Report from the Commission - Progress on financial services - Second report
Date: 2000-05-30
Institutions: European Commission
Subjects: financial institution, financial legislation, financial market, free movement of capital, single market

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 30.05.2000
COM(2000) 336 final

REPORT FROM THE COMMISSION

Progress on Financial Services

SECOND REPORT

REPORT FROM THE COMMISSION

Progress on Financial Services

SECOND REPORT

The Lisbon European Council – A Step Change

The Lisbon European Council took an important political step in March towards an integrated
financial services and capital market in the European Union. At Lisbon, Heads of State and
Government recognized the central role of efficient financial markets for long term European
competitiveness and for the development of the New Economy - the strategic aim over the
next decade being for the Union to become “…the most competitive and dynamic knowledge
based economy in the world capable of sustainable economic growth with more and better
jobs and greater social cohesion…”. Heads of State and Government went further by asking
that the Financial Services Action Plan (FSAP)1 should be completed by 2005, and the Risk
Capital Action Plan by 2003. These target dates are now the key reference for this and all
subsequent reviews of the Financial Services and Risk Capital Action Plans.

The Lisbon European Council was also specific about certain near term priorities for financial
services. Para 21 of the Presidency Conclusions states that “…in order to accelerate the
completion of the Internal Market for Financial Services, steps should be taken in…. priority
action areas such as…” :

– facilitating the widest possible access to investment capital on an EU-wide basis, including

for SMEs, by means of a “single passport” for issuers;

– facilitating the successful participation of all

investors in an integrated market by

eliminating barriers to investment in pension funds;

– promoting further integration and better functioning of government bond markets through
greater consultation and transparency on debt
techniques and
instruments, and improved functioning of cross-border sale and repurchase (“repo”)
markets;

issuing calendars,

– enhancing the comparability of companies’ financial statements;

– intensifying cooperation by EU financial market regulators;

– making rapid progress on the long-standing proposals on takeover bids and on the
restructuring and winding-up of credit institutions and insurance companies in order to
improve the functioning and stability of the European financial market.

1

FINANCIAL SERVICES-Implementing the Framework for financial markets:Action Plan Commission
Communication of 11.05.1999 COM(1999)232

2

These are also reflected in the priorities set out in the Broad Economic Policy Guidelines.

The emphasis on priority measures relating to wholesale financial markets and the call for an
acceleration of their implementation reflect the important contribution they can make to
economic growth and the need to keep up with rapid market developments. Similarly the
European Council (para 11) called in particular on the Council and the European Parliament
to adopt as rapidly as possible during 2000 pending legislation on the legal framework for
electronic commerce, on e-money and on the distance selling of financial services. The
Commission and Council were also asked to promote consumer confidence in e-commerce, in
particular through alternative dispute resolution systems.

Particular recognition was also given to the importance of growing and nurturing small and
medium sized companies, entrepreneurship and innovation in general and spreading the use of
risk capital. The Council asked that, by the end of 2000, the EIB and EIF’s financial
instruments should be reviewed to redirect funding towards support for business start ups,
high tech firms and micro-enterprises, as well as other risk capital initiatives proposed by the
EIB.

Taken together, these Conclusions represent a step change. They are a clear challenge to
financial services policy makers, Commission, Council, European Parliament and all other
interested parties, to achieve the deadlines and meet the targets set out by Heads of State and
Governments on time.

The Council invited the Commission to report on a regular basis on the progress made to
assist the implementation of the FSAP. This report has been prepared with the assistance of
personal representatives of ECOFIN ministers meeting in the Financial Services Policy
Group. This second report to the ECOFIN Council2 examines key developments in the
financial sector that are of relevance to the policies underpinning the Action Plan (section I);
provides a progress report on the implementation of the measures of the Action Plan (section
II and annex); and considers those areas that require acceleration or new policy orientation
(section III).

1.

KEY DEVELOPMENTS IN THE FINANCIAL SECTOR

Integrated European capital markets are essential for sustained growth and employment

Financial services represent about 6% of EU GDP and 2.5% of EU employment. It is a sector
that underpins all economic activity and also one where the Union has the greatest potential
for expansion.

An integrated European securities market and a dynamic financial sector are now within
reach. Companies will benefit from raising capital across the European Union; cheaper and
more flexible financing arrangements for corporate borrowers will emerge; innovative start-
up companies will find more appropriate funding for its needs, such as as seed- and risk
capital. Investors will see improved returns: existing savings will be able to work more
productively, freeing up resources for other uses. Private sector savings in Europe amount to
some 20% of GDP - a valuable asset, if efficiently used, to stimulate growth and job-creation.

2

report,see:Financial Services Action Plan Progress Report,November 1999.Available on

First
Internet:http://europa.eu.int/comm/internal_market

3

Against a backdrop of low interest rates, new ways must be found to make this pool of
savings yield higher returns for investors and savers. This is particularly important
to
overcome the medium term public sector debt overhang.

Box 1 HOW FINANCIAL MARKETS CONTRIBUTE TO JOB-CREATION

Modern financial markets which are widely accessible to all companies can contribute to
the emergence of a new generation of entrepreneur and job creation: the companies quoted
on Europe’s small company exchanges recorded average employment growth of 40%
(Neuer Markt) and 47% (Nouveau Marché) in the period 96- beginning 99. However, the
number of companies served by these markets remains small – a total of 785 companies
were listed on EASDAQ, AIM and Euro.NM in March 2000 compared to 4800 companies
listed on NASDAQ. Market capitalisation of these 3 markets was 1/17 of NASDAQ levels.
European venture capital investment, , was also far outstripped by levels in US – some 7
billion Euro in venture capital, compared to 12 billion in US. The gap widened further in
1999. Creating and funding fast growing small companies is essential for job creation (see
the Risk Capital Action Plan).

EU capital markets are rapidly changing…

The euro has made its mark on international capital markets. It has already captured
approximately 40% of the international bond market

The market value of private sector bond issues continues to increase in all Member States (on
average by 1.5% per year). For example, early in 1999, the market value of listed private
sector bond issues represented more than 110% of GDP in Denmark, almost 70% in Germany
and over 40% in the Netherlands.

Stock market capitalisation in the EU continues to grow…

The stock market capitalisation of EU Member States is still only around one half of the US
level, but there are signs of renewed growth. In 1999, newly admitted companies raised over
130 billion euro in European markets, more than doubled compared to 1998.

Stock market capitalisation as % of GDP

1997

1998

1999

300

250

200

150

100

50

0

AT BE DK FIN FR DE EL

IRL

IT LUX NL PT ES SW UK

Source : Eurostat

4

Implementing the FSAP will help these markets grow more. The Action Plan contains a series
of key measures to eliminate the mass of barriers that remain. Those measures will respond to
rapid changes to the infrastructure of EU securities markets : over 20 new trading platforms
have emerged and “traditional” exchanges and regulated markets have responded by seeking
alliances and mergers, notably the “Euronext” and “IX” projects. Work is underway and has
been accelerated on common rules for
integrated securities and derivatives markets,
streamlined procedures for raising capital on an EU-wide basis, and a single set of financial
reporting standards for listed companies (see below).

Financial markets are becoming a more popular way of raising finance for European
companies. The trend decline in the debt to equity ratio of European companies confirms this.
The large increases in stock market capitalisation of all EU member States (with the
exceptions of Austria and Luxembourg) since 1997 point
to a sea-change in corporate
financing strategy. Despite these encouraging developments, universal banks still account for
lion’s share of corporate financing (in 1999, EU-11 bank assets amounted to 212% of GDP
compared with a corresponding figure of 47.9% for equities: almost the inverse of the US
where equities amount to 160% of GDP and bank assets correspond to 62.5%°).

The growing importance of institutions for occupational retirement provision for an
ageing Europe

By providing a ready source of long-term capital, pension funds, subject to strict prudential
supervision providing for a high of level of protection to ensure the security of pension fund
beneficiaries, can improve the flow of funds for private sector investment. This will stimulate
employment creation by lowering non-wage labour costs and alleviate the growing burden of
financing old age pensions due to demographic change. Pension fund assets could grow from
around 2,000 billion euro (half of total bank deposits in the EU) to 3,000 billion euro by end
2005. If, in relative terms, the Member States had as many assets in pension funds as the
Netherlands there could be nearly 3-5 trillion euro more available in European capital
markets.

Graph 2 How lONG-TERM EQUITY INVESTMENTS OUTPERFORM BONDS

Inflation

Bonds

Equities

.
a

.

p
%

16

14

12

10
8
6
4
2
0

1952-98
France

51-98
Italy70-98

NL

1947-98
1926-98
1919-98
USA
CH
UK

D

26-98

Source : Rebuilding Pensions – European Commission 1999

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With the introduction of the euro, currency matching rules within the euro zone have
disappeared for both institutions for occupational retirement provision and life assurers. Asset
allocation rules must not be over restrictive, in order to allow long term investors such as
pension funds to invest in the real economy and make optimum use of the savings that are
entrusted to them. Effective asset diversification will help provide the highest possible
returns, whilst maintaining the security of retirement provision. Institutions for occupational
retirement provision. should be allowed to select assets that better and simultaneously match
the real, long term nature of their liabilities and reduce risk. Taking fully into account the
different approaches in the Member States, agreeing sensible, prudential rules to give pension
funds the possibility to optimise their portfolio structures could have significant benefits. As
announced in the Action Plan the Commission will propose this summer a proposal for a
directive to meet these challenges.

The changing landscape of Europe’s Financial sector

The continuing trend towards financial conglomeration is changing the dividing-lines between
different financial activities (banking, insurance, asset management, investment services).

Box 4 MORE THAN 250 FINANCIAL CONGLOMERATES HAVE BEEN CREATED SINCE 1995

Since 1995, more than 1.300 new cases of domestic groups engaged in banking, securities
and insurance activities have been reported. These cases are predominantly domestic
affairs although cross-border conglomerates have emerged in Scandinavia and the Benelux
In five Member States (Belgium, Spain, Netherlands, Portugal and Sweden), more than two
thirds of domestic banking assets are held banks that are part of a bank/insurance financial
conglomerate. In four Member States (France, Finland, Spain and Ireland) more than
50% of life assurance products are provided by insurance companies that are part of
banking groups.

Commission, April 2000

The rapid pace of concentration and consolidation of the European financial industry also
continues. These developments raise issues of efficient prudential supervision and require a
further policy refinement (see below).

Box 5 CONSOLIDATION IN THE EU BANKING MARKET

The share of bank assets accounted for by the top 20 European banks has risen from 35%
in 1997 to 41% beginning 1999). Mergers and acquisitions in the EU are largely domestic
affairs: 24 of the 190 M&A’s in the EU banking sector that occurred during the first half
of 1999 involved a foreign bank (19 of which involved third country banks)

City University Business School December 1999 and ECB April 2000

The E-commerce, and Alternative Trading Systems

The rapid emergence of e-commerce is beginning to change the financial services
landscape.For example, over 20 Alternative Trading Systems in Europe are having a
considerable impact on wholesale securities trading. Seizing the opportunity of e-commerce
will be a crucial test of the Union’s capacity to create - and adapt to - new business

6

opportunities. It depends on creating a regulatory and institutional framework at European
level which stimulates innovation, investment and economic efficiency.

The Action Plan develops a dual approach: protecting consumers against unfair trading
practices but helping them to seek the best offers on the market. Crucial in this process is to
build confidence and to have at hand alternative redress procedures that are fair and efficient
throughout the Union. The obstacles to cross-border sales of retail financial products are
becoming more evident as the new electronic technologies bring retail financial products to
the reach of any internet user.

Box 6 EU INTERNET BANKING IS GROWING RAPIDLY

UK financial institutions have 18 internet banking sites, followed by Germany with 16;
Spain with 12; Austria with 9; Sweden with 7; and Portugal, France and Italy with 5.
Finland, Ireland and the Netherlands had 3 sites; Denmark 2. This overview includes
‘virtual banks’. The number of Europeans using internet banking is predicted to grow by
30% to more than 20 million by 2004. The first virtual bank has already been set up which
has its head office in France, but runs its operations from Dublin. Two other virtual banks
also recently received banking licenses in France and in Germany.

Source: Datamonitor April 2000

Although the internet widely used for online trading of stocks and shares in the US (the
number of households engaged in online trading jumped 30% between May 1999 and January
2000, from 2.7 million to 3.5 million) online EU brokerages are only recent entrants to e-
financial commerce. 65% of online brokerage firms started business less than 2 years’ ago and
only 20% have more than two years’ experience). The number of online European trading
accounts is expected to increase by ten times or more in the next four years.

The emergence of new electronic trading systems (at present around 25 across the EU,
relatively small and engaged in niche activities) raise new challenges for regulators and
supervisors, in particular whether these systems constitute regulated markets or investment
firms and sufficiently safeguard investors and orderly markets.

These developments raise new supervisory and prudential
issues for authorities. The
Commission will publish this summer a Green Paper the purpose of which is to establish
whether the provisions of existing financial legislation are sufficient to provide a propitious
prudential and legal environment in which e-commerce based financial services business can
thrive, while ensuring that consumers' interests are fully safeguarded.

Enlargement and institution building

In a context of increasing globalisation, guarding financial stability is essential within the EU
Financial Services Market. The pre-adhesion policies of the Union, especially in the
to Central and Eastern European Countries
perspective of its impending enlargement
(CEECs), Cyprus and Malta should help to achieve these goals.

7

BOX 7 THE INTERDEPENDENCY BETWEEN EU FINANCIAL MARKETS AND INSTITUTIONS AND
THEIR COUNTERPARTS IN CEEC’S IS GROWING

The exposure of EU banks towards East European countries increased by 2% between
1997 and 1999; overall flows of direct investment from the EU into CEECs tripled annually
between 1992 and 1998 (over
8 billio in 1998); more than 70% of the 1999 bond issues in
CEECs were denominated in euro.

€

Source: BIS

Only pervasive and precise rules on prudential supervision, in line with EU standards, can lay
adequate foundations for a wider Internal Market for financial services as it will exist after
enlargement. Transposition of the EU’s financial services legislative framework is not
sufficient to make enlargement a success in this field As the single license and home country
control principles will be part and parcel of the wider Internal Market for financial services,
the efficiency of supervision in the accession countries will be as decisive as the existence of
legislation itself. Greater emphasis is being placed on institution-building and supervisory
assistance in the context of preparations for accession. Member States’ own authorities have a
key role to play in judging whether appropriate supervisory institutions with adequate
administrative capacities are in place. The Commission, in co-operation with national experts,
is thus preparing proposals for a “peer review” process for end 2000.

2.

PROGRESS ON IMPLEMENTATION OF THE ACTION PLAN FOR FINANCIAL SERVICES

Progress has been made….

Following Lisbon, the Financial Services Action Plan needs to be implemented by 2005. The
first year has already seen good progress (the annex to this report contains a detailed
overview). The Commission has already issued its Communication on Pension Funds and is
preparing a draft directive for this summer. It has also adopted a proposal for a directive to
amend the Money Laundering Directive and proposals to amend the 4th and 7th Company Law
Directives to allow fair value accounting. A Commission Communication on the freedom to
provide services in insurance was issued beginning 2000, as was its Communication on
payment systems.

With regard to wholesale markets work is well underway within the Forum of European
the
Securities Commissions (FESCO) and the Accounting Contact Committee to meet
timeframe set out in the Action Plan. Political agreement has been reached on the proposal for
a Take Over Bids Directive. A Commission Communication on the definition of
‘sophisticated’
investors should be available before the summer. The Commission’s
Communication on the Investment Services Directive (ISD) will be presented this autumn,
alongside a Communication on ‘market manipulation’. A Commission Communication on the
Union’s future accounting strategy, will be issued shortly.

Progress to achieve open and secure retail markets is also satisfactory. Discussions in the
Council and the European Parliament on the distance selling proposal for financial services
are continuing. The legislative proposal for insurance intermediaries will be presented this
summer. The work on a Communication on consumer information and a Green Paper on E-
Commerce and financial services is on track. Work on prudential rules has also advanced.

8

The proposal for a E-Money Directive is advancing through Council and European
Parliament.

Political agreement has been reached on the proposed directives on the winding-up and
reorganisation of credit institutions and of insurance undertakings. The review of bank capital
rules in parallel with the G-10 Basel Committee on Banking Supervision, proposals for new
insurance solvency requirements will be made this summer, and work on the supervision of
financial conglomerates is on schedule.

Finally, work on the wider conditions for a single market is continuing notably on direct
taxation. Work is continuing in the High level Group and in Ecofin to reach agreement on the
Commission’s proposal on a minimum taxation of savings income on the basis of the
conclusions of the Helsinki Council. Work in the group on the implementation of the Code of
Conduct on business taxation is also continuing. In the Taxation Policy group, work on the
taxation of supplementary pensions and financial services in general will be continued as a
priority in 2000.

The Risk Capital Action Plan is advancing…..

The Commission’s April 1998 Communication sets out six sets of barriers that need to be
removed in order to accelerate the growth of risk capital in the EU which is so important for
job creation. The barriers listed fell under 6 headings: market fragmentation, regulatory,
fiscal, cultural, paucity of high tech companies and insufficiently qualified human resources.
Together the removal of these barriers formed the Risk Capital Action Plan that was broadly
endorsed at the Cardiff European Council and now has to be implemented by 2003, according
to Lisbon.

The Commission has always emphasized that whilst some parts of the Risk Capital Action
Plan required action at Community level – the majority were exclusively the responsibility of
the Member States. On the regulatory side, the Commission is well advanced on its work on
issues like modernizing the prospectus directive, common accounting standards, “prudent
man” rules in the context of pension reform and a single Community patent.

A review of the Risk Capital Action Plan was sent to ECOFIN in autumn 1999, which led to
the ECOFIN Council requesting the Commission to set up a risk capital benchmarking
processThe Commission is finalising its proposal to develop some key indicators such as :
venture capital/GDP ratio; number of companies obtaining seed capital, number of new IPO’s
in the context of the Commission’s e-Europe, a initiative which the
etc. Secondly,
Commission proposed setting a target of tripling early stage finance by 2003, the Commission
subsequently tabled a working paper to the Economic & Finance Committee on improving the
coherence of all the Community’s financial instruments to facilitate the growth of risk capital
and fast growing companies. This led in turn to some new EIB/EIF ideas taken up in the
Conclusions.
the European Council has requested the Council and the
Commission to report by the end of 2000 on the on-going review of EIB and EIF financial
instruments in order to redirect funding towards support for business start ups, high tech firms
and micro enterprises as well as other risk capital initiatives proposed by the EIB.

In particular

.. But there is a need for greater effort

Whilst good progress has been made in some areas, in others further effort is required. Lack
of progress is noticeable in particular in the following areas:

9

• Despite successive political commitments at the most senior level, there is little progress
on the European Company Statute. This has had implications for two other measures in
the field of company law (10th Company Law Directive and the 14th Company Law
Directive).

• The Commission Communication on Fraud and Counterfeiting in Payment Systems and its
Recommendation on disclosure of financial instruments will be presented before the
summer.

• Three Member States (FR, IT, LUX) are late in transposing the Settlement Finality
Directive and are urged to adopt the national transposition measures as soon as possible.

3.

POLICY AREAS AND MEASURES UNDER THE ACTION PLAN REQUIRING FURTHER
POLICY CONSIDERATION OR REFINEMENT

Since the adoption of the Financial Services Action Plan of May 1999, the scale and speed of
structural change in Europe’s financial markets has intensified. Two key policy areas require
further consideration or refinement:

• faciliting access to capital markets

• improving financial stability

Five EU priorities for efficient financial markets and facilitating access to equity
financing

The Lisbon European Summit has singled out a number of priority actions relating to the
functioning of securities and wholesale markets where accelerated progress needs to be made
quickly to reach the overall 2005 deadline.

1.

A “single passport” for issuers

EU legislation on listing particular and public offer prospectus Directive was intended to
facilitate access to partner country markets on the basis of the same statutory information
required by their domestic authorities. However, this legislation has not worked. Multiple
listing and cross-border share offers are rare. The obstacles to mutual recognition are:

• national authorities tend to limit its scope to narrowly defined classes of securities;

• demands for additional requirements are frequent;

• concerns that the minimum disclosure requirements are insufficient;

• traditional systems for listings and public offer prospectus are ill-adapted for those issuers

wishing to raise successive instalments of share capital; and

• investor needs for regular updating of market information are not covered.

The Commission is now preparing a new legislative proposal for market information. This
overhaul of the existing rules will probably centre on the introduction of shelf-registration
techniques for all companies whose securities are publicly traded.

10

2.

Enhancing the comparability of companies financial statements:

Discussions with personal representatives of Finance Ministers have revealed near consensus
on the need for rapid progress towards a single financial reporting framework (for
consolidated accounts) for all listed/publicly traded companies. A single set of reporting
standards for publicly traded companies is the best means of securing the transparency and
disclosure needed to underpin cross-border
securities trading. As envisaged in the
Commission’s 1995 Strategy, International Accounting Standards (IAS) should form the basis
for comparable financial reporting in Europe. The commitment to IAS has been validated by
the strong support expressed for IAS recently in IOSCO. Enforcement issues and common
guidance will also be covered in the Commission’s forthcoming Communication on Financial
Reporting Strategy to be issued in June. A legislative proposal that requires listed companies
to apply IAS will be made by the end of this year. Subsequently, in 2001, the Commission
will set out its thinking on the modernization of the EU’s accounting directives.

3.

Eliminating barriers to investment by pension funds and UCITS

The Commission’s proposal for a Directive on occupational pension funds will be ready
this summer. Subject to strict prudential supervision, it will propose easing quantitative
restrictions on the proportion of assets which can be placed in securities or private equity.
Given the volume of funds which are widely expected to be at the disposal of these funds,
freeing-up their investment options could secure large increases in investment for different
categories of security3. Two related proposals for UCITS, under negotiation in the Council
and EP, will broaden the range of investment that can be undertaken by unit trusts which wish
to sell units of their fund on a cross-border basis.

4.

Improved functioning of cross-border sale and repurchase markets

The Commission is currently preparing a proposal for a Directive on collateral to facilitate
cross-border collateralistaion techniques, and so eliminate an important source of legal
uncertainty that unnecessarily increases counterparty and settlement risk. The Commission
will take forward the debate on the basis of a consultation paper so as to be ready to make the
necessary legislative proposals at the beginning of next year. This proposal will be of
particular benefit to sale and repurchase agreements as it will clarify the legal situation in
respect of title transfer which underpins repo activity. It will also resolve uncertainty about the
location of collateral for the purposes of settlement.

5.

Fundamental review of the Investment Services Directive

The changes sweeping through EU securities markets call for a wider review of EU policy
relating to securities markets. The Investment Services Directive – the cornerstone of the
EUinvestment services regulatory framework– inter alia aimed to open up membership of
national exchanges by introducing a “single passport” for investment service providers on the
basis of home country authorisation. However, this framework is of limited relevance to
securities markets characterised by the multiplication of trading platforms and the blurring of
functions between exchanges and firms. The implications of the erosion of the pivotal role of
exchanges in the future and the responses of exchanges to that development
through
demutualisation and the shedding of regulatory functions, require detailed reflection.

3

In the US,pension funds allocate 0.3% of their assets in venture capital.This minimal level of exposure
to venture capital still amounts to 47% of US venture capital.

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Clear guidance is also needed on the distinction between ‘sophisticated’ investors and ‘retail’
investors in the ISD.Attention needs to be given to new sources of systemic risk which may
reside in the electronic order-matching systems or in clearing and settlement systems. In
particular the latter have a key role in maintaining systemic stability. The Commission will
launch this summer a wide-ranging consultation on the nature and significance of these
developments and on the need to upgrade the Investment Services Directive.

Common approaches to regulation of securities markets cannot be divorced from the way
such regulation is enforced, in particular as the pace of change accelerates towards the
emergence of European securities networks.

Regulatory and supervisory contributions to financial stability

The Financial Services Action Plan recognizes that co-operation between national
supervisors must be strengthened in order to respond to cross-border problems and to
develop common supervisory approaches in tackling new forms of prudential risk in banking,
insurance and securities markets. Increased co-operation among supervisory authorities is key
in the management of institutional/prudential risk. This approach is shared and supported by
the Economic Finance Committee (EFC) in its report on Financial Stability, which was
its informal meeting in Lisbon. The
endorsed and published by the Ecofin Council at
exchange of information among different supervisory authorities, and between supervisory
authorities and central banks, on the major financial institutions and market trends is seen as a
key feature in the strengthened co-operation between the authorities involved.The cooperation
between supervisors and central banks needs to be strengthened. In addition, as regards crisis
management further reflection may be needed to enhance the co-operation between Finance
Ministries in view of their specific responsibilities for systemic stability.

Further efforts are therefore required by the institutions and supervisory bodies to improve the
practical functioning of the system.The Commission shares this analysis and will bring
forward a number of measures :

• a legislative proposal to regulate urgent prudential supervisory issues related to financial

conglomerates will be presented beginning next year;

• as financial institutions reorganise themselves on a cross-border basis their nationality and
the identification of their responsible supervisory authority is becoming more difficult.
Following the proposal, Authorities will be required to appoint a co-ordinating supervisor
for large financial groups;

• closer co-operation between the cross-sector supervisory and regulatory groups has been
ensured by establishing an informal roundtable of regulators to identify issues of
common concern and take appropriate action. Its first tasks should be to review practical
co-operation arrangements in each sector. If necessary, a “supervisors co-operation
charter” will be elaborated to assign responsibility for performing different supervisory
tasks on a cross-border basis and to establish mechanisms for problem management.

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Convergence of supervisory practices

The concentration and consolidation of the European financial industry is continuing, spurred
on by the arrival of the euro. It is imperative that EU supervisors implement supervisory
actions consistently.These require measures to guide supervisors and markets, conduct of
business rules etc in order to safeguard the stability of the financial system in the single
currency zone, to ensure that EU directives achieve their maximum effect and to accelerate
the emergence of a single financial market. (Work on converging bank capital adequacy
supervisory practices, as recommended by the EFC, is already underway in the Banking
Advisory Committee and the Groupe de Contact). Convergence of supervisory practices for
financial markets is a key theme for the immediate future.

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ANNEX

Progress on the Action Plan for Financial Services

This annex provides a second overview of progress on actions included in the Action Plan for
Financial Services (COM(1999) 232). This second report to the Council and to the European
Parliament tracks progress over the first twelve months since the adoption of the Action Plan.
The reporting date is May 2000. The tables summarise the current situation and provide the
Commission’s assessment of the degree to which Community institutions and Member States
are achieving the objectives set out in the Action Plan. Where appropriate a comment has
been added in the final column, notably to indicate the next steps to be taken A star (H)
indicates an action which has been successfully completed. A cross (:) indicates actions
where some progress has been achieved in meeting the targets set in the Action Plan. A minus
sign (-) indicates those for which progress is disappointing. The third progress report will be
made to the ECOFIN Council and the European parliament end 2000.

Mechanisms & process

The mechanisms for implementing the Action Plan are critical to its achievement. Over the
past six months, and in line with the suggestions in the Action Plan, the Commission has put
in place the following structures.

• The Financial Services Policy Group (FSPG), comprising personal representatives of
economic and finance ministers, has resumed its tasks as a forum to forge consensus
between national ministries involved in financial services regulation. The FSPG has met
three times since the adoption of the action plan and has assisted the Commission in
monitoring progress and preparing this report.

• Initial

informal discussions have taken place with representatives of the European
Parliament with a view to finding arrangements to discuss major policy orientations with
parliamentarians at an early stage.

• EU representative bodies have assisted the Commission in setting up ‘Forum Groups’,
composed of market experts, to consider the practical and technical aspects of FSAP
measures.

• The Commission Communication on Fraud and Counterfeiting in Payment Systems
and its Recommendation on disclosure of financial instruments will be presented before
the summer. The short delay in their adoption is due to administrative reasons caused by
the change in the Commission.

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STRATEGIC OBJECTIVE 1: A SINGLE EU WHOLESALE MARKET

Raising capital on an EU-wide basis:

Action

Timeframe

State of Play

Assessment

Follow-up

Upgrade the Directives
on Prospectuses through
a possible legislative
amendment

For issue by mid
2000

Adoption: 2002

Draft proposal for directive
under preparation in close
co-operation with FESCO

Update the Directive on
Regular Reporting
(82/121/EEC)

Launch
consultation by
mid 2000

Proposal: 2001

Adoption: 2002

Work continuing in the
Commission in close co-
operation with parties
concerned

:

:

Results from
FESCO expected
in May 2000

Commission’s
Contact Committee
meeting second
quarter of 2000

Establishing a common legal framework for integrated securities and derivatives markets:

Action

Timeframe

State of Play

Assessment

Follow-up

Issue a Commission
Communication on
distinction between
“sophisticated”
investors and retail
investors.

Draft for issue
by first half of
2000

Draft Communication in
internal consultation for
Commission adoption

Directive to address
market manipulation.

Proposal by end
2000

Adoption: 2003

Work continuing in close
co-operation with FESCO
and the industry (‘Forum
Group’)

Green Paper on
upgrading the ISD

Publish Green
Paper: Nov.
2000

Work continuing in close
co-operation with FESCO
and the industry (‘Forum
Group’)

:

:

:

FESCO paper on
categorisation of
investors adopted
March 2000

Member State and
industry
consultation second
quarter 2000

Industry ‘Forum
Group’ to complete
work by May/June
2000

Preliminary results
available from
FESCO by May
2000

Preparatory
discussion with
FSPG, FESCO,
HLSS and Industry
‘Forum Group’
underway

15

Towards a single set of financial statements for listed companies:

Action

Timeframe

State of Play

Assessment

Follow-up

Amend the 4th and 7th
Company Law
Directives to allow fair
value accounting

Commission
Communication
updating the EU
accounting strategy

Adoption: 2001

Proposal adopted by the
Commission on 24
February 2000.

For issue by mid
2000

Communication to be
adopted by the Commission
in June.

Modernisation of the
accounting provisions of
the 4th and 7th Company
Law Directives

Proposal end-
2000

Adoption: 2002

Commission
Recommendations on
EU auditing practices

For issue by
summer 2000
and beginning
2001

Progress is linked to
progress on the
Communication to update
the EU Accounting
Strategy (see above) and is
therefore on target.

Recommendation on
quality assurance scheduled
summer 2000

Recommendation on
auditor independence
scheduled beginning 2001

Containing systemic risk in securities settlement:

Discussion in the
Council Working
Party and in the
European
Parliament

Implementation
before end 2000.

Discussion in the
Accounting Contact
Committee and
Accounting
Advisory Forum
2000 – 2001

:

:

:

:

Action

Timeframe

State of Play

Assessment

Follow-up

Implementation of the
Settlement Finality
Directive

Commission to
continue
monitoring of
implementation
in a working
Group.

Commission
report to
Council end
2002

Directive on cross-
border use of collateral.

Proposal end-
2000.

Adoption: 2003

-

:

June 2000 : next
interpretation
meeting MS
experts

First discussions
with Member
States’ experts
on 22 June 2000

Implementation date
11.12.1999

Transposition of the
Directive completed in: BE,
IR, NL, S, UK, DE, AT,
PT, FI, GR, ES, DA

Infringement procedures
started against, FR, IT,
LUX

The Commission has
finalised its general
discussions with the
industry. A working
document on collateral
from the Commission to
relevant bodies for
consultation is under
preparation including
legislative provisions
suggested for a Directive

16

Towards a secure and transparent environment for cross-border restructuring:

Action

Timeframe

State of Play

Assessment

Follow-up

Political agreement of
the proposed directive
on Take Over Bids

Mid-99

Adoption: 2000

Council reached Political
agreement in May

Political agreement on
the European Company
Statute

Mid-1999

No further progress

Adoption: 2000

Review of EU corporate
governance practices

Launch review
early 2000

Tender procedure has been
launched

Amend the 10th
Company Law Directive

Proposal in
autumn 1999

Awaiting political
agreement on the ECS

Adoption: 2002

14th Company Law
Directive

Proposal in
autumn 1999

Awaiting political
agreement on the ECS

-

-

:

-

-

Adoption: 2002

A Single Market which works for investors:

2nd reading EP :
autumn 2000

Progressin Council
required

Completion of
Study in 2001

Meeting of
Member State
company law
experts on 5 June

Meeting of
Member State
company law
experts on 5 June

Action

Timeframe

State of Play

Assessment

Follow-up

Commission
Communication on
Funded pension
Schemes

Directive on the
prudential supervision
of pension funds

Issued on 11
May 1999 Com
(1999)134

Proposal: Mid
2000

Proposal for directive is
being finalised.

Adoption: 2002

Political agreement on
the proposed directives
on UCITS

Mid 2000
Adoption : 2001

EP finished its first reading
17 Feb. 2000. Commission
is preparing amended
proposals

H

:

:

Informal
consultation with
MS and industry
are under way.
Commission
adoption scheduled
for July.

Technical
discussions
progressing in the
Council with a
view to achieving a
common position

17

STRATEGIC OBJECTIVE 2: OPEN AND SECURE RETAIL MARKETS

Action

Timeframe

State of Play

Assessment

Follow-up

Political agreement on
proposal for a directive
on the distance selling of
financial services

End 99.
Adoption 2000

Commission
communication
codifying clear and
comprehensible
information for
purchasers

Review of
market practices
to begin end 99:

Communication:
mid 2000

Commission working on
inventory of information
requirements with a view to
achieving better Internal
Market Legislation

Discussions with industry
(‘Forum Group’) and
consumers in progress. Final
meetings scheduled for
May/June.

Recommendation to
support best practice in
respect of information
provision (mortgage
credit).

Commission report on
substantive differences
between national
arrangements relating to
consumer-business
transactions.

Interpretative
Communication on the
freedom to provide
services and the general
good in insurance

Proposal for amendment
of Insurance
Intermediaries Directive

For issue by
end-99

Dialogue restarted. Recent
progress encouraging

Review to begin
autumn 1999:
status report -
mid-2000:

Discussions
with Council,
EP begin end-
2000.

Discussions with industry
(‘Forum Group’) in
preparation

Forum Group had 4
meetings (11/1999,
12/1999, 1/2000, 3/2000.
Status report is being
drafted

For issue by:
end 1999

Adopted 16/02/00 (Com
(2000) 43).

Proposal mid-
2000

Proposal for a Directive is
being finalised.

Adoption: 2002

Commission
Communication on a
single market for
payments

For issue
summer 1999

Adopted 31/01/00 (Com
(2000) 36)

:

:

:

:

H

:

H

Lisbon European
Council has re-
affirmed goal of
adopting directive
by end 2000

Information
gathered will prove
useful for a number
of Commission
initiatives,
including work on
e-commerce +
financial services

Recommendation
planned or
successful
completion of
dialogue.

Draft consultancy
report Summer
2000: for
examination with
MS

A last experts
meeting taking
place on 2 May.
Commission
adoption planned in
June.

Round Table
planned end 2000
industry
discussions
continue

18

Commission Action Plan
to prevent fraud and
counterfeiting in
payment systems

Communication
for issue by end
1999.

Draft Communication in
preparation

-

Bilateral market
consultation to
March 2000. April
2000: meeting with
interested parties.
Consultation MS’s
experts: June 2000.
Adoption Sept/Oct.
2000

Commission
Communication on an e-
commerce policy for
financial services

For issue by:
mid-2000

Discussion on policy
outline continuing in the
FSPG in May

Communication
scheduled for
Autumn

:

19

STRATEGIC OBJECTIVE 3: STATE-OF-THE-ART PRUDENTIAL RULES AND
SUPERVISION

Action

Timeframe

State of Play

Assessment

Follow-up

After a common
position, the
Commission will
prepare its
communication to
EP. EP to start 2nd
reading

Awaiting breaking
of deadlock in
Council on the
‘Gibraltar’ issue.

Possible adoption
of the proposal
before summer
2000.

:

:

:

:

Adopt the proposed
directive on the winding-
up of insurance
undertakings

Common
position under
French
Presidency

Final adoption:
first half of 2001

Adopt the proposed
directive on the winding-
up and liquidation of
banks

Common
position: April
99

Adoption: 2001

No new first reading
required in EP. Work in
Council working group
completed under
Portuguese Presidency.
Large support for
Presidency text. Political
agreement on a common
position expected under
Portuguese Presidency.

Political Agreement has
been reached.

Adopt the proposal for an
Electronic Money
directive

Common
position: autumn
99

Council has accepted EP
amendments in 2nd reading

Amendment of the money
laundering directive

Adoption: 2000

Commission
adopted on
14.7.99
Adoption: 2001

The Tampere European
Council of October 1999
called for this measure to
be adopted “as soon as
possible”. The European
Parliament, Council
Presidency and the
Commission are still
exploring the possibility of
a first reading adoption,
though difficult issues still
remain to be resolved. The
Portuguese Presidency is
convening regular meetings
of the Council working
party to seek to push this
work forward.

Commission
Recommendation on
disclosure of financial
instruments

Communication
mid 1999

Adoption by the
Commission scheduled for
May

-

20

Amend the directives
governing the capital
framework for banks and
investment firms

Commission consultation
directed at banks and
securities expected by Mid
April

Proposal for
directive: 2001,
pending
developments in
Basle

Adoption:
2002/3

Amend the solvency
margin requirements in
the insurance directives

Proposal for
directive: mid
2000

Adoption: 2003

Adoption: 2001

Proposal: end-
2000

Adoption: 2002

Proposal to amend the
insurance directives and
the ISD to permit
information exchange
with third countries

Development of
prudential rules for
financial conglomerates
following the
recommendations of the
‘Joint Forum’

Creation of a Securities
Committee

Proposal end
2000

Adoption: 2002

Last technical meeting held
on 31/01/00. IC consulted
on 11/04/00 barring
something unforeseen.
Work programme is
proceeding satisfactorily.

Proposal adopted by
Commission 14/01/2000.

Council accepted proposal
without amendments

The mixed technical group
of experts will present its
recommendations to the
Commission’s regulatory
committees (BAC, HLSS
and IC) this Summer

The Commission is
assessing the possible role
of the committee as part of
its overall analysis of the
needs of the European
regulatory framework in
this area.

:

:

:

:

:

Results of
consultation being
factored into to the
ongoing
development of the
framework. This
mirrors Basel.
Further
consultation on
certain issues may
be necessary at the
end of this year or
early next.

The Commission is
currently revising
draft proposal in
light of these
meetings and will
adopt proposal mid
2000.

Discussion Council
Common Position
end Portuguese
Presidency. First
reading Parliament

Recommendations
from the technical
group will be
discussed in the
BAC, HLSS and
IC. The
Commission will
draw conclusions
from those
deliberations

The Commission
will define the
structure and
content of a
proposal for a
directive

21

GENERAL OBJECTIVE: WIDER CONDITIONS FOR AN OPTIMAL SINGLE
FINANCIAL MARKET

Action

Timeframe

State of Play

Assessment

Follow-up

Adopt a Directive on the
minimum taxation of
savings income

Political
agreement by
June 2000

Adoption: 2000

Work in Council is
progressing steadily on the
political issues and is a
priority under the
Portuguese presidency.

Implementation of the
December 1997 Code of
Conduct on business
taxation

Ongoing
examination in
the Code of
Conduct group

A report was submitted to
the ECOFIN Council in
November 1999, as
scheduled..

Review of taxation of
financial service products

Commission proposals for
co-ordination of the tax
arrangements governing
supplementary pensions

Discussions in
Taxation Policy
Group

Proposal 2000

Adoption:
2002/3

A preliminary analysis and
discussions have started.

Discussions have taken
place with Member States
in the Taxation Policy
Group and a technical sub
group

:

:

:

:

Discussions will
continue on a
framework for the
roll-back of
harmful tax
measures.
Discussions on the
review of the
provisions of the
code will take place
in e the Taxation
Policy Group^in
2000.

A draft proposal is
under preparation

22