The Financial Services Action Plan
Evaluation and future

Speech by Alexander Schaub,
Director General of DG Internal Market and Services
European Savings Banks Group conference, Brussels, 8.12.2004

Chairman, Ladies and Gentlemen,

It’s a great pleasure to talk this morning at your impressive conference. The line up this morning makes clear that the European Barroso Commission works in closest harmony. I am delighted to have been invited to address you this morning – together with our new Irish Commissioner Charlie McCreevy.

I will immediately use this occasion to give an additional compliment to the organisation, or better, to express an expectation I have. The work the European Savings Banks Group is doing in the area of integrating financial markets has always been of extremely high quality. You have contributed to the work of the Commission frequently. And this important conference is a prime example of your commitment. Recently, I had the luxury of receiving a 30 page contribution advising the Commission on the way ahead in the area of financial integration – with extremely helpful suggestion.

It is clear that you are engaged in the integration process and that you are influential. For us you are an important partner, as the European Commission can not function without the views of the most important stakeholders and their experts being expressed.

In my key note presentation today, I will do three things. I will:

• look back and review the past years,
• reflect on what is going on now, and
• look forward to what the new years will bring.

In other words, exactly what you might expect anyone else to do in a December month.

Looking back at recent achievements

General

To judge by some of the recent press on the European Union, and more specifically on the former Prodi Commission, you might think that the past five years had been a rather lean and directionless period. This is not true. The press is mainly organised domestically and thus sometimes fed by national views having limited interest in explaining the success of a distant European Union. Thus, the achievements and developments prepared by ‘Brussels’ - as they call it - are undervalued. Let me mention the three most striking ones in the last five years: the introduction of the euro, enlargement, and the integration process of European financial markets. The European Union has shown ambition, a clear vision, and it has been realistic; thus delivering concrete results – whatever contradicting populist sentiments might suggest.

Financial integration

Back in 1999, a Single Market for Financial Services was still a distant vision. Despite the ‘92 Single Market Program, financial markets and their infrastructure remained fragmented. It was time for action. It was time for the Financial Services Action Plan.

We should keep in mind that the financial sector touches upon all segments of the European economy. Without a good functioning financial sector, economic developments in other areas will be slow or even non-existent. In a knowledge-driven economy, companies need easy and cheap access to financing to be able to innovate. A more efficient financial sector will also help the European Union face the demographic challenge of an ageing population, by increasing returns for investors and pension funds through improved risk allocation and increased liquidity. Important benefits for consumers, in terms of better quality and choice and lower prices, are expected from an integrated pan-European financial market.

FSAP

The Financial Services Action Plan – with all its measures to integrate the financial markets - was a milestone in European financial integration. As already pointed out by Commissioner McCreevy, it also has become an important element of the Lisbon agenda. Over the coming weeks and months you will see it be become an even more important element in the coming years.

Whilst the assessment of achievements on the overall Lisbon strategy is rightly rather critical, the FSAP is commonly seen as a success. Where individual Member States refused to deliver in other important Lisbon areas, they did deliver in the area of financial services.

With the FSAP, the dominantly legislative stage of our journey towards European Financial Integration has been successfully completed.

Reflect on what is going on

The measures of the FSAP represent major achievements already now. Let me mention just two of them:

Capital Requirements

First, - of crucial importance for the banking industry - the revised Capital Requirements Directive. This Directive is currently under discussion and a negotiating mandate has been agreed upon in yesterday’s ECOFIN Council. The revision aims at modernising the existing capital requirements framework; making it more comprehensive and more risk sensitive; and fostering enhanced risk management amongst financial institutions. This will strengthen financial stability and help maintain confidence in financial institutions.

International Accounting Standards

Second, the FSAP measures reinforced investor protection by providing more clear and comprehensive information. Investors need to be able to compare company results across borders – across European borders and borders worldwide. The requirement for listed companies to apply the International Accounting Standards as from the 1st of January 2005 onwards is a crucial first step towards global convergence of accounting standards.

The broad package of these standards was already adopted and recently, it cannot have been escaped by you, agreement has been reached on the final elements via a temporary carve-out of certain technical provisions; on the fair value option of IAS 39 and on the hedge accounting provisions.

Regulatory Dialogue

Another top priority has become the regulatory dialogue with our main trading partner, the US, and we have also made the first strides with Asia, where we find an extreme interest on their side. In the last 5 years it has become crystal clear that all measures to promote financial integration within the EU cannot be taken without regard for related developments at international level. Indeed, the borderline between the European Single Market and global markets has become more and more insignificant. Financial services are a global business - developments in one jurisdiction can and will impact on others. You have seen the impact of the Sarbanes-Oxley Act and we can mention dozens of other examples. We should avoid the potential for problematic regulatory overspill.

Looking forward

With the successful completion of the FSAP, and looking forward, the question arose: “what next”? What will and what should the next years bring in terms of concrete priorities as there are certainly areas where EU action is still wanted and needed.

Stock-taking exercise

The first steps in this reflection about future priorities are now underway. The Commission had organised – as you know - a wide-ranging, transparent and bottom-up consultation of market practitioners. Four working groups of experts have provided a market practitioner’s perspective on the state of financial integration following 5 years of FSAP. The expert groups were asked to identify products and markets where integration has yet to manifest itself and to consider the reasons which might explain these integration failures.

Their reports have been made public in early May this year and they have served as the raw material for an open public consultation over the course of the summer. We are now finalising our analysis on the results of this consultation. Our synthesis will be published in the coming month. This will help us to define the views for the Barroso Commission on directions for further work in this area.

I would like to inform you about some of the main conclusions the Commission draws from a first reading of the reports:

Too early to assess

The reports suggest it is too early to draw final conclusions on the impact and effectiveness of FSAP measures – as many of the regulatory initiatives are not yet implemented at Member State level. They are just printed in the EU’s Official Journal and – as you know – that itself will not change the world. So far, – at this early stage - the provisions of the FSAP have not yet translated into improvements in market access or easier organisation of cross-border financial business.

European reflex

However, there is evidence, particularly in the wholesale market, that a dynamic, open style European capital market has become closer. Markets are beginning to restructure and rationalise in anticipation. We see for instance a growing presence of financial institutions in partner country markets.

Integration of retail banking market

In the FSAP, a lot of emphasis was placed on the integration of the wholesale markets. Integration of the retail markets turned out to be more complex and demanding – we know this. Product characteristics, distribution systems, differences in consumption culture or indeed other economic or structural realities play a more prominent role in this area. We cannot assume that by simply harmonising the legal rules for market access, we will definitely increase the opportunities for cross-border business. We should invest our energy wisely and choose the right priorities.

This morning, Commissioner McCreevy already outlined some of these ideas regarding an integrated retail banking market. I would like to add that while retail markets in Europe may be restricted by national boundaries, I hope this will no longer be the case 10 years from now. We would make an historic mistake if we were to define retail banking as a ‘no-go area’ for new regulatory initiatives. Retail business consistently delivers a major contribution to the profitability of the banking industry, to the European economy, and it helps to ensure the stability of financial systems. More integration would also benefit workers’ mobility. Cross-border provision of retail banking services will become less and less the exception - Commissioner McCreevy rightly pointed this out.

I agree with the Savings Banks that a pluralistic banking sector is indeed important and crucial for consumer choice; banking concentration for the sake of it, might introduce undesired effects. At the same time, however, the banking market should not be too fragmented and should not be artificially fragmented. Size matters and new business models and opportunities should be given a fair chance.

Although domestic competition might keep the costs for services relatively low, market-entry for new competitors on domestic markets remains problematic. We have heard several complaints concerning artificial barriers being put in place. Thus preventing legitimate business cases from being explored. My services will therefore study the consolidation of the financial services sector and report on the findings in September. This was also a specific request from the Savings Banks and I am happy to announce that we have already responded to your call.

Which other suggestions have we heard?

Better implementation

It is obvious – and I would like to underline this quite particularly - that priority should be given to making the most out of the current legislative framework. There is a clear call for better implementation and enforcement of European regulation, in order to secure the benefits of integration. The Commission will therefore continue to work closely with the Member States, or even more closely, to develop a coherent strategy, supported with a full range of tools. Member States too need to take their responsibility very seriously, and some more in particular. In an enlarging Europe, there is an increased risk that late or incorrect transposition of legislative measures will result in fragmentation of the internal market – this to the detriment of businesses and consumers.

Better enforcement

But, it is clear that agreeing Directives and implementing these at domestic level is not enough. The way in which national enforcement agencies exercise their discretion is equally important. The financial services industry has an important role to play here. They should pro-actively inform the Commission when they hit upon divergences in enforcement, unnecessary barriers and duplex requirements. As part of the exercise, industry should not be afraid in appropriate cases to name and shame national administrations, regulators, supervisors and their competitors who are not ready to play the game. After all, it’s ultimately in their interest. A financial market can only function effectively if there is a level playing field. However, I would like to add here that an overreaction should also be prevented as confidence is an important ingredient for cooperation and day-to-day partnerships.

Lamfalussy approach

Crucial to this process of better implementation and more supervisory convergence has been the so-called Lamfalussy approach, bringing together national regulators and national supervisors respectively. This approach is now being extended to all financial services sectors, including the banking sector, and even wider. The review of the Lamfalussy approach shows that all of this has led to an increase in both the speed and quality of EU legislation. Although the process has just started, some regulatory and supervisory convergence is already taking place in the real world.

Prioritisation and justification

Finally, there is a strong plea for more prioritisation and justification of legislative interventions and continued improvements in consultation.

The FSAP “stock-taking” is thus not the prelude to an ambitious new legislative programme. We will not present a FSAP II – as announced by some of the media against better knowledge for quite some time. Only targeted legislative action to overcome clearly identified legal or regulatory barriers will be proposed. Continuing our present programme on Capital Requirements; on Solvency II; on Reinsurance; on the Legal Framework for Payments; Corporate Governance, Statutory Audit and reform of Company Law will already be demanding enough.

Other priorities defined

Retail financial services will be a clear priority in the coming years. Also two other priority areas have already been identified. First, Clearing and Settlement of securities transactions. We need to cut down the excessive costs of pan-European Clearing and Settlement activities. Secondly, we need to take a fresh look at asset management. There is an enormous potential in Europe if you compare the situation with the US. The FSAP stock-taking exercise has revealed that the current single market framework for investment funds is in need of considerable improvement.

The Commission will explore all these areas carefully. Preparing a thorough economic impact assessment is now standard practice for all major Commission proposals and it will be a vital element in our decision on these priority areas – and all other areas – as well. We are doing this not because a lot of people have recently discovered this, but we believe in the advantage of it and will continue to apply this even once the fashion has disappeared.

Conclusion

Ladies and gentlemen, let me conclude….. we are not there yet. In fact, we have only just begun.

Five years ago, there was no integrated market in financial services at all. In the life span of the Financial Services Action Plan, Europe has made decisive steps from fragmented national markets to a Single Financial Market; resulting in more and more integration – especially in the wholesale sector. And when that sector now pleas for a regulatory pause, enabling proper implementation and application of the new rules, I take their point.

However, the same is not true for the retail markets. The dominant market players today will not be the same ones tomorrow; this is not a very dangerous prediction. The dynamics of international financial markets ultimately leave us no choice. Measures in the area of financial services must continue and will continue to contribute positively to the Lisbon economic reform agenda. Our final objective of boosting competitiveness, growth and employment in Europe remains valid.

A first outline of the assessment of priorities and the options for tackling them will be published by the Commission in the form of a consultative green paper in May 2005. Stakeholders will again have the opportunity to comment on this assessment and on the proposed options.

I am therefore very much interested in your views on priorities and techniques. In other words, in the results of this important and promising conference.

Thank you for you patience and interest in our work.