Opinion of the Economic and Social Committee on the 'Commission Communication Financial Services: Building a Framework for Action'
Date: 1999-05-26
Institutions: European Economic and Social Committee
Subjects: financial legislation, provision of services, service industry

22.7.1999

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Official Journal of the European Communities

C 209/35

which is to allow permanent monitoring of the process
of
implementing the single market. The potential of the
Observatory is now starting to be exploited and the ESC, with

the Commission’s support, ought
to look into ways of
incorporating this work into the broader monitoring process
which the Commission is developing.

Brussels, 26 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

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

On 28 October 1998 the Commission addressed to
1.1.
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.

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
integration of markets and
regulatory and fiscal barriers,
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.

The following comments are deliberately limited to the
1.2.
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.

This observation — made by the Commission itself,
1.5.
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.

1.3.
The Committee congratulates the Commission on
drawing up an extremely clear document, which has succeeded

(1) See Communication, point 6.

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2. A leaner and more effective regulatory apparatus

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.

As regards prudential legislation (1), the Commission
2.1.
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 con-
ditions.

2.4.
To sum up, while accepting the Commission’s
approach, the Committee recommends that any ‘lean legis-
lation’ initiative be assessed in the light of its possible practical

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

3. Making the most of existing rules(2)

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.

As regards supervision rules, the Committee would
3.3.
draw the Member States’ attention to the cost of failing to
harmonize them, which ought to be assessed in detail at
European level (3). 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 administrat-
ive complications.

4.

Integrated wholesale markets are within reach (4)

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
fully from certain financing
firms which cannot benefit

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

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

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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 (1), 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 (2): 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.

In terms of risk, the Committee would point out that
4.4.
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 signifi-
cant data (3): 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 consider-
able 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 (4)

The Commission document sketches out a review of
in financial products and services for

5.1.
the retail market
companies and consumers, and points out that:

— cross-border supply is still largely based on the establish-
ment 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
they vary substantially

convergence; on the contrary,
between one national market and another.

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

(3) See the Introduction to the Communication.
(4) See points 21 to 33 of the Communication.

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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 auth-
orities 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 prod-
ucts’, ‘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 (1). A ‘financial service’ is some-
where 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.

(1) 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.

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
they include consultancy, the supply of
involving assets:
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 (2). The Commission’s statement (3) 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
to
find it
understand why financial services cannot easily be bought or
sold across borders’ (4). The euro has eliminated exchange risks

increasingly difficult

(2) 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 estab-
lishment.

(3) See point 24 of the Communication.
(4) See point 26 of the Communication.

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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
though with special reference to services (1), the
services,
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 (2).
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 profita-
bility 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).

An approach of

5.14.
this kind would provide more
likely to bring out the real nature of the
significant data,
differences in price levels in the various countries. On this
basis the Commission could make a useful contribution to
institutions and
clarifying the dialogue between financial

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
the results of
spin-off,
proper comparative analyses would help to stimulate greater
competition in the sector, with real reductions in the general
level of prices.

though by no means negligible,

5.15.
In line with the above comments, the Committee
agrees with the analysis of the obstacles (3) 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.

In promoting convergence of the rules on consumer
5.17.
protection as regards financial services,
the Commission
mentions the need to apply a common understanding of the
distinction between professional and non-professional users (4),
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 guaran-
tees). In order to avoid certain legal uncertainties encountered
by the Committee when examining the Commission docu-
ment, 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 initia-
tive 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’ (5). The conditional

(1) See point 22 and figure 4 of the Communication.
(2) 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.

(3) See points 28 to 33 of the Communication.
(4) See point 28 (1st paragraph) and point 31 of the Communication.
(5) See point 32 of the Communication.

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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 (1)

6.1.
The Commission makes a wide-ranging analysis of
the current situation in the European financial markets (2):
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 (3).

At global level (4) the scene becomes rather worrying.
6.2.
Recent events draw attention to the need for more active
cooperation between national authorities and for an improve-
ment 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 acknowl-
edged the need to lay down procedures for increased surveil-
lance of the financial sector as a whole, through structured
coordination of the main international authorities responsible
for
studying the
implementing arrangements was entrusted to Mr Tietmeyer,
the president of the German Central Bank, and he produced a
report (5) 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 Com-
mission, as the body responsible for European financial rules,
could be represented in the Forum.

stability in the sector. The task of

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

(1) See points 34 to 41 of the Communication.
(2) See points 34 to 37 of the Communication.
(3) Banking Advisory Committee, Insurance Committee, High Level
Securities Supervisors, Accounting Committee, UCITS Contact
Committee.

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

(5) Report published in ‘Auszüge aus Presseartikeln’, Deutsche Bun-

desbank, 26 February 1999.

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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 (1)

As regards infrastructure, the Commission notes with
7.1.
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
the Commission encourages the creation of
same time,
intracommunity links between national payment systems.

In the Committee’s view, the analysis is correct but
7.3.
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 sys-
tems. Real progress can however be achieved by studying the
problem as a whole and in a different light.

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

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.

On state aids, the Commission refers to a report
7.4.
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 Com-
mission 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.

Independently of

7.4.2.
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

C 209/42

EN

Official Journal of the European Communities

22.7.1999

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 cus-
tomers 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.
including
A specific case which raises problems,
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.

The problem of fiscal policy (1)

involves the most
7.5.
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 Com-
mission’s draft directive has been commented upon by the
Committee (2); 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

(1) See points 49-54 of the Communication.
(2) 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.

Brussels, 26 May 1999.

foreign countries and the levelling of ‘fiscal competition’
between the Member States.

The other proposed measures — elimination of the
7.6.
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
the interests of the market
be a long and difficult one:
sometimes differ from those of the Member States, and within
the latter there are often diverging and conflicting interests.

8. Building a consensus (3)

Following on from the series of initiatives proposed at
8.1.
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.

The Committee supports this initiative and the others
8.2.
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.

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

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI