential supervisionsupervision

Mutual recognition : the European passportMutual recognition : the European passport only for ‘branching’ and ‘provision’ of services only for ‘branching’ and ‘provision’ of services

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BankingBanking Codified Banking (2000/12/EC)Codified Banking (2000/12/EC)

contains 1st and 2nd coordination , solvency ratios, own funds, large exposures, contains 1st and 2nd coordination , solvency ratios, own funds, large exposures, consolidated supervisionconsolidated supervision

Capital Adequacy - CAD Capital Adequacy - CAD (93/6/EEC, amended by 98/31/EC)(93/6/EEC, amended by 98/31/EC) Bank Accounts (86/635/EEC)Bank Accounts (86/635/EEC) Branch Accounts (89/117/EEC)Branch Accounts (89/117/EEC) Deposit Guarantee (94/19/EC)Deposit Guarantee (94/19/EC) E-money (2000/49/EC)E-money (2000/49/EC)

Financial conglomeratesFinancial conglomerates

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InsuranceInsurance Insurance on Life - 3 directives Insurance on Life - 3 directives

(79/267/EEC,90/619/EEC and 92/96/EEC)(79/267/EEC,90/619/EEC and 92/96/EEC) Insurance on Non-Life - 4 directivesInsurance on Non-Life - 4 directives

(73/239/EEC, 88/537/EEC, 92/49/EEC, 87/344/EEC)(73/239/EEC, 88/537/EEC, 92/49/EEC, 87/344/EEC) Insurance Accounts Insurance Accounts (91/674/EC)(91/674/EC) Insurance on Motor Vehicles - 4 directivesInsurance on Motor Vehicles - 4 directives

(72/166/EEC, 84/5/EEC, 90/232/EC and 2000/26/EC)(72/166/EEC, 84/5/EEC, 90/232/EC and 2000/26/EC) Pension fundsPension funds IntermediariesIntermediaries

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SecuritiesSecurities Investment Services - ISD (93/22/EEC)Investment Services - ISD (93/22/EEC) Insider Trading (89/592/EEC)Insider Trading (89/592/EEC) Listing Particulars (80/390/EC)Listing Particulars (80/390/EC) Regular Reporting (82/121/EC)Regular Reporting (82/121/EC) Prospectus (89/298/EEC)Prospectus (89/298/EEC) Public Offer (90/211/EEC)Public Offer (90/211/EEC) Admission to Trading (79/279/EC)Admission to Trading (79/279/EC) Major Holdings (88/627EEC)Major Holdings (88/627EEC) UCITS (85/611/EEC) UCITS (85/611/EEC) (subsequently replaced)(subsequently replaced)

Investor Compensation (97/9/EC)Investor Compensation (97/9/EC)

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Payment SystemsPayment Systems Cross-border Credit Transfer (97/5/EC)Cross-border Credit Transfer (97/5/EC) Settlement Finality (98/26/EC)Settlement Finality (98/26/EC) Electronic Payment Instruments (REC 97/489/EC)Electronic Payment Instruments (REC 97/489/EC)

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Money LaunderingMoney Laundering

New rule : identify your customer New rule : identify your customer (no anonymous account)(no anonymous account)

Every bank must have an officer responsible for Every bank must have an officer responsible for detecting and reporting suspicious operations from detecting and reporting suspicious operations from criminal activities criminal activities exceeding € 15 000exceeding € 15 000

Keep records for 5 yearsKeep records for 5 years Enhanced administrative co-operationEnhanced administrative co-operation

Second Money Laundering DirectiveSecond Money Laundering Directive Obligations on lawyers, accountants, ... Obligations on lawyers, accountants, ... Know also the final beneficiary ownerKnow also the final beneficiary owner

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Fundamental economic objective

Lisbon European Council 23/24 March 2000

“To become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable growth and

with more and better jobs”

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A single market of 25 in financial A single market of 25 in financial servicesservices

What is its aim?What is its aim?

To ensure smooth operation of single financial To ensure smooth operation of single financial services marketservices market BankingBanking InsuranceInsurance Investment and trading Investment and trading Asset managementAsset management

Consumers and operators can take full Consumers and operators can take full advantageadvantage

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Integration of Financial Markets crucial:

Link companies looking for finance Link companies looking for finance with investors wanting to make most with investors wanting to make most of savings through efficient exchangesof savings through efficient exchanges

Huge economic benefits:Huge economic benefits:• MicroeconomicMicroeconomic• MacroeconomicMacroeconomic• SocialSocial• Financial Stability Financial Stability

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Not there yetNot there yet

Markets remain fragmentedMarkets remain fragmented• The cost of financial products 3 times higher in one The cost of financial products 3 times higher in one

Member State than in anotherMember State than in another• stock market capitalisation in US is 179% of GDP stock market capitalisation in US is 179% of GDP

compared to 90% in EUcompared to 90% in EU• expensive clearing and settlementexpensive clearing and settlement• Retail markets vs B2BRetail markets vs B2B

Obstacles remainObstacles remain• Heavy handed lawsHeavy handed laws• Gaps in scopeGaps in scope• Failure to implement Directives adequatelyFailure to implement Directives adequately• And more…And more…

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Important unfinished business:

ISD Revision• Single passport for investment firms• Harmonised high levels of investor protection• Functional approach to ATS• Common regulatory principles for regulated markets

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Need to integrateNeed to integrate nownow

Introduction of EuroIntroduction of Euro EnlargementEnlargement ‘‘post-Enron’ confidence issuespost-Enron’ confidence issues

Technological breakthroughsTechnological breakthroughs Market pressuresMarket pressures

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Two wider issues for Two wider issues for regulatory convergence and regulatory convergence and

financial servicesfinancial services1. Creating a more efficient regulatory system:

the Lamfalussy process

2. Ensuring that EU Enlargement takes place successfully

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Level 1: Broad Framework Principles in Directive/Regulation

Level 2: Implementing Rules delegated to Commission, assisted by ESC and CESR

Level 3: Strengthened Co-operation between Regulators to Improve Implementation

(and achieve converging practices)

Level 4: Strengthened Enforcement of Community Law

The Lamfalussy approach

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Enlarge the EU: why and howEnlarge the EU: why and how

The obligation and the benefitsThe obligation and the benefits The conditions for successThe conditions for success

Acceding countries must fulfil Acceding countries must fulfil criteria criteria Union needs Union needs to prepare itselfto prepare itself adequately adequately

The agreements and Treaty :The case of financial services The agreements and Treaty :The case of financial services and insuranceand insurance

No permanent derogations; No permanent derogations; only limited transition periods for some banking and only limited transition periods for some banking and

securities issues but none for insurance.securities issues but none for insurance.

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Ensuring successful Enlargement of a single market in financial services

Five processes :

• Transposition checks

• Peer Reviews with recommendations

• Action plans

• Monitoring and safeguard measures

• Other preparations

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Key messages in the EU Commission's Key messages in the EU Commission's Comprehensive Monitoring Reports Comprehensive Monitoring Reports

of 5 November 2003of 5 November 2003

Most countries advanced in reforming and Most countries advanced in reforming and strengthening judicial systemstrengthening judicial system

Progress in fight against corruption, fraud and Progress in fight against corruption, fraud and economic crime, but some concerns remaineconomic crime, but some concerns remain

Financial intermediation has strengthenedFinancial intermediation has strengthened All ACs now have a more stable and efficient All ACs now have a more stable and efficient

banking sector banking sector

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Key messages (continued)Key messages (continued)

Domestic bank lending still low Domestic bank lending still low Liberalisation of capital movements in line with acquis is Liberalisation of capital movements in line with acquis is

now complete in most countriesnow complete in most countries Attention needs to be paid to proper implementation of Attention needs to be paid to proper implementation of

money laundering directives and financial services money laundering directives and financial services legislation, in particular the independence of supervisory legislation, in particular the independence of supervisory authoritiesauthorities

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Between now and 1 May 2004Between now and 1 May 2004

Next step : assess the urgent needs identified in Next step : assess the urgent needs identified in the Comprehensive Monitoring Reports of the the Comprehensive Monitoring Reports of the the 10 countries , published on 5 November the 10 countries , published on 5 November 2003 , and the regular reports on 2+1 countries 2003 , and the regular reports on 2+1 countries

Comprehensive monitoring and possibility of Comprehensive monitoring and possibility of imposing safeguard clause for Internal Marketimposing safeguard clause for Internal Market

Transposition control : legislation of Acceding Transposition control : legislation of Acceding Countries checked by Commission services (in Countries checked by Commission services (in translation), comments sent and draft translation), comments sent and draft corrections received corrections received

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ACs Compliance with Community lawACs Compliance with Community lawAlthough good progress in transposition, more Although good progress in transposition, more

needs to be done in the next 6 months:needs to be done in the next 6 months: BankingBanking : successfully implemented : successfully implemented

but non-codified directives less advanced but non-codified directives less advanced (e.g. Capital Adequacy)(e.g. Capital Adequacy)

InsuranceInsurance : not bad, but work still needed in : not bad, but work still needed in order to be fully in-line, especially on motor order to be fully in-line, especially on motor insuranceinsurance

SecuritiesSecurities : some concerns about correct : some concerns about correct implementation implementation

Payment SystemsPayment Systems : steadily proceeding- : steadily proceeding-progressingprogressing

Money launderingMoney laundering: laws in place: laws in place

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Effective Implementation and Effective Implementation and EnforcementEnforcement

Peer reviews and implementing capabilityPeer reviews and implementing capability Supervision: some EU legislation and direct Supervision: some EU legislation and direct

relevance of international voluntary relevance of international voluntary standards, especially the standards, especially the Basel Committee CORE PRINCIPLESBasel Committee CORE PRINCIPLES IAIS Insurance Core Principles, see their website: IAIS Insurance Core Principles, see their website:

www.iaisweb.orgwww.iaisweb.org IOSCO core principles for securitiesIOSCO core principles for securities

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Supervisory AuthoritiesSupervisory Authorities : progress but more to : progress but more to be done to achieve internationally accepted be done to achieve internationally accepted standardsstandardsMost advanced : Banking supervisionMost advanced : Banking supervisionLess experienced : Insurance and SecuritiesLess experienced : Insurance and Securities

Implementation of Implementation of out-of-court redress out-of-court redress schemesschemes (FIN-NET) has just started: (FIN-NET) has just started: settlement settlement of disputes between service providers and customers, of disputes between service providers and customers, including insurance. including insurance.

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Anti-Money Laundering DefencesAnti-Money Laundering Defences

LegislationLegislation generally positive generally positive (first directive implemented, second underway)(first directive implemented, second underway)but certain technical problems but certain technical problems (e.g. systematic (e.g. systematic reporting of all transactions above a low threshold)reporting of all transactions above a low threshold)

Good progress in implementation but Good progress in implementation but situation to be kept under situation to be kept under close scrutinyclose scrutiny(e.g.: off-shore centre with links to high-risk countries)(e.g.: off-shore centre with links to high-risk countries)

Third EU directive in preparationThird EU directive in preparation Insurance sector to be more carefulInsurance sector to be more careful

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FSAP – What next?FSAP – What next?

Take stockTake stock what workedwhat worked what less successfulwhat less successful impactimpact

State of integretation of EU financial State of integretation of EU financial marketsmarkets (Are markets fragmented? Is this (Are markets fragmented? Is this a problem?)a problem?)

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How? (see press release of 27 Oct. 2003)How? (see press release of 27 Oct. 2003)

Assessment by market practioners Assessment by market practioners 4 Sectoral Expert Groups: banking, 4 Sectoral Expert Groups: banking,

insurance, investment and trading(of insurance, investment and trading(of financial instrumnts), asset managementfinancial instrumnts), asset management

Case for any further EU actionCase for any further EU action Start soon: 4 groups of experts meet early Start soon: 4 groups of experts meet early

decemberdecember Report summer 2004Report summer 2004

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A single market of 25 in financial A single market of 25 in financial services: challenges and services: challenges and

opportunitiesopportunities

ACs made good progress in financial sectors. ACs made good progress in financial sectors.

Strong presence of foreign companies, often via large Strong presence of foreign companies, often via large local enterprises.local enterprises.

Privatisations resulted in strategic investments, Privatisations resulted in strategic investments, bringing local market knowledge together with access bringing local market knowledge together with access to capital and know-how of the foreign financial to capital and know-how of the foreign financial institution.institution.

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Challenges and opportunities(continued)Challenges and opportunities(continued) financial market for large companies is relatively financial market for large companies is relatively

developed. Enormous long term potential for developed. Enormous long term potential for developing the middle market.developing the middle market.

Increased business will depend, in addition to Increased business will depend, in addition to stability, on progress in rule of law and reform of stability, on progress in rule of law and reform of judiciary systems. judiciary systems.

pension savings reform will generate further pension savings reform will generate further opportunities for insurance and securities markets opportunities for insurance and securities markets (and fund management). (and fund management).

Supervision of supplementary pension funds : an Supervision of supplementary pension funds : an obligation as from 2005obligation as from 2005

Challenge to supervisory authorities: large amounts Challenge to supervisory authorities: large amounts of funds may also attract all sorts of "interests". of funds may also attract all sorts of "interests".

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Challenge in financial services is to deepen legal Challenge in financial services is to deepen legal framework and institutions that underpin financial framework and institutions that underpin financial

stabilitystability

harmonisation of legislationharmonisation of legislation transparent accounting and auditing, transparent accounting and auditing, comprehensive supervision, comprehensive supervision, effective bankruptcy mechanisms and adequate effective bankruptcy mechanisms and adequate

collateral registration and recovery mechanisms. collateral registration and recovery mechanisms. new EU committee structure ( level 3 committees of new EU committee structure ( level 3 committees of

regulators(=supervisors)) will contribute to better regulators(=supervisors)) will contribute to better supervision practices and efficiency, also in the acceding supervision practices and efficiency, also in the acceding countries. countries.

restructuring of sector, finished in some cases and well restructuring of sector, finished in some cases and well under way in others, needs to be completed.under way in others, needs to be completed.

1 DRAFT EU Financial Services Legislation – enlargement and regulatory convergence UNECE WORKSHOP Athens 7-8 November 2003 Dr. Alexander Spachis Adviser.

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