Communication from the Commission to the European Parliament and the Council- Financial Services - Political Challenges June 2001 Fourth Progress Report
Date: 2001-06-01
Institutions: European Commission
Subjects: financial institution, financial legislation, financial market, free movement of capital, single market

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 01.06.2001
COM(2001) 286 final

COMMUNICATION FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

Financial Services

Political Challenges
June 2001
Fourth Progress Report

INTRODUCTION: THE BALANCE OF DECISION-MAKING WILL MOVE TO THE COUNCIL
AND EP

The political and economic case for a seamless, integrated European financial services
market is as strong as ever. The internal benefits of a fully integrated pan-European
financial sector, anchored on the Euro, remain huge, notably a significant increase of
the EU’s financial markets. The stronger, internally, Europe’s financial sector is, the
trade
stronger Europe will stand externally on global markets and in global
negotiations. However, moves to achieve this – in a shorter term – will be played out
against a less propitious global economic outlook. This will strengthen the cost-
pressures for consolidation of Europe’s fragmented markets.

By the summer, in terms of decision making the locus of work in relation to the
Financial Services Action Plan (FSAP) will gravitate from the Commission to the
Council and the European Parliament although the Commission will, of course,
continue to play an active role throughout this new phase. Since the endorsement of
the FSAP by the Cologne European Council in June 1999, 18 measures are now on
the table for adoption in the Council and the European Parliament. Although early
there are already some challenging issues which will
agreements are emerging,
demonstrate whether there is a real political will to complete the FSAP on time and in
accordance with the European Council’s 2003/2005 mandates. A key issue is whether
the Stockholm European Council Resolution (23.3.2001) to secure more efficient
securities market regulation can be made to work expeditiously.

1
A PERIOD OF CONTINUOUS CHANGE IN EUROPE’S FINANCIAL SECTOR

The consolidation of the European financial services industry is continuing as
financial institutions engage in mergers and acquisitions on a cross-border and cross-
sector basis. The privatisation of the banking sector is continuing in a number of
Member States. Recent developments (notably including the Allianz/Dresdner and
Nordea/Unibank deals) show the emergence of some of the largest financial groups in
the marketplace. Several Member States are examining the adequacy of their
regulatory structures in response to these developments. There are some signs of
convergence and closer cross-border and cross-sector cooperation. On an international
scale recent turmoil in the banking markets in Turkey and the continued need for a
bank balance sheet restructuring in Japan reinforce the Union’s need to be rigorous in
its own regulatory and supervisory systems to withstand any spill-over effects.

The first example of a cross-border European stock Exchange – Euronext – is now in
place and may lead to further consolidation if it proves to be successful. The Austrian
stock exchange has formed an alliance with Deutsche Börse and created NEWEX, in
co-operation with the relevant exchanges for the trading of Central and East European
securities. The global dimension of the rationalisation of trading infrastructures was
recently heightened by the acquisition by NASDAQ of a majority shareholding in
EASDAQ (‘NASDAQ Europe’). The corresponding central counterparty and
settlement systems are also in the process of consolidation. A growing number of

1

As indicated in the third progress report the Commission will define, by the end of the year,
indicators of key trends and the economic benefits of an integrated financial services sector.
These will provide a more detailed statistical analysis. First indicators will be available by the
end of this year

2

exchanges are developing links with central counterparties/clearing houses in other
Member States. Competition between these facilities is increasing. In equity markets,
new trading systems have made limited progress in attracting liquidity from
traditional exchanges. Despite the dampening of volume growth and the slow pace of
consolidation of infrastructures, European financial markets continue to mature and
become more sophisticated. This is evidenced by the continued deepening of
European markets of corporate bonds of all investment grades and of venture capital
markets.

THE POLITICAL RESPONSES: THE STOCKHOLM EUROPEAN COUNCIL AND THE FSAP

The European institutions have responded to this continuing change in Europe’s
financial landscape and developments in the global marketplace. The measures in the
FSAP are more targeted and address the issues arising from these market trends.

First, the Stockholm European Council has added impetus to securities market
integration

In its Resolution,

The Stockholm European Council’s key message is that a prosperous EU economy
over the next years depends on the rapid and successful integration of the Union’s
financial markets. The deadlines set by Heads of State and Government to implement
the Action Plan by 2005 and to integrate European securities markets by 2003 are
now firm.
the Stockholm European Council endorsed the
conclusions of the Wise Men’s report, the steps it proposed in the securities field, and
the priorities identified in the Action Plan, including the importance of adopting the
proposed directive on the distance marketing of financial services. The European
Council confirmed that the regulation of securities markets should be flexible enough
to respond to market developments, be transparent and be characterised by legal
certainty.

As a first response to the continuing change in the Union’s financial sector and the
Stockholm Council, the Commission will, shortly, adopt the decisions to set up the
new committee structure - a Securities Committee (in its advisory – non comitology -
function) and a Regulators Committee. National regulators are also working urgently
to organise the establishment of the independent Regulators committee to act as an
independent advisory group to assist the Commission, in particular in its preparation
of draft implementing measures.

Making this new approach work through targeted and up-to-date legislation is central
to achieving the integration of Europe’s financial markets. However, success will only
be possible if the three institutions - the European Parliament, the Council and the
Commission - work together, fully respecting the present institutional balance in the
Treaty and the prerogatives of the institutions involved. The Commission has, as a
result of these developments, brought
the FSAP into line with the Stockholm
conclusions (fig. 1).

3

Stockholm European Council Priorities

FSAP measure

State of Play

Adoption before the end of year of the
financial services
Distance marketing of
directive

Amended Commission proposal 26
July 1999

Modernisation or
supplementary

Pension funds

investment

rules

for

Commission proposal 11 October
2000

Adoption
standards

of

international

accounting

Commission proposal 13 February
2001

Single prospectus for issuers

Modernisation of admission to listing

Commission proposal scheduled for
end May

Commission proposal scheduled for
end 2001

Single passport for recognised stock markets Commission proposal scheduled for

end 2001

Home country control for all wholesale
markets and
Definition of professional investors

Commission proposal scheduled for
end 2001

Figure 1

Second, progress is being made on the implementation of the FSAP

Since the last progress report, the Commission has delivered 12 actions under the
FSAP, including seven legislative proposals:

the prudential supervision of financial conglomerates (April);

a streamlined prospectus aiming to establish a single passport for European

issuers (end May)2;

preventing market abuse (end May)²;

two Commission decisions to create a committee structure in the securities

area (imminent);

common standards on collateral arrangements (March); and

2

Depending on a Commission decision (30 May)

4

r
r
r
r
r
a draft regulation to apply international accounting standards for EU listed

companies (February).

In the retail financial sector the Commission has issued a recommendation on the
marketing of home loans together with two communications (on e-commerce and
financial services, and the prevention of fraud in non-cash payment systems). A EU-
wide complaints network has been established to facilitate consumers' access to out-
of-court settlement of cross-border disputes on financial services (‘Fin-Net’). In the
securities sector, the two Commission communications issued last year are laying the
ground for the revision of the investment services directive later this year. The
modernisation of admission to listing, a single passport for stock markets and home
country control for all wholesale markets (all identified as Stockholm priorities), will
be considered as part the review of the ISD. However, the late transposition of the
Settlement Finality Directive remains a concern. For the remainder of 2001 an
ambitious timetable underpins the implementation of the revised capital framework
for banks and for investment firms by 2004, following discussions in the G-10 Basel
Committee.

A number of significant developments in the Council and the European Parliament
have occurred:

after 30 years there is political agreement on the European Company

Statute;

the winding-up directives for banks’ and for insurance companies have

finally been adopted;

a common position has been adopted on the two UCITS proposals; and

the take-over bids directive is in conciliation.

5

r
r
r
r
r
FAPSI : Commission

The Commission has
delivered almost all its
proposals on time

% achieved

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Nov-99

May-00

Nov-00

May-01

Nov-01

May-02

Nov-02

May-03

Nov-03

May-04

Nov-04

thick line = as per May 2001(full = confirmed, dashed = projected)
thin dashed line = optimal timeframe as in FSAP Nov. 99

Figure 2

Progress on individual FSAP measures was tracked in the annex to earlier progress
reports. This detailed exercise will continue on the internet and will be constantly
updated
(http://europa.eu.int/comm/internal_market/en/finances/actionplan/annex.htm).

Commission progress reports will, in future, present only general indications of the
implementation of the Action Plan, whilst the ‘FAPSI’ index (Financial Services
Action Plan Implementation) will plot actual against required progress cumulatively,
of all FSAP measures. The percentage of progress reflects actions that have been
achieved and the time required to process and finalise remaining measures as at the
end of May 2001 (figure 2).

The FAPSI index shows that the Commission has delivered most of its proposals in
time and will, by the end of 2001, have made almost all of its proposals under the
FSAP. This is reflected in figure 3 where the ten priorities set in the Commission’s
last progress report have been, or are likely to be achieved. However, the FAPSI index
for the European Parliament and Council shows a number of cumulative delays
representing slippages in the decision-making process of the Council and/or the
Parliament (figure 4). More specifically the major delays are identified in figure 5.

6

The Commission priorities according to the third progress report

Upgrading the two Directives on Prospectuses

4 expected
May ‘01

Legislative
Communication

follow-up

to

the EU Accounting Strategy

Directive on Cross-Border Use of Collateral

Commission Communication on Upgrading the Investment
Services Directive

Commission Communication on Article 11 of the ISD

4

4

4

4

Directive on Market Abuse

Commission Communication on an e-commerce policy for
financial services

Commission Decisions establishing a Securities Committee and

a Regulators Committee

Directive on Prudential Rules for Financial Conglomerates

Directive Governing the Capital Framework for Banks and
Investment Firms

FAPSI : European Parliament and Council

4 expected
May ‘01

4

4 expected
May ‘01

4

End 2001

Figure 3

% achieved

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

There is some slippage in the
decision-making process of the
Council and/or the Parliament

Nov-99

May-00

Nov-00

May-01

Nov-01

May-02

Nov-02

May-03

Nov-03

May-04

Nov-04

thick line = as per May 2001(full = confirmed, dashed = projected)
thin dashed line = optimal timeframe as in FSAP Nov. 99

Figure 4

7

The Council and European Parliament priorities according to the third progress
report

Directive on the Prudential Supervision of Supplementary
Pension Funds

Discussion
ongoing

The two UCITS Directives

European Company Statute

Directive on Take Over Bids

Directive on Distance Marketing of Financial Services

Directive on the Re-organisation and liquidation of Insurance
Undertakings

Directive on the Winding-up and reorganisation of Banks

Amendments to the Money Laundering Directive

Directive on Savings Tax

2nd reading in
EP

Political
agreement

Conciliation

Discussion
ongoing

4

4

Conciliation

Political
agreement

Implementing the December 1997 Code of Conduct on business
taxation

Discussion
ongoing

Figure 5

FINDING THE POLITICAL WILL TO MOVE FORWARD ON THE DIFFICULT ISSUES

Overall progress is at present reasonably satisfactory although care must be taken to
avoid any complacency to emerge. Even today there are three areas of concern:
pension funds, e-commerce and money laundering. The Stockholm European Council
has identified the first two as absolute priorities. The Tampere Council concluded that
measures to combat money laundering are similarly top priorities. In the coming
months, other policy issues could cause delays and the Commission will in the next
report highlight such issues.

Pension funds

There are diverging views on three critical contentious points: (i) the scope of the
directive, (ii) the possibility for Member States to apply more detailed, quantitative
investment rules, and (iii) the technical provisions. Broadly,
the debate is split
between those countries that already have ‘second pillar’ funded pension schemes and
which want to avoid imposing rules that would reduce their efficiency and success,
and other countries that are considering the introduction of such schemes but lack
experience with the use of qualitative rules and are concerned that a qualitative
approach does not provide an appropriate level of security.

8

The Parliament wants to cover certain risks and is seeking for a legislative proposal to
eliminate tax obstacles to the cross-border provision of occupational pensions. The
Commission is of the view at this stage that such a legislative measure is not required.
In a recent Communication3 the Commission concludes that discriminatory tax
treatment of pensions taken out with pension institutions in other Member States is
contrary to the freedoms of the EC Treaty and announces that infringements may lead
to legal action.

E-commerce and distance marketing

The Commission’s Communication on e-commerce and financial services was
the broad policy framework for future work on electronic
designed to set out
commerce and financial services. The E-Commerce Directive, which enters into force
mid January next year, is at the heart of that framework. It stipulates that each
Member State ensure that financial services offered on the internet (with some
exemptions) by a service provider established on its territory comply with the national
provisions in that Member State within the coordinated field. Member States must not
(in principle) restrict the freedom to provide financial services via internet on a cross-
border basis. A large majority of Member States consider that this approach is the
cornerstone for future policy developments in retail financial services. However, some
Member States are concerned that this approach would leave gaps in consumer
protection and argue that further harmonisation of consumer protection rules should
precede an internal market in e-commerce and financial services.

On 7 May 2001 the ECOFIN Council endorsed the strategic approach proposed by the
Commission and agreed that a programme of further convergence in consumer and
retail investor protection rules aiming at a higher level of harmonisation should be
complemented by additional
flanking measures to build consumer confidence.
According to the conclusions of the ECOFIN Council, “the Council supports the
Commission’s intention to propose guidance to Member States on the application of
Article 3(4)-(6) of the E-commerce Directive in order to promote understanding of the
regulatory framework”. The Internal Market Council will consider the proposed
directive on distance marketing of financial services late May. That proposal is a vital
step toward further convergence in national consumer and investor protection rules
and is thus an essential component of the Union’s future policy framework for
financial services.

Money laundering

Efficient and targeted measures to combat money laundering operations are at the
heart of protecting the integrity of Europe’s financial system. The proposal to broaden
the range of criminal activities covered by the Money Laundering Directive and to
extend the reporting requirements to certain non-financial activities and professions –
in particular the legal profession – is central to achieving that objective. Parliament
has a number of concerns, particularly regarding the advisory role of the legal
profession, and a conciliation procedure is likely. It
is hoped that a workable
compromise between the position of the Council and the European Parliament will be
achieved.

3

Communication on 19 April 2001 on the elimination of tax obstacles to the cross-border
provision of occupational pensions (COM(2001)214).

9

CONCLUSION

There are three key political messages enshrined in this report.

The overall balance sheet at the end of May 2001 is broadly positive. Of the initial 41
measures of the FSAP 16 have now been finalised. Only 6 legislative proposals are to
be made by the Commission in line with the FSAP timetable (regular reporting;
investment services directive; capital adequacy proposals; 10th Company Law
Directive on mergers; 14th Company Law Directive on the transfer of corporate seats;
and amendments to the 4th and 7th Company Law Directives on fair value accounting).
However, by this summer, the centre of decision taking on the Financial Services
Action Plan (FSAP) will gravitate from the Commission to the Council and the
European Parliament. The Council and the Parliament currently have 18 measures
under discussion. This already represents a major challenge to ensure that the FSAP
deadlines are respected.

Second, three cases will, more immediately, demonstrate how committed the Union is
to achieving the deadlines set by successive European Councils. They are on pension
funds, distance marketing of
services and money laundering. The
the
Recommendations made by the Committee of Wise Men and endorsed at
Stockholm European Council will shortly be translated into the formal establishment
of a Securities Committee and a Regulators Committee. But that structure must be
seen to work quickly and efficiently, and this demands the full cooperation of all the
institutions and parties concerned.

financial

Third, the FSAP is a comprehensive framework of inter-linked measures which will
allow the EU to benefit from the single currency and an integrated financial sector.
The full benefits will not be realised without agreement on all the elements. Future
reports will identify where blockages are occurring. Moreover, there are other issues
that will require political attention in a slightly longer term. The state of preparedness
of the financial sector of Accession Countries, and a new trade round are but two
examples. The Commission will report on these longer term challenges in future
reports.

10