Opinion of the Economic and Social Committee on the "Commission Communication Financial Services: Building a Framework for Action"

(1999/C 209/10)

On 28 January 1999 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an opinion on the abovementionned Communication and to set up a subcommittee to prepare the Committee's work on the subject, in accordance with Rules 11 (4) and 19 (1) of the Rules of Procedure.

The Subcommittee adopted a draft opinion on 20 April 1999. The rapporteur was Mr Burani.

At its 364th plenary session (meeting of 26 May 1999) the Economic and Social Committee adopted the following opinion unanimously.

1. Introduction

1.1. On 28 October 1998 the Commission addressed to the Council and the European Parliament a Communication (COM(1998) 625 final) which surveys the current situation of the European financial markets and proposes a plan of future initiatives to make the markets more integrated at European and international level, stronger, better controlled and more transparent. The Economic and Social Committee - to which the Communication was not addressed - takes note of this document and intends to make - with this opinion - a contribution which, though not requested, may help to arouse some useful reflections.

1.2. The following comments are deliberately limited to the essential aspects of the Commission document; going into detail would require a commitment of resources and time which would probably not be justified, given that we are still at the preliminary stage of developing strategies. But precisely for that reason it is important for the basic concepts underlying the strategies to be clear.

1.3. The Committee congratulates the Commission on drawing up an extremely clear document, which has succeeded in combining the contribution of professionals with that of the national authorities, users and consumers; consequently it cannot but endorse, in general terms, the objectives and future approaches set out in it.

1.4. The Commission's objectives are summed up in six points in the introductory part of the Commission document. The emphasis is on legislative structures, the remaining regulatory and fiscal barriers, integration of markets and infrastructures, and coordination of controls. The Committee would like to draw attention to another basic need in the background: the need to create a strong European financial sector, capable of creating jobs, offering competitive and transparent products and services, and finally of attracting inward capital investment.

1.5. This observation - made by the Commission itself, but with reference to prudential rules alone(1) - should also apply when individual initiatives are examined: the need to strengthen Europe's competitive position in relation to the rest of the world should become a point of reference. This does not necessarily mean - as will be further clarified later in this document - that the rules of the game should be less strict: if anything the opposite should occur in some cases.

2. A leaner and more effective regulatory apparatus

2.1. As regards prudential legislation(2), the Commission takes a very critical view - which the Committee shares - of the legislative procedures: too slow, too confused and open to the temptation for each to add "something of his own". The examples it gives are typical: one directive which arrives 30 months late in relation to American initiatives, another of 26 pages which ends up being 79 pages long; these are examples of the legislators' failure to perceive the need to adopt timely measures to adjust the market to developments in the international environment. Prudential rules are an extremely technical and specialist matter: in cases of justified urgency it should not be impossible for the Commission to make use of faster comitology procedure. Alignment with the rules of the Bank for International Settlements (BIS) and the consent of national monitoring authorities should be a sufficient guarantee for direct, rapid transposition of the Basle Committee rules into European legislation. This is all the more true since the Basle Committee rules already offer the possibility, as regards market risk, and will very soon do so as regards credit risks, of using either the standard method or internal models validated by the national authorities. The problem of how to apply its rules to all credit establishments regardless of size - which justified a specific Community approach to all credit establishments - is therefore solved.

2.2. In the wider context of legislation on providers of financial services and on products, the Commission proposes a different approach from that adopted in the past: rules should be limited to fundamental requirements, leaving aside quantitative or qualitative aspects. The latter could be dealt with, when necessary, using faster or more flexible procedures, such as Commission communications, recommendations or decisions, involving - for decisions only - the adoption of comitology rules.

2.3. The Committee agrees in principle with this approach, but cannot refrain from expressing a degree of concern. The more flexible a rule, the more likely it is to be interpreted in the various countries according to the economic environment and customs prevailing in each of them - and this is certainly a positive aspect. The negative aspect is that the broader the scope for discussion and interpretation, the greater the risk of new rules developing: there is a risk of new obstacles being created on the road to market integration and of maintaining or even strengthening certain disparities in competition conditions.

2.4. To sum up, while accepting the Commission's approach, the Committee recommends that any "lean legislation" initiative be assessed in the light of its possible practical consequences: at all events it will be necessary to exercise extreme caution to ensure that the freedom of action allowed to Member States or individual players is not used to distort the rules of competition or impede integration.

3. Making the most of existing rules(3)

3.1. The Commission notes that the existing rules could prove their usefulness if the Member States gave clearer and more uniform interpretations of community legislation, transposing it more rapidly into national legislation. Moreover, the supervisory authorities could agree amongst themselves on non-legislative and self-regulation solutions to ensure better understanding of the operational concepts. Any discrepancies could be overcome through interpretative communications from the Commission.

3.2. The Committee cannot but agree with the comments and suggestions made by the Commission; however, it would point out that, more than ten years since the entry into force of the Second Banking Directive and the other basic rules for the system, there is still a need to harmonize, clarify and interpret, and much still remains to be done on the road to real globalization of the European market. It could be said with some justification that these are details, and that in general terms integration has been achieved: however, the Commission's comments imply that the responsibility for "real" harmonization (in the sense of adoption of uniform concepts and approaches) lies with the Member States and their supervisory authorities.

3.3. As regards supervision rules, the Committee would draw the Member States' attention to the cost of failing to harmonize them, which ought to be assessed in detail at European level(4). Indeed, supervision by the country of origin does not exclude the possibility of the authorities of the host country being able - or rather obliged - to request information on the activities of branches existing in that country; notification arrangements often differ from one country to another, involving significant costs and administrative complications.

4. Integrated wholesale markets are within reach(5)

4.1. The Commission introduces the subject with the comment that the adoption of the euro will not in itself integrate capital markets. The persistent market fragmentation is due to residual regulatory, administrative and tax obstacles, which are one of the causes of the underdevelopment of capital markets in a number of Member States. The Commission goes on to say that fragmentation represents a considerable cost for firms which cannot benefit fully from certain financing mechanisms such as equity and bond issues; this drawback is felt particularly by new innovative firms, particularly as regards risk capital.

4.2. The analysis of the situation is impeccable, and the solutions proposed are rational; the Committee would however like to dwell on the comments relating to the American market, which is indicated as a sort of reference model. The Commission document(6), to show the underdevelopment of the European capital market, cites the fact that 70 % of issuance in the EU is accounted for by more secure assets (credit rating Aa2 and above) as opposed to 30 % in the USA. If this is meant to imply that the market should be more open to higher-risk undertakings, some consideration should be given to certain basic concepts which are often taken for granted.

4.3. The European situation (70 % of issuance at rating Aa2 and above) indicates that the criteria for admission to stock market quotation are so rigid that only stronger companies can have access to the market. The measures proposed by the Commission are therefore welcome(7): mutual recognition of prospectuses, financing unlisted start-ups, uniform principles of corporate governance, greater transparency of accounts, elimination of restrictions on investment, and conditions of perfect competition among similar financial products. All this should cause the traditional approach of the European market to shift towards structures which are less dependent on bank credit and more open to risk. Moreover, it must be borne in mind that markets also vary: in Europe there is in general less propensity to risk and sometimes a certain reluctance to publish detailed information.

4.3.1. Another problem to be solved concerns the fiscal aspects: in general, the use of credit enables a firm to deduct interest from the taxable amount, while an increase in capital involves additional burdens, especially as regards profits tax. The fiscal mechanism should therefore be such as to encourage firms to resort to the equity market as a source of funding.

4.4. In terms of risk, the Committee would point out that broadening of the market must be accompanied by strict measures to assess the shares to be admitted, in order to assessment of risks as against returns. There is more cause for concern about consumers avoid an excessive lowering of its qualitative level. Institutional investors are well aware of the rules of the game and know how to make use of financial information: their choices are based on a professional: an increasing number of small investors are drawn towards risk capital investments because of low returns on the government bond and monetary market; they lack the necessary experience to find their way in an environment which is by its very nature risky, and becomes more so the lower the rating of the assets offered by the market. It is true that mechanisms (investment funds) exist which spread the risk, thereby attenuating it for the consumer/investor; but the overall risk is not diminished - only transferred and redistributed over the whole market.

4.5. The problem is well known, and it is hardly necessary to restate it; it can be summed up as that of finding a balance between the need to finance the productive sector and the need to protect the market as a whole. The basic question is a different one, involving a much wider set of problems, which is mentioned here even though it digresses somewhat from the specific subject under discussion: the question of European companies dependence on financing in comparison with American companies. The Commission has provided significant data(8): such dependence is 20 % in the United States, as compared with the European percentage which varies from 50 % in the Netherlands to 80 % in Spain, with an average of around 70 %.

4.6. The discrepancy between Europe and the United States is too wide not to be significant: in terms of business efficiency, a high level of own capital implies lower costs and greater operational flexibility, but in terms of risk for the investors it generally means that guarantees are greater. The reasons for these differences are many; first and foremost is the considerable divergence in the tax position of undertakings; however, this is not the place to discuss that subject further. With regard to equity markets, the Committee would point out that to regard the American market as a reference point or model would be inappropriate and dangerous. First and foremost the following question should be answered: among companies in search of "fresh" capital, how many have an initial rating at least equal to Aa2? The model of financing through the markets, albeit desirable, is nonetheless not a panacea. It should be stressed that the European financing model, which has always prioritised credit, has enabled the long-term development of SMEs. The European banks have also played a role as a driving force in the economic rise of the European area, and this should be borne in mind.

5. Member States' "retail" markets are not yet open(9)

5.1. The Commission document sketches out a review of the retail market in financial products and services for companies and consumers, and points out that:

- cross-border supply is still largely based on the establishment of subsidiaries or branches, while the supply of services by non-established companies is underdeveloped;

- prices, despite the euro's adoption, have not yet shown convergence; on the contrary, they vary substantially between one national market and another.

5.2. The objectives to be achieved in order to overcome these disadvantages are mainly that of adopting measures designed to increase competition, ensuring that intermediaries compete on the basis of authorization granted by the authorities of their country of origin, and that of establishing consumer protection enabling the consumer to make reasoned choices: information on prices and quality, and adequate, uniform protection. But it must not be forgotten that from the suppliers' viewpoint the diversity of rules intended to protect the consumer is regarded as an obstacle: the rule of the "destination country" gives rise to uncertainties and costs for them. The Committee takes the view that - even when the difficulties mentioned in point 28 of the Commission Communication are taken into account - there is a need for greater harmonization of the consumer protection rules, and suggests that the Commission should include the appropriate measures in the "points for action" listed after point 33.

5.2.1. Action is also needed in the insurance field: the consumer must be given the choice of taking out an insurance policy (whether life or non-life) in countries other than his/her own. The barriers which still exist are justified in some cases, but others can be eliminated through suitable measures, not necessarily of a legislative kind.

5.3. The other proposed measures are consistent with the objectives, and the Committee generally endorses them. It would still like to make some supplementary comments with a view to contributing to a clear analysis of the problem as a whole.

5.4. Firstly, there is a confusion between "financial products", "banking services" and "financial services": point 21 of the document refers to "services" and the subsequent point to "products", while still dealing with the same subject. There is, however, a substantial difference: the three categories do not have the same characteristics and the factors affecting them are often different.

5.5. A "financial product" is something of which ownership can be acquired: investment funds, shares, bonds; it can be freely bought or sold on the market, and once the price has been paid any contractual relationship with the seller ceases. By contrast, a "banking service" is not acquired: a price is paid for the use of it, and it generally involves a risk for the seller; examples are credit cards, consumer credits, mortgage credits, and even current accounts(10). A "financial service" is somewhere between the two: pensions, life assurance and similar offers become over time a tangible product, but are so complex as to make the expert advice of an intermediary useful - and often essential.

5.6. Financial products can therefore be bought and sold in the same way as a non-financial product or service: the seller offers them on the market and he is willing to sell them to anyone who is prepared to pay the price asked, provided that they are well identified under the rules governing the recycling of money. As pointed out by the Commission in point 32 of the document, the new electronic technology (Internet) - as well as the adoption of the euro - will give a great boost to this market once certain persisting regulatory and fiscal obstacles are removed. Integration of the market does not involve any other significant problems.

5.7. For banking services - which generally involve a risk for the seller, as stated above - the issues are completely different. The seller must know his own customer, not only because before concluding the contract he must be able to assess the risk, but also because he has a clear obligation under European and national laws to prevent recycling of funds. There is another condition: the need to monitor development of the risk over time.

5.8. Financial services are often sold with advice, usually provided by an intermediary. In the interest of consumers, intermediaries should be regulated; a failure to harmonize this aspect would become an obstacle to the development of a single market in financial services.

5.9. The points made above with regard to products and banking services usually imply - especially for the SME market, but also for that of individuals - a continuity in contacts and links, but not confined to matters simply involving assets: they include consultancy, the supply of more or less sophisticated or personalized services, etc. The complexity of these links contributes, often decisively, to the decision to provide services by establishing subsidiaries or branches(11). The Commission's statement(12) to the effect that "financial intermediaries at present generally find themselves obliged to establish subsidiaries in other Member States for legal, tax or administrative reasons" should therefore be reworded or qualified to take account of other important reasons.

5.10. The distinction made in the preceding points should help to explain certain basic reasons, corresponding to the Commission comment that "..... following the introduction of the euro, consumers will find it increasingly difficult to understand why financial services cannot easily be bought or sold across borders"(13). The euro has eliminated exchange risks and costs, facilitated the integration of markets, made possible the acquisition of financial products across frontiers; however, neither the euro nor legal, fiscal or administrative measures could modify the basic characteristics of trade in financial services.

5.11. With regard to prices of banking products and services, though with special reference to services(14), the Committee would like to make a few comments in the hope of contributing to a clarification in the exchange of views which the Commission has begun with consumers and financial institutions. These comments will not at this stage include an assessment of the lack of convergence in product and services prices noted by the Commission - a problem which also concerns many other sectors - but are rather intended to provide a methodological basis for analysis.

5.12. Mere comparison of individual products or services may be misleading: every financial institution offers a wide variety of them, and the consumer has the right to choose those which suit him best in terms of utility and price. Thus a supply and demand market is created for groups of banking products and services, which is no different from the large-scale retail market and commerce in general: consumer choices are determined by a overall assessment of suitability and quality(15). On the supply side there is still an analogy with the large-scale trade, since the price is often fixed on the basis of cross-selling calculations, i.e. taking account of the possible overall profitability of the products and services offered.

5.13. It follows from the above that a proper methodology for calculating convergence should be based on an initial study of the characteristics of the various markets, moving on to the formation of comparable "packages" of products and services normally used in the various market segments at national level. The subsequent comparison of the price for such packages for homogenous customer groups in the various countries would make possible an initial assessment of price differences. The mathematical results would then have to be supplemented with comparative analyses of objective risk (by type of product), subjective risk (by type of customer) and value (in terms of quality of the product or of the service).

5.14. An approach of this kind would provide more significant data, likely to bring out the real nature of the differences in price levels in the various countries. On this basis the Commission could make a useful contribution to clarifying the dialogue between financial institutions and consumers; the latter would at last be in a position to make informed choices, without being misled by assessments limited to the price of a single product or service. As an indirect spin-off, though by no means negligible, the results of proper comparative analyses would help to stimulate greater competition in the sector, with real reductions in the general level of prices.

5.15. In line with the above comments, the Committee agrees with the analysis of the obstacles(16) which still stand in the way of completion of a totally integrated market; similarly, it agrees with the suggested lines of action, but would wish to add a few comments.

5.16. Where financial services and products are concerned, the credit risk is essential. Although the task is very difficult, it is vital to try to harmonize bankruptcy law in Europe in order to respond to the concerns of consumers and professionals alike.

5.17. In promoting convergence of the rules on consumer protection as regards financial services, the Commission mentions the need to apply a common understanding of the distinction between professional and non-professional users(17), stressing that professional investors certainly do not need the same level of protection as ordinary consumers. Despite the distinction already codified by the Commission in the legislation, certain doubts about interpretation may still persist. The Committee takes the view that, with regard to non-professional users, the possibility should be considered of confining protection to amounts which are indeed high but not unlimited. For example, an individual investing one million euro undoubtedly comes into the category of non-professional users, but the amount of money involved leads one to assume that he is - or should be - well acquainted with the rules and risks applying to a professional investor: to give him protection as a "consumer" would mean placing on "real" consumers the burdens which the financial firm must bear to cope with the general risk. There is therefore a need to fix a ceiling above which the protection granted to "normal" consumers cannot be invoked (subject of course to contractual and legal guarantees). In order to avoid certain legal uncertainties encountered by the Committee when examining the Commission document, the simplest solution could be to leave unchanged both the definition of "consumer" and the rules protecting the consumer, but to stipulate that these rules apply only up to a certain amount.

5.18. The Communication mentions the need to protect consumers when they take up Internet offers. In this context, the Commission states that "where consumers take the initiative of accessing Internet web-sites operated by financial service providers in another Member State, they should be willing to accept that the web-site is configured and operated in accordance with the laws of the country"(18). The conditional mood of this sentence gives rise to some doubt. A consumer with access to the Internet is not necessarily conversant with all the rules governing such transactions: the fact that the use of financial services (or, rather, products) requested by a consumer on the Internet is regulated by the laws of the Member State of origin should be compulsorily made clear in the exchange of messages on products and services - and not only of a financial nature. This condition must be fulfilled to ensure complete information for the consumer.

6. Regulatory and supervisory cooperation for financial stability(19)

6.1. The Commission makes a wide-ranging analysis of the current situation in the European financial markets(20): globalization, the creation of cross-border financial groups, the growing difficulty in drawing dividing lines between the different sectors, the trend towards out-sourcing of some financial activities to some external bodies - all this helps to create a complex environment: the task of the supervisory and monetary bodies - the latter responsible for the liquidity of the system - is becoming ever more difficult. One possible solution would be to strengthen cooperation within the liaison bodies set up by the supervisors themselves, and between them and the Commission, which is also ably assisted by various committees which it has set up(21).

6.2. At global level(22) the scene becomes rather worrying. Recent events draw attention to the need for more active cooperation between national authorities and for an improvement in regulatory and supervisory systems. These subjects - together with the request to relax the restrictive rules on direct financial investments in certain countries - will form part of the positions which the Commission intends to defend at the forthcoming GATS negotiations. The World Bank for its part intends to strengthen its supervisory assistance powers by asking the countries to which funds are sent to improve their supervisory structures.

6.3. Europe has given fairly satisfactory proof that it can resist the contagion of crises in third countries: the adoption of the euro has strengthened its monetary structure, and controls have proved to be effective. However, there is no cause for complacency: the prospects for the global economy this year are not favourable, and even Europe - as the Commission points out - needs continuous revision of its regulatory and supervisory structure, which needs to adapt rapidly to changes in the situation and in international rules.

6.4. There are some fundamental comments the Committee would like to make. The crises which in successive and overlapping periods have struck Japan, south-east Asia, Russia and finally Brazil have shown supranational organizations' inability to foresee events and to control them once they have begun. The reports presented to the World Economic Forum in Davos have pointed the finger not only at the way the International Monetary Fund operates, but also at the policies of the World Bank; in a sense, criticism has also been levelled at the efficiency of controls at national and global level which are carried out under the rules proposed by the Basle Committee within the Bank for International Settlements (BIS).

6.5. One aspect was only touched upon in the Commission document - the soundness of the financial sector as a whole. Globalization, the fluidity of distinctions between the various activities, and deregulation have made possible the birth and growth of multinational bodies which - because of the multiplicity of supervisory arrangements - in practice escape overall supervision of their activities. Despite the cooperation - not always effective everywhere - between the supervisory authorities, there still exist grey areas in which their respective powers are not precise, or indeed overlap. It is above all these grey areas which make possible the formation of anomalous bodies or speculative positions which are only discovered when it is too late.

6.6. The above leads one to the conclusion that the present situation may indeed be regarded as satisfactory, but it does not prevent us regarding the future with some apprehension, especially if one takes into account possible, but unforeseeable, short-term economic trends linked with global political events. The G-7 has reached similar conclusions and has acknowledged the need to lay down procedures for increased surveillance of the financial sector as a whole, through structured coordination of the main international authorities responsible for stability in the sector. The task of studying the implementing arrangements was entrusted to Mr Tietmeyer, the president of the German Central Bank, and he produced a report(23) which suggests the creation of a "Financial Stability Forum" made up of the G-7's finance ministers and central bank governors, the international regulatory bodies, the IMF, the BIS and some national central banks. The Committee strongly supports this solution, but suggests that the Commission, as the body responsible for European financial rules, could be represented in the Forum.

6.7. Mr Tietmeyer's mandate clearly covers the global aspects of the problem only; the Committee hopes that at European level the possibility will be studied of collating centrally all data relevant to the stability of the system and devoting special attention to control of the multinational bodies, which by their very nature can have aspects which escape the attention of the national authorities responsible for supervising them. Even more attention should be devoted to those non-financial bodies which are increasingly important on the financial markets but elude rules and controls thanks to their status which makes them legally "invulnerable".

7. General conditions for a fully integrated EU financial market(24)

7.1. As regards infrastructure, the Commission notes with satisfaction - which the Committee shares - that the payment systems of the wholesale capital markets and of the equity markets operate efficiently and are - at least in principle - safe from systemic risks particularly thanks to the Target system, based on real time gross settlement (RTGS), and to the implementation of the directive on finality of payments. It should also be borne in mind that all the other directives designed to ensure the soundness and solvency of participants in the system contribute to the final purpose of guaranteeing the operation of a transparent market, capable of allowing trouble-free circulation of monetary flows.

7.2. On retail payment systems, the Commission points out that they continue to lag behind other systems; cross-border payments are therefore more expensive - particularly in relation to the euro zone - and arouse bitter criticism from consumers. The reason can be found in the need for the system to carry out statistical surveys, a problem which should soon be mitigated by the introduction of uniform methods and by exemptions for amounts lower than a certain level. At the same time, the Commission encourages the creation of intracommunity links between national payment systems.

7.3. In the Committee's view, the analysis is correct but does not tackle the essence of the problem. There is in fact a general economic rule concerning the distribution of goods and services in general, including those of a financial nature: the costs of retail trade are higher than those of wholesale trade, because of economies of scale and investment possible only with high enough volumes of traffic. Moreover, the linking of different national systems implies higher costs than those needed for the operation of purely domestic systems: a case in point is the telephone, for which international charges are always higher than domestic charges. The Committee feels that efforts towards a reduction in cost to the consumer must be continued, but that it will not be possible to eliminate completely the differences between wholesale and retail systems. Real progress can however be achieved by studying the problem as a whole and in a different light.

7.3.1. Market trends in cross-border retail payments are obvious to all: payments - even distance payments - are increasingly carried out using credit cards, withdrawals using debit or credit cards, and transfers using electronic money (prepaid cards and virtual money) applications (already now, but even more and better in the near future). All these operations are rapid, inexpensive and sufficiently secure. The Commission is working actively to bring in rules to guarantee adequate consumer protection.

7.3.2. The above would suggest the forecast that traditional systems for transfer of retail payments will tend to diminish in importance in favour of alternative systems which are more efficient and less expensive. The Commission must continue with its efforts to obtain a reduction in transfer costs, but it should not lose sight of the inevitable market developments. It should therefore encourage the financial sector to inform the consumer of alternative ways of transferring money. Moreover, it should intensify and complete current or planned initiatives on electronic commerce, of which the keystone is payments.

7.4. On state aids, the Commission refers to a report prepared in response to a request from the Amsterdam European Council of 1997, which will be submitted to the Ecofin Council "in due time". The time which has elapsed since then indicates the complexity and sensitiveness of the subject. Pointing out that in recent times the number of cases of aid to financial enterprises in difficulty has increased, the Commission seems to want to concentrate its attention on the competition-distorting effects which state aids can have. In its view, such distorting effects could be offset, for example, by the obligation to reduce the turnover of the enterprise benefiting from aid.

7.4.1. A measure of this kind should in the Committee's view be regarded with extreme caution. A reduction in the competitive strength of the enterprise receiving aid would no doubt benefit the rest of the sector, but the general interest should be the main and most important preoccupation. This requirement implies that the public money invested in a firm in difficulty should be repaid: a reduction in turnover could make such repayment difficult. Secondly, a "large firm" which has encountered problems and returns to the market on a reduced scale will have to bear restructuring costs and, for well-known image reasons, would find it difficult to enjoy the confidence of depositors and other firms.

7.4.2. Independently of the conclusions which will be submitted to the Ecofin Council (see point 7.4 above), the Committee points out that a credit firm in difficulty - especially a very large one - is in the paradoxical position of having to be assisted with public money if the rest of the sector is unwilling or unable to come to its aid. The funds of hundreds of thousands - or more often millions - of depositors - both firms and consumers - cannot be wasted without the risk of devastating social and systemic crisis. The "too big to fail" doctrine, so often questioned, applies fully - albeit by extension - here, as recent cases in France and Italy - and earlier cases in the Nordic countries - demonstrated beyond any doubt. Incidentally, these considerations militate for a strengthening of supervisory and regulatory rules - a policy which the Committee vigorously supports.

7.4.2.1. However, this legitimate concern to protect customers and depositors must not blind people to the "moral hazard" risk, i.e. the near certainty that state intervention to help a large credit firm in difficulty is in itself an incentive to take unreasonable risks. So, the concern to protect savers and the stability of the financial system should not be incompatible with the need to punish managers and shareholders who have not shown evidence of the requisite caution and competence.

7.4.3. A specific case which raises problems, including ethical ones, is that of state aids to be allocated to partly or wholly state-run enterprises. The use of public money to assist a public enterprise is far from unusual in some Member States, but one would be justified in wondering whether "protection of the public interest" is in these cases leading to distortions of competition the cost of which would once more be borne by the public itself.

7.5. The problem of fiscal policy(25) involves the most controversial aspects. On taxation of interest received by individuals, the Commission points out that the disparities in treatment lead to a distortion in a location of investments and of financial firms themselves, both attracted by more favourable conditions offered by certain countries. The Commission's draft directive has been commented upon by the Committee(26); the arguments in its favour are those of morality and equal competition conditions between financial firms; the arguments against are those of the fear of a flight of capital to foreign countries and the levelling of "fiscal competition" between the Member States.

7.6. The other proposed measures - elimination of the risk of double taxation for financial products, action in the area of pension funds, reduction in disparities in treatment between credit instruments and securities - are all initiatives with which the Committee fully agrees. The hope is that these matters can be properly regulated as soon as possible and given priority over any other tax harmonization programme; it is indeed these aspects which constitute the main obstacle to real integration of the European markets. Given the multiplicity of existing systems, the consumer cannot easily obtain a life assurance policy, a supplementary pension, a mortgage, etc. from a financial institution in another Member State: the fiscal obstacle thus constitutes the most important real barrier to integration of the markets. One realises that the process will be a long and difficult one: the interests of the market sometimes differ from those of the Member States, and within the latter there are often diverging and conflicting interests.

8. Building a consensus(27)

8.1. Following on from the series of initiatives proposed at the end of each chapter, the document calls upon the Commission and the Parliament to take forward the debate. To maintain political momentum, the Commission proposes the setting up of a Financial Services Policy Group, composed of the personal representatives of Finance Ministers under the chairmanship of the Commission. The Group's objective would be firstly to agree on a plan of future action to be presented in June 1999 to the Council, and secondly, before that date, to define a number of urgent priorities for immediate implementation.

8.2. The Committee supports this initiative and the others which will follow it, reserving the right to make its own comments and proposals as part of a collaboration which, although not requested, will, it hopes, be useful.

Brussels, 26 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) See Communication, point 6.

(2) See points 6 to 10 of the Communication.

(3) See points 11-13 of the Communication.

(4) To give one example, one of the largest European banking groups operating at world level has to submit to 45 different national controls, each of them involving different arrangements and requirements.

(5) See points 14 to 20 of the Communication.

(6) See footnote 7 of the Communication.

(7) See points 17 to 19 of the Communication.

(8) See the Introduction to the Communication.

(9) See points 21 to 33 of the Communication.

(10) The right of ownership of deposited or borrowed money should not be confused with the service connected with the management of the money itself. Figure 4 in the Commission document should therefore refer to prices of financial services and not of products.

(11) The introduction of "distance banking" solutions is a fairly recent phenomenon, with its own characteristics. In general it is aimed at the individual market and operates on the basis of detailed assessments of the risk, which is usually confined to the national territory. Although likely to expand, distance banking is a complementary solution, which does not replace territorial establishment.

(12) See point 24 of the Communication.

(13) See point 26 of the Communication.

(14) See point 22 and figure 4 of the Communication.

(15) Of importance in this context are the periodical surveys made by a consumer magazine on the "housewife's shopping basket", covering groups of mass consumer products.

(16) See points 28 to 33 of the Communication.

(17) See point 28 (1st paragraph) and point 31 of the Communication.

(18) See point 32 of the Communication.

(19) See points 34 to 41 of the Communication.

(20) See points 34 to 37 of the Communication.

(21) Banking Advisory Committee, Insurance Committee, High Level Securities Supervisors, Accounting Committee, UCITS Contact Committee.

(22) See points 38 to 41 of the Communication.

(23) Report published in "Auszüge aus Presseartikeln", Deutsche Bundesbank, 26 February 1999.

(24) See points 42-48 of the Communication.

(25) See points 49-54 of the Communication.

(26) See opinion of the Economic and Social Committee on the Proposal for a Council Directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community, rapporteur Mr Geuenich, CES 194/99, 24.2.1999.

(27) See points 55 to 62 of the Communication.