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No 27 (July 2001/Juillet 2001/Juli 2001)
The Commission has recently unveiled a first package of reforms designed to integrate Europe’s financial markets. The package, which establishes a new system of regulation for European securities and contains far-reaching proposals to tackle market abuse and to enable companies to raise money on a cross-border basis, should deliver real improvements for European businesses, investors and markets. It will be followed by further proposals and work towards the end of this year, including the long awaited revision of the Investment Services Directive.
The reforms recognise the central role of financial markets in the European economy and the enormous gains to be made from integrating them, including higher economic growth. These gains will include lower cost of capital for European companies, better returns for investors and pensioners, more liquid markets, but with increased rather than reduced stability, increased competitiveness and higher job creation. Evidence suggests that these benefits will be spread across all sectors and all geographical areas of the European economy.
The reforms are designed to tackle the cross-border barriers still faced by European businesses, markets and investors despite the introduction of the single currency, technological improvements, and continuing market innovation. They are the first part of the Commission’s response to the call by European Heads of State and Government at the recent Stockholm Council for European securities legislation (see SMN 26) to be in place by the end of 2003. As such, they will contribute to the wider objective of completion of the EU’s Financial Services Action Plan by 2005 and to the EU’s overall economic goal of becoming “the most competitive and dynamic knowledge-based economy in the world”.
Crucially, the two proposals in the package are the first to reflect the new “Lamfalussy” architecture of European securities legislation, to make it faster, more flexible to be able to respond to market developments, more effective and more transparent. This approach was endorsed by European Heads of State and Government at Stockholm (23-24 March 2001) and is vital if the EU is to successfully integrate its markets.
The four-level regulatory approach (see also SMN 25) can be described as follows :
All this being reviewed half-yearly by a Monitoring Committee, composed of two nominees per EU institution, with a full review in 2004, to allow results to feed into the next Inter-Governmental Conference.
By putting this new approach in place, and by introducing appropriate implementing measures, the EU should be able to ensure that the good intentions of legislators translate into real results on the ground.
The new Committees
The first element of the package is two Commission Decisions establishing the European Securities Committee (the “Securities Committee”) and the Committee of European Securities Regulators (the “Regulators Committee”) with a vital role to play in ensuring that barriers to integration and expansion are removed on the ground.
The European Securities Committee (ESC) is composed of high level representatives of Member State governments and chaired by the Commission. It will have two key roles:
Initially, the Securities Committee will act only in advisory capacity. However, as and when new legislation gives the Commission implementing powers, the Securities Committee will also formally function as a regulatory committee, in the sense of the 1999 Comitology Decision, assisting the Commission in the exercise of those powers.
The second Committee will be the Committee of European Securities Regulators (CESR), composed of representatives of public authorities competent in the field of securities. Its role will be to advise the Commission on securities policy issues in particular, but not exclusively, in the preparation of technical implementing measures.
After consulting the Securities Committee, the Commission may mandate the Regulators’ Committee to prepare draft implementing measures. The Committee will also help enhance consistent and timely day-to-day implementation of Community law through reinforced co-operation between national regulators. This should avoid uneven transposition and so ensure legal certainty. The Committee will be independent and will elect its chairperson and set out its own operational arrangements, keeping strong operational links with the Commission. The Commission will be represented at all meetings.
Underpinning the work of these two Committees, will be processes and arrangements designed to ensure maximum transparency, consultation and co-operation. To this end, the Regulators’ Committee will be able to invite experts or observers to participate in its meetings. The Commission favours the establishment of working groups, including a market participants group to advise the Regulators.
There are also a number of provisions designed to ensure that the European Parliament is adequately informed of the work of the two Committees.
The second element of the package is a proposal for common European standards against market abuse. These are absolutely necessary if consumers are to have confidence in investing cross-border and if we are to have stable and transparent European markets.
The proposal covers both insider dealing and market manipulation. It aims to update the 1989 Insider Dealing Directive and to replace the variety of rules across Europe on market manipulation with a single set of standards, increasing standards for market integrity in the securities field throughout the EU.
By doing this, the proposal aims to establish a basic framework for the allocation of responsibilities, enforcement and co-operation within the Community and so deliver a coherent, consistent and administratively simpler system. The proposal contains a number of elements:
To ensure that the Directive remains relevant over the next decades in rapidly changing financial markets, the proposal provides for a general definition of what constitutes market abuse. It is flexible enough to ensure that new abusive practices which might emerge are adequately covered. At the same time it is sufficiently clear to provide adequate guidance for behaviour to market participants.
The scope is related to all financial instruments admitted to trading on at least one regulated market in the European Union, including primary markets. The proposal applies to all transactions concerning those instruments, whether those transactions are undertaken on regulated markets or elsewhere. This is to avoid unregulated markets, Alternative Trading Systems and others being used for abusive purposes concerning those financial instruments.
If the European Union is to develop integrated financial markets, there needs to be convergence in the methods of implementation and enforcement in Member States. Different sets of responsibilities and powers of national administrative authorities hinder the establishment of a fully in tegrated market and add to market confusion. To address this, the proposal foresees that each Member State designates a single administrative regulatory and supervisory authority with a common minimum set of responsibilities to tackle market abuse.
Given the increasing number of cross-border activities, Euro pean legislation will need to ensure that regulatory and supervisory authorities work effectively together to prevent, detect, investigate and prosecute market abuse. For this purpose they need to be able to rely on the assistance of and to receive relevant information from each other in good time.
In principle it is unacceptable in an integrated financial market for wrongful conduct to incur a heavy penalty in one country, a light one in another and no penalty in a third. However, under the EC Treaty, full harmonisation of sanctions is outside the scope of Community competence. Nevertheless, it is both desirable and consistent with Community law for the proposal to set a general obligation for Member States to impose and determine the administrative and criminal sanctions to be imposed for infringement of measures pursuant to the Directive in a way that is sufficient to promote compliance with its requirements.
All the key rules, basic concepts and principles are laid down in the Directive itself. In addition, the proposal provides for the Commission to be able to adopt implementing measures assisted by the two new Committees and according to the new regulatory procedure described above. The areas covered are: clarification of definitions; updating of financial instruments covered; clarification of fair disclosure of information; technical details of transactions exempted from the prohibitions of market abuse; technical modalities of co-operation between competent authorities.
The final element of the package is a proposal for a Directive on Prospectuses. A prospectus is a disclosure document given to investors by issuers when they want to publicly raise capital and/or when they want their securities admitted to trading.
The aim is to make it much simpler and less costly to raise capital across Europe, whilst ensuring high standards of investor protection. At the moment, widely varying national rules render the process expensive, complex and inefficient.
The centrepiece of the Directive is a “single passport for issuers”, meaning that there will be only one prospectus approved by the home country authority (of the issuer), which will have to be accepted throughout the EU for public offer and/or admission to trading on regulated markets. Compared to the existing regime, which involves mutual recognition subject to certain stringent conditions, the new system is based on compulsory automatic recognition of prospectuses drafted in accordance with the Directive.
To underpin this, the Directive would ensure that adequate and equivalent disclosure standards are in place in all Member States when securities are made available for all European investors either through a public offer procedure or because they are admitted to trading. These standards will protect investors and they are in line with international standards. This should make it easier for EU issuers to offer their securities in third countries, notably the US.
The proposed Directive includes in its scope all types of securities normally traded in the market and to avoid loopholes and disparities in the treatment of retail investors, it introduces a standard definition of a ‘public offer’.
To simplify capital raising procedures, a new mandatory registration system will be introduced. This system allows the publication of the prospectus as a set of disclosure documents, instead of a single prospectus: a prospectus will be split into a Registration Document, a Securities Note and a Summary Note – each of which may circulate separately. The Registration Document (RD) is to contain the information related to the issuer while the Securities Note (SN) is to contain the information related to the specific securities issued. The Summary Note is to contain a summary of the two documents and the risk warning. Issuers will be required to prepare the full set of documents only for the first offer/admission to trading. In any subsequent capital raising operation, issuers will only be required to draft and submit the Securities Note and the Summary Note for approval by the competent authority.
For investors, the proposal will ensure easy access through centralised filing of disclosure documents and better quality of information through higher standards.
As with the Market Abuse proposal, the Directive would give the Commission Level 2 technical implementing powers in some specific areas, and once again subject to the rigorous consultation, voting and transparency procedures of the new regulatory approach.
These reforms should deliver real results on the ground, but they are only the start of the process. The onus will now be on representatives to make the Committees work in practice, and on the three EU institutions to ensure that there is agreement on the two proposals, and that the essence is not lost in negotiation.
The Commission is, however, keenly aware that the package is only one element in a much wider raft of change needed for European securities.
In line with the new pre-legislative consultation process, the Commission will shortly be launching consultation on revising the 1982 Directive on information to be published by companies the shares of which have been admitted to official stock exchange listing (the Regular Reporting Directive).
The existing Directive applies to companies whose shares are admitted to official listing. It obliges listed companies to publish half-yearly reports to enable investors to make an informed appraisal of the general development of the company’s activities during the interval. However, at the moment, these reports only contain core information on the financial position and general progress of the company’s business. The Directive takes a minimum co-ordination approach which has led to many different practices and differing interpretations across the EU on the content and the layout of the reports.
Without reform, these inconsistencies will remain, creating a barrier to financial market integration. The Commission is therefore determined to tackle these inconsistencies.
Clearing and Settlement
Investors must be able not only to trade securities, but also ensure that they are transferred and paid for in efficient systems, with adequate risk management mechanisms. The current landscape for clearing and settlement in Europe is characterised by multiple systems with a variety of legal bases and market practices. This situation increases the costs and risks for those involved in cross-border activities.
The Commission believes that it is for the market to determine the best model of clearing and settlement for Europe and to deliver consolidation and cost reduction. However, it is seeking to gain a better understanding of the obstacles affecting cross-border clearing and settlement and the main factors that give rise to additional costs. A group of market experts, the Giovannini Group, will produce a report advising the Commission on this subject during the summer.
The Commission will issue a Communication on Clearing and Settlement by the end of the year. The emphasis of the paper will be on barriers to open access and competition between systems and how these can be removed, but it will also be an opportunity to debate the future public policy issues in this area. These systems are important to financial stability and their regulation, oversight and risk management practices are therefore of great importance to the integrity of the market as a whole.
Investment Services Directive
Finally and most crucially, the Commission will be soon launching its pre-legislative consultation on its revision of the Investment Services Directive (ISD), setting out its intended approach. This should reflect the many responses received to the Communication issued in November 2000.
Among the issues that the proposal will look to address are:
The package launched by the Commission marks a major step in the new regulation of European securities markets and the drive to European financial integration, and builds on existing work on UCITS, Pension Funds, Accounting Standards and Collateral. If agreed, it will make real progress on the ground by ensuring that European regulation is best able to adapt to the needs of the markets and European investors; that European companies do not have to face reels of red tape to access European capital markets; and that market abuse is effectively deterred and punished across Europe, giving investors real confidence.
The onus is now on the other EU institutions to work with the Commission to achieve this. With this in mind, the Commission is working very closely with the European Parliament and Council to agree the exact mechanics of the new approach. Market participants, experts and consumers also have a vital role to play in making the new approach work.
The European Union’s objective remains to achieve an integrated securities market by 2003 – and full implementation of the Financial Services Action Plan by 2005 – as decided by the Lisbon and Stockholm European Councils.
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