Green paper on Financial Services Policy (2005-2010)
Date: 2005-05-03
Institutions: European Commission
Subjects: approximation of laws, consumer protection, financial institution, financial market, free movement of capital

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.5.2005 
COM(2005) 177 final 

GREEN PAPER 

on Financial Services Policy (2005-2010) 

(presented by the Commission) 

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TABLE OF CONTENTS 

OVERALL POLICY OBJECTIVE .................................................................................3 

1. 

2. 

3. 

KEY POLITICAL ORIENTATION............................................................................ 4 

BETTER REGULATION, TRANSPOSITION, ENFORCEMENT AND 
CONTINUOUS EVALUATION ................................................................................ 8 

CONSOLIDATION OF FINANCIAL SERVICES LEGISLATION OVER THE 
2005-2010 PERIOD .................................................................................................. 9 

3.1. 

FINISH REMAINING MEASURES ......................................................................... 9 

3.2. 

EFFICIENT AND EFFECTIVE SUPERVISION .................................................. 10 

3.3. 

ENABLING CROSS-BORDER INVESTMENT AND COMPETITION ............ 10 

3.4. 

THE EXTERNAL DIMENSION.............................................................................. 10 

4. 

POSSIBLE, TARGETED NEW INITIATIVES...................................................... 11 

ANNEX I 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

ECONOMIC BENEFITS FROM FINANCIAL INTEGRATION 

BETTER  REGULATION,  TRANSPOSITION,  ENFORCEMENT  AND 
CONTINUOUS EVALUATION 

EFFICIENT AND EFFECTIVE SUPERVISION 

BARRIERS TO CROSS-BORDER CONSOLIDATION 

THE EXTERNAL DIMENSION 

ASSET MANAGEMENT 

RETAIL FINANCIAL SERVICES 

ANNEX II 

TIMELINES INCLUDING MEASURES ADOPTED, UNDER NEGOTIATION, UNDER 
PREPARATION 

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GREEN PAPER 

ON FINANCIAL SERVICES POLICY 
(2005-2010) 

(Text with EEA-relevance) 

The  overall  objective  of  the  Commission’s  financial  services  policy1  over 
the next five years is : 

– 

– 

– 

integrated,  open, 
to  consolidate  progress 
competitive,  and  economically  efficient  European  financial 
market and to remove the remaining economically significant 
barriers; 

towards  an 

to  foster  a  market  where  financial  services  and  capital  can 
circulate freely at the lowest possible cost throughout the EU 
-  with  adequate  and  effective  levels  of  prudential  control, 
financial stability and a high level of consumer protection; 

framework, 

to implement, enforce and continuously evaluate the existing 
legislative 
the  better 
to  deploy 
regulation  agenda  for  any  future  initiatives,  to  enhance 
supervisory convergence and strengthen European influence 
in global financial markets. 

rigorously 

This  paper  presents  the  preliminary  views  of  the  Commission  for  its 
financial  services  policy  priorities  for  the  next  five  years.  It  takes  into 
account  many  convergent  opinions  expressed  in  the  2-year  consultation 
process that started with the work of four expert groups, followed by wide 
public consultation2. Other parallel initiatives include the report on financial 
integration by the EU Financial Services Committee3 and the Draft Report 
by  the  Economic  and  Monetary  Affairs  Committee  of  the  European 
Parliament on the current state of integration of EU financial markets4.  

The Commission now seeks views on its initial ideas on the future of 
European  financial  services  policy.  Responses  should  be  sent  by  1 
following  email  address:  markt-consult-
August  2005, 
financialservices@cec.eu.int.  Responses  will  be  placed  on 
the 
Commission’s website – unless there is an explicit request to the contrary. 

the 

to 

Comments  and  further  preparatory  work  within  the  Commission  will  be 
taken  into  account  for  the  determination  of  the  Final Policy Programme, 
which will be presented in the form of a White Paper in November 2005. 

1 

2 
3 
4 

As  part  of  the  Commission’s  overall  strategic  objectives  2005-2009  -  see  COM(2005)  12, 
26.1.2005, Section 1.1, 2nd paragraph and COM(2005) 24, 2.2.2005, point 3.2.1. 
http://europa.eu.int/comm/internal_market/en/finances/actionplan/stocktaking_en.htm 
Report for consideration by EU Finance Ministers on 2nd June 2004, only in limited circulation. 
http://www.europarl.eu.int/meetdocs/2004_2009/documents/PR/553/553131/553131en.pdf 

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1. 

KEY POLITICAL ORIENTATION 

In the last six years there has been major progress towards an integrated 
European  capital  and  financial  services  market.  Most  of  the  necessary 
rules  outlined  in  the  Financial  Services  Action  Plan  (FSAP)  have  been 
agreed  on  time  and  are  now  being  put  in  place.  European  decision 
making and regulatory structures have become more rational and efficient 
the  ”Lamfalussy  process”5.  Continued  systematic 
as  a  result  of 
cooperation has developed between the European institutions and market 
participants.  And,  in  the  wake  of  the  euro,  political  confidence  in  the 
integration process has increased. 

The job, however, is not finished. A new phase now begins for the period 
2005-2010, with a very different focus: 

– 

– 

– 

consolidation of existing legislation, with few new initiatives; 

ensuring  the  effective  transposition  of  European  rules  into 
national  regulation  and  more  rigorous  enforcement  by 
supervisory authorities; 

continuous ex-post evaluation whereby the Commission will 
monitor  carefully  the  application  of  these  rules  in  practice  – 
and their impact on the European financial sector. 

Member States, regulators and market participants must play their role. If 
needed,  the  Commission  will  not  hesitate  to  propose  to  modify  or  even 
repeal  measures  that  are  not  delivering  the  intended  benefits.  This 
approach  is  essential  to  ensure  that  the  hard-won  European  regulatory 
framework  will  function  optimally  –  for  the  benefit  of  market  participants, 
more  than  20  million  European  businesses  and  450  million  citizens,  and 
thus for the European economy as a whole. 

The  agenda  for  the  last  six  years  was  driven  by  the  vision  that  deep, 
liquid,  dynamic  financial  markets  will  ensure  the  efficient  allocation  and 
provision  of  capital  and  services  throughout  the  European  economy  – 
from  wholesale  to  retail  –  laying  the  foundation  for  higher  long  term 
growth  and  job  creation  across  the  economy.  The  watchwords  for  the 
FSAP 
legislative  proposals  were  cross-border  competition,  market 
access,  enhanced  transparency,  market  integrity,  financial  stability  and 
efficiency.  Overall,  FSAP  legislation  remained  faithful  to  these  guiding 
principles – and they are still valid today. 

5 

The  Lamfalussy  report,  published  on  15  February  2001,  can  be  found  on  the  Commission’s 
website:  http://europa.eu.int/comm/internal_market/securities/lamfalussy/index_en.htm;  see 
also footnote 8 in Annex I. 

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The  economic  benefits  of  European  financial  integration  (Annex  I)  are 
beyond  doubt.  This  has  also  been  recognised  in  the  Lisbon  strategy6  – 
and  confirmed  by  the  Commission’s  mid-term  review  of  Lisbon  with  its 
strengthened emphasis on growth and jobs7.  

to  a  common  European 
Aligning  national  regulatory  approaches 
is  challenging: 
it  entails  considerable  “ex-ante” 
regulatory  system 
adjustment  costs 
for  national  enforcement  agencies  and  market 
participants. These transitional problems pose a challenge in themselves 
– particularly as they are mainly concentrated over a short period (2005-
2007).However,  concerns  about  these  transitional  costs  should  not 
is  stark: 
the  broader  economic  benefits.  The  alternative 
obscure 
fragmented and under-performing financial markets and/or a patchwork of 
national  pools  of  liquidity  subject  to  divergent,  uncoordinated  risk-
management  practices  and  a  higher  cost  of  capital.  The  FSAP  has 
created an enabling legal framework which should allow issuers, investors 
and  providers  of  financial  services  to  transact  on  a  pan-European  level 
without undue legal impediment. The key, now, is to make it function well. 

Today,  economic  and  market  evidence  suggests  that  European  financial 
integration  is  underway  in  many  sectors:  in  the  wholesale  markets;  in 
stock exchanges; in financial markets infrastructure, such as clearing and 
settlement. This has improved conditions for all users of financial services. 
A  European  market  “reflex”  is  beginning  to  emerge,  however,  much 
remains to be done both in the above mentioned areas and other areas in 
retail  and  wholesale.  For  example,  the  area  of  retail  distribution  remains 
fragmented and some markets remain impenetrable. These barriers need 
to  be  carefully  assessed,  in  particular  to  see  whether  they  constitute 
significant economic impediments to the free flow of capital and financial 
services. 

A  well-functioning  risk  capital  market  is  a  strategically  important  element 
of  promoting  new  and 
firms,  entrepreneurship,  raising 
productivity  and  the  sustainable  rate  of  economic  growth  in  Europe. 
Currently the European market for risk capital is much less effective than 
for  instance  the  market  in  the  US.  Therefore,  identifying  the  priorities  for 
any further initiatives in this area is important.  

innovative 

A  rigorous  “better  regulation”  approach  will  be  applied  throughout:  from 
policy  conception,  to  open  and  transparent  consultation  at  all  levels,  to 
establishing  thorough  and  convincing  economic  impact  assessments 
before launching a new proposal and to ex-post evaluation. This is crucial 
to reduce administrative costs for financial institutions and issuers and to 

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The Lisbon European Council of 23 and 24 March 2000 agreed on a new strategic EU goal for 
the next decade: 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. 
Growth  and 
http://europa.eu.int/growthandjobs/pdf/COM2005_024_en.pdf 

the  Lisbon  Strategy’,  February  2005 

jobs:  A  New  Start 

for 

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raise the competitiveness of the European financial industry. 

These disciplines should also be applied by the European Parliament and 
the  Council  to  avoid  evidence-based  Commission  proposals  being 
mushroomed into unnecessary, sapping complexity. In particular, Member 
States  should  avoid  adding  layer  upon  layer  of  regulatory  additions  that 
go  beyond  the  Directives  themselves  –  so-called  “goldplating”  -  thus 
stifling  the  benefits  of  a  single  set  of  EU  rules  and  adding  unnecessary 
burden and cost to European industry8. 

As  before,  there  must  be  an  evidence-based  expectation  that  any  new 
European  proposal  for  financial  services  legislation  and  implementing 
rules  will  yield  significant  economic  benefits  in  terms  of  efficiency  and 
stability.  A  yardstick  should  be  the  extent  to  which  measures  facilitate 
cross-border  business  and  enhance  the  competitiveness  of  Europe’s 
financial markets, while, at the same time, protecting internal stability. 

The Commission’s approach will continue to build as much consensus as 
possible in any preparatory phase, working closely and transparently with 
Member  States  and  the  European  Parliament,  with  EU  supervisory 
networks  (CEBS9,  CEIOPS10,  and  CESR11),  with  the  European  Central 
Bank, market participants and more intensely in the future with consumer 
groups12.  Regulatory  philosophies  differ  among  Member  States  –  so  the 
art  of  European  legislation  in  these  complex  areas  is  to  find  the  balance 
best  serving  Europe’s  interest.  Any  legislation  should  respect  the 
subsidiary  and  proportionality  principles  of  the  Treaty13  and  strengthen 
competition. 

to  make  European 

The  important  debate  on  European  supervisory  convergence  now  needs 
to  be  taken  forward.  The  supervisory  system  must  have  the  necessary 
instruments 
financial  services  regulation  work 
effectively and thus facilitate pan-European business. The outcome must 
ensure full democratic accountability to the Member States and European 
Parliament.  In  this  context,  the  entry  into  force  of  the  European 
Constitution14 
term  continuity  and 
sustainability of the Lamfalussy process15. 

the  medium 

important 

for 

is 

8 

9 
10 

11 
12 

13 

14 

15 

See Commission Recommendation on best practices for Member States’ transposition of EU 
legislation - SEC(2004) 918. 
Committee of European Banking Supervisors, established as per 1 January 2004. 
Committee  of  European  Insurance  and  Occupational  Pensions  Supervisors,  established  as 
per 24 November 2003. 
Committee of European Securities Regulators, established as per 7 June 2001. 
The  FIN-USE  forum  of  financial  services  experts  is  already  providing  the  Commission  with 
valuable input from a user perspective. 
Where  legislative  solutions  appear  justified,  these  are  enacted  on  an  EU-wide  basis  only  if 
local measures clearly demonstrated to have failed or to be impracticable; their effects should 
not go beyond those needed for the good functioning of the internal market. 
In particular (new) article I-36 that provides call-back rights to the European Parliament and to 
the Council for controlling delegated regulations adopted by the Commission. 
The ‘sunset clauses’ in the securities area come into effect from 2007 onwards. Under these 
clauses,  delegated  powers  to  the  Commission  to  adopt  implementing  measures  through 
comitology  (level  2  of  the  Lamfalussy  process)  will  expire,  unless  the  Council  and  the 

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With the regulatory framework and supervisory structures largely in place, 
the  Commission  foresees  that  synergies  with  different  policy  areas  – 
particularly competition and consumer policy - will grow over the next five 
years. Some sectoral enquiries in the financial services area have already 
been announced. The Commission would like market participants to play 
a  more  effective  and  pro-active  role  in  consistently  signalling  clear 
infringements or anti-competitive behaviour from whatever source – first at 
national level and then to the Commission. 

Other horizontal and complementary policy areas (corporate governance, 
company law reform, accounting, statutory auditing) are also of immense 
importance in building confidence and transparency in European financial 
markets.  Although  outside  the  scope  of  this  Paper,  work  in  these  areas 
will  progress  in  line  with  the  agreed  timetables16  and  the  “better 
regulation”  principle-based  and  simplification  approach.  Companies, 
accountants,  auditors  and  other  market  participants  must  apply  the 
highest ethical standards in their work. National supervisors must ensure 
they  are  effectively  applied,  also  vis-à-vis  off-shore  financial  centres.  If 
not, market and political pressure for additional regulatory intervention in 
these  and  other  domains  will  intensify.  Currently,  this  issue  is  further 
reflected on in the revision of the 4th and 7th Company Law Directives on 
accounting  standards.  The  objective  is  to  strengthen  disclosure  when 
using entities established in off-shore financial centres. 

the 

future  governance, 

The  debate  about 
funding  and  political 
accountability of global standard-setting bodies, such as the International 
Accounting  Standards  Board,  are  of  growing  political  importance.  The 
Commission  considers  that  public  oversight  of  these  structures  must  be 
strengthened, 
reflection  of  stakeholders, 
satisfactory transparency, due process and sustainable financing. 

to  ensure  appropriate 

Looking  outwards,  Europe  has  a  major  strategic  opportunity  to  influence 
the regulatory parameters of the emerging global financial market. That is 
why  the  deepening  of  the  EU-US  financial  markets  dialogue  and 
strengthening financial relations with Japan, China and for instance India 
are so important (see 3.4).The Commission favours widening the agendas 
of these dialogues, making them more forward-looking and drawing more 
on market participants’ input. Further efforts to open third country financial 
markets will be pursued in the Doha trade round as well as in bilateral an 
regional trade agreements. 

The Commission would be interested to hear from stakeholders: 

16 

European Parliament explicitly agree to extend them (which will be a co-decision proposal by 
the Commission). 
The  Corporate  Governance  and  Company  Law  Action  Plan;  including  actions  on:  IAS 
implementation; 8th Company Law Directive; acceptance of IAS in third country jurisdictions, 
such  as  the  US;  transparency  of  corporate  governance  structures;  improving  shareholder 
structures etc. 

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– 

– 

2. 

whether 
Commission’s policy over the next five years; 

they  agree  with 

the  overall  objectives 

for 

the 

whether  they  agree  with  the  key  political  orientation  described 
above. 

BETTER  REGULATION,  TRANSPOSITION,  ENFORCEMENT 
AND CONTINUOUS EVALUATION 

Improved economic performance and welfare creation will largely depend 
on  the  capability  of  European  institutions,  supervisory  authorities  and 
market  participants  to  ensure  that  the  existing  rules  are  consistently 
applied and enforced - so that best practice becomes the norm (Annex I, 
Section II). This way a level playing field is created – with consistent and 
accurate  interpretations  of  Community  law  –  avoiding  legal  uncertainties 
and  ambiguities.  This  means  enforcement  mechanisms  need  to  be 
strengthened and interconnected across the Member States, inter alia, via 
the European supervisory networks. This shared responsibility is a major 
challenge  in  a  European  Union  of  25  Member  States  –  with  further 
enlargements in the pipeline. 

The priorities are: 

– 

– 

– 

– 

– 

– 

continued application of open and transparent policy making 
with extensive use of consultation mechanisms at all levels; 

simplifying  and  consolidating  all  relevant  (European  and 
national) financial services rules17;  

converging  standards  and  practices  at  supervisory  level, 
respecting  political  accountability  and  current 
while 
institutional boundaries; 

working with Member States to improve transposition and to 
ensure consistent implementation; 

evaluation  whether  the  existing  directives  and  regulations 
are delivering the expected economic benefits and repealing 
measures that do not pass this test; and 

ensuring proper implementation and enforcement, if needed, 
by  infringement  procedures  building  on  existing  legislation 
and case law. 

The Commission would be interested to hear from stakeholders: 

– 

– 

17 

whether they agree with the priority measures identified; and 

which  additional  measures  should  be  taken  to  foster  consistent 

A  few  pilots  for  simplification  might  be  chosen  in  the  coming  years.  Launching  a  feasibility 
study might be helpful to find out if over time all rules can be fused in one body of consistent 
law (some sort of ‘Financial services rulebook’). 

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application and enforcement of European legislation. 

3. 

CONSOLIDATION  OF  FINANCIAL  SERVICES  LEGISLATION 
OVER THE 2005-2010 PERIOD 

3.1. 

FINISH REMAINING MEASURES 

ONGOING LEGISLATION AND MEASURES IN PREPARATION 

The  first  priority  of  the  next  twelve  months  is  to  complete  the  unfinished 
business  of  the  remaining  elements  in  the  negotiation  phase  at  the 
European Parliament and the Council and of the key measures now under 
preparation by the Commission. 

The  latter  are  a  (possible)  directive  on  post-trade  financial  services 
(clearing  and  settlement),  the  new  Insurance  Solvency  framework  and  a 
II).This 
(possible) 
preparation  involves  both  thorough  impact  assessments  and  wide 
stakeholders’ consultations. 

legislative  proposal  on  payments 

(see  Annex 

AREAS  WHERE  THE  COMMISSION  MAY  DECIDE  NOT  TO  MAKE  A 
PROPOSAL 

The Commission is committed to act only where European initiatives bring 
clear economic benefits to industry, markets and consumers. Concretely, 
the Commission is currently looking into the areas of rating agencies and 
financial  analysts,  where  –  after  having  received  the  advice  of  CESR 
and CEBS – a decision should be made if additional legislation is needed 
at this stage or if the current provisions in the Market Abuse Directive as 
well as self-regulation18 and monitoring mechanisms could be sufficient. It 
is  already  clear  that  the  Commission  will  not  propose  any  implementing 
measures under the Take Over Bids Directive. 

However,  if  the  Commission  would  decide  not  to  propose  legislation  in 
these  and  other  areas,  the  Commission  would  not  hesitate  to  revisit  this 
that  robust 
position,  should 
intervention is needed. 

future  market  developments  suggest 

AREAS  WHERE  THE  COMMISSION  MAY  RECONSIDER 
PROPOSAL 

ITS 

Following  EU  Member  States  agreement  to  The  Hague  Convention  (a 
multilateral  treaty  on  conflicts  of  law  for  securities  held  with  an 
intermediary19),  the  Commission  made  a  proposal  for  signature  but 
recently  some  Member  States  and  the  ECB  have  expressed  concerns 
with the Convention. The Commission will prepare, by end 2005, a legal 
assessment  evaluating  the  concerns  raised  and  then  decide  whether 

18 
19 

For instance the Code of the International Organisation of Securities Commissions (IOSCO). 
A  uniform  legal  formula  for  determining  proprietary  rights  is  considered  particularly  useful  in 
cases  where  securities  are  held  through  a  chain  of  financial  intermediaries  in  different 
countries. 

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changes are needed to the current signature proposal or not. 

3.2. 

EFFICIENT AND EFFECTIVE SUPERVISION  

financial 

integration  progresses,  new  challenges 

As  European 
for 
supervisors are emerging. Monitoring cross-border risk is becoming more 
critical  and  although  integration  will  strengthen  overall  stability,  the 
potential  for  ‘spill-over  effects’  such  as  a  system  failure  affecting  several 
financial  markets  and/or  groups  that  operate  on  an  EU-wide  basis  will 
increase.  The  Commission  believes  in  tackling  these  challenges  through 
an evolutionary, bottom up approach (Annex I, Section III).  

3.3. 

ENABLING 
COMPETITION 

CROSS-BORDER 

INVESTMENT 

AND 

Consolidation  in  the  financial  services  sector  should  be  driven  by  the 
market. At the same time, financial soundness and stability of the financial 
system must be ensured in some areas. The costs and barriers to cross-
border  transactions  constitute  a  formidable  obstacle  to  cross-border 
investment and economic rationalisation within Europe. The Commission 
has identified in a preliminary report the potential barriers and has invited 
stakeholders  to  come  forward  with  –  in  their  view  –  the  most  inhibiting 
obstacles20. Eliminating or at least reducing these unjustified barriers will 
strengthen the competitiveness of the sector and of the economy at large 
– and foster growth and job creation (Annex I, Section IV). 

3.4. 

THE EXTERNAL DIMENSION 

The Commission will monitor carefully that candidate countries fulfil their 
responsibilities  in  the  financial  services  area.  Furthermore,  enhancing 
European  influence  on  the  global  stage  and  ensuring  the  global 
competitiveness of the European financial sector should remain a priority. 
Financial services are a global business - developments in one jurisdiction 
have  an  impact  on  others.  Annex  I,  Section  V  outlines  the  (regulatory) 
objectives  identified  and  the  good  progress  made  in  building  open,  ex-
ante regulatory dialogues with the US and China. The Commission would 
also  like  to  deepen  financial  relations  with  other  countries,  like  Japan, 
and, if possible, also with India over the next five years 

The Commission would be interested to learn from stakeholders: 

– 

– 

20 

whether  they  agree  with  the  identified  measures  where  the 
Commission  might  decide  to  take  no  action,  or  if  there  are  other 
concrete  areas  where  the  Commission  should  not  bring  forward 
proposals  presently  in  the  pipeline  or,  indeed,  areas  where  the 
Commission should consider withdrawing; 

their  assessment  if  the  existing  regulatory  and  supervisory 
framework is sufficient to tackle the supervisory challenges in the 
years ahead, what are the gaps and how these can be filled most 

http://europa.eu.int/comm/internal_market/finances/cross-sector/index_en.htm#obstacles 

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effectively; 

– 

what  are  the  objectives,  sectors  to  be  covered  and  the  priority 
areas in regulatory and cooperative activities on a global scale. 

4. 

POSSIBLE, TARGETED NEW INITIATIVES 

In  line  with  the  opinions  expressed  in  the  two-year  consultation  process 
that  started  with  the  work  of  four  expert  groups,  the  Commission  has 
identified  two  clear  policy  areas  where  initiatives  might  bring  benefits  to 
the  European  economy:  asset  management  (Annex  I,  Section  VI)  and 
retail  financial  services.  Work  in  these  areas  will  be  bottom  up, 
consultative, and working with the grain of the market. 

The  post-FSAP  stocktaking  process  identified  the  market  for  retail 
financial services as an area requiring further attention (Annex I, Section 
VII).  While  significant  progress  has  been  achieved  to  integrate  financial 
markets, retail financial services markets – i.e. financial services offered to 
consumers, remain deeply fragmented. 

The role of the Commission is to facilitate the provision of retail financial 
services  in  Europe.  In  cross-border  service  provision,  four  distribution 
channels  can  be  identified:  (i)  a  consumer  purchases  the  service  from  a 
provider in another Member State by travelling to that Member State; (ii) a 
firm  markets/sells  to  consumers  in  another  Member  State  without 
establishing;  (iii)  a  firm  establishes  in  more  than  one  Member  State  and 
adapts its offerings to local markets; and (iv) services being designed on a 
pan-European basis, even if delivered locally.  

the  approach  of  creating  pan-European  passports 

Although 
for 
businesses and consumers seems to be the most beneficial one, possible 
alternative  regimes,  such  as  so-called  “26th  regimes”  for  those  operators 
and consumers who want to be active across borders, leaving the 25 sets 
of  national  rules  untouched,  are  currently  debated.  The  benefits  of  such 
“26th  regimes”  remain  to  be  proven  and  reaching  agreement  on  optional 
European  standards  designed  only  for  certain  products  will  be  difficult. 
However,  the  Commission  takes  note  of  the  current  debate  and  will 
respond  to  the  call  to  explore  such  26th  regimes  further,  by  launching  a 
feasibility  study,  e.g.  in  the  areas  of  simple  (term-life)  insurance  and 
savings products. 

The  Commission  thus  proposes  to  establish  Forum  groups  for  specific 
retail products, consisting of experts in the field, representing industry and 
consumer  interests,  to  identify  any  barriers  and  examine  possible 
solutions. This work will be supported by extensive research.  

AREAS OF POSSIBLE FUTURE ACTION 

Mortgage  credit  is  one  area  where  further  retail  integration  might  be 
beneficial  –  while  the  number  of  products  in  the  market  should  not  be 
limited; a separate Green Paper, planned for summer 2005, will address 

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the 48 recommendations coming from the Mortgage Credit Forum Group’s 
thorough 
report.  Concrete 
consultation - earliest in 2006. 

initiatives  could  be  announced  –  after 

Based  on  the  conclusions  coming  from  the  expert  groups  and  the  views 
expressed  in  the  public  consultation,  the  following  areas  might  merit 
further consideration as well: 

– 

– 

– 

codification  and  possibly  simplification  of  existing  rules  on 
information  requirements,  in  particular  with  a  view  to  ensuring 
consistency and coherence between different texts21; 

in  particular  by  allowing  cross-border 
financial  mediation, 
service  provision  by  knowledgeable  and  reliable  intermediaries, 
while  applying  full  transparency  on  fees  and  relationships  with 
providers.  Work  has  already  been  done  in  this  area22.  However, 
given  developments  in  products  and  the  structure  of  financial 
providers,  the  need  for  further  alignment  of  rules  on  conduct  of 
business, sales advice and disclosure should be examined; 

bank  accounts:  in  particular  looking  into  obstacles  to  opening 
accounts cross-border, as well as issues regarding their handling, 
portability, 
to  be 
particular  problems  associated  with,  e.g.  non-residency  and 
identification requirements. 

transferability  and  closure.  There  appear 

The Commission would be interested to learn from stakeholders: 

– 

– 

– 

– 

21 

22 

whether they agree with the new identified priority areas; 

what  are  the  (dis)advantages  of  the  various  models  for  cross-
border provision of services, whether there is a business case for 
developing a 26th regime, and which business lines might benefit; 

how  to  enable  consumers  to  deal  more  effectively  with  financial 
products  and  whether 
this  means  more  professional  and 
independent  advice,  improved  education  or  financial  literacy 
training are needed; 

whether  they  agree  with  the  issues  identified  in  the  above  list  of 
retail  products,  or  if  they  would  suggest  other  areas  where 
additional action at EU level could be beneficial. 

The Commission is developing a Common Frame of Reference as a tool to use in improving 
the coherence of European contract law. 
Under the Insurance mediation Directive and in the Markets in Financial Instruments Directive. 

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Annex I, Section I - Economic benefits from financial integration 

The  financial  sector  plays  a  key  role  in  the  economy  by  allocating  economic 
resources  efficiently  in  time  and  space  and  thereby  enabling  real-sector  activity  to 
expand and develop optimally. In playing this role, a well-functioning financial sector 
should provide the means to: 

– 

– 

– 

– 

– 

– 

– 

execute  financial  securities  transactions  on  a  cost-effective  and  safe  basis 
through  the  appropriate  mechanisms  for  trading,  clearing,  settlement  and 
custody; 

investor 

investment 
pool 
opportunities, and spread the risk, thereby overcoming issues of scale in the 
resource allocation process; 

resources,  subdivide  shares 

in  available 

rapidly be able to finance and respond to new business opportunities; 

price and manage effectively the risks related to financial transactions; 

reflect available information efficiently in prices so as to overcome problems 
of co-ordination in decentralised decision making;  

meet consumers’ needs at reasonable cost; and 

address possible incentive problems created by the existence of information 
asymmetries  and  by 
financial 
intermediation process. 

the  principal-agent  relationship 

the 

in 

So that: 

– 

– 

– 

– 

– 

– 

small  and  medium  sized  entities  (vital  for  EU  job-creation)  can  access  a 
wider availability of risk capital and more innovative and lower cost finance to 
fuel their growth; 

larger companies profit from an overall reduction in the cost of capital and a 
wider range of financial products; 

the public sector can meet its financing needs at lower cost; 

consumers  benefit  from  improved  returns  on  investment  funds  or  life 
products, or reduced borrowing costs; to access a wider choice of investment 
opportunities  and  cheaper  and  more  reliable  ways  of  paying  for  goods  and 
services;  

financial  stability  can  improve  and  the  European  market  becomes  more 
attractiveness for foreign capital inflows; and 

the  society  as  a  whole  to  help  finance  the  major  structural  economic 
challenge Europe faces – namely its long run pension deficit – by introducing 
more efficient pan-European markets for long-term savings products. 

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To  the  extent  that  the  financial  sector  is  constrained  in  the  performance  of  these 
various  functions,  there  is  a  consequent  cost  in  terms  of  sub-optimal  economic 
performance and welfare loss. 

Within the European Union, the financial sectors of the Member States have evolved 
to  reflect  specific  national  conditions  and  preferences.  While  these  systems  are 
generally  efficient  from  a  national  perspective,  they  are  much  less  so  when  viewed 
from the perspective of a progressively integrating European economy. Over time, a 
divergence  has  emerged  at  European  level  between  the  real  sector  which 
increasingly operates on a cross-border basis and a still highly fragmented financial 
sector.  The  degree  of  fragmentation  has  been  such  that  the  European  financial 
sector  cannot  function  efficiently  and  therefore  acts  as  a  drag  on  the  overall 
performance  of  the  European  economy.  The  costs  and  risks  associated  with  cross-
border  financial  transactions  are  unnecessarily  high,  thereby  discouraging  the 
conduct  of  financial  activity  on  a  pan-European  basis.  The  result  has  been  an 
to  unexploited  scale/scope 
inefficient  allocation  of  economic  resources  due 
economies,  sub-optimal 
reduced 
risk  management, 
opportunities for an optimal distribution of investment/consumption over time. 

inefficient  pricing  and 

In  light  of  these  inefficiencies,  financial  integration  has  been  a  European  policy 
priority  since  1998  and  now  forms  an  integral  part  of  the  Lisbon  strategy.The 
underlying  economic  rationale  is  that  financial  integration  will  enhance  the  level  of 
financial  development  throughout  Europe  and  thus  contribute  positively  to  the 
performance  of  the  European  economy.  A  more  efficiently  functioning  economy  will 
mean more jobs as new business opportunities open up. The largest benefits could 
accrue  to  those  Member  States  with  the  least  developed  financial  markets  – 
facilitating over time economic convergence within the Union. 

Given their growth potential and their share of GDP, financial service sectors have a 
direct and decisive impact on the aggregate competitiveness of modern economies. 
For example, the key differences in economic performance between Europe and the 
United States, with US productivity growth showing a strong acceleration during the 
second  half  of  the  1990s,  can  be  found  in  a  limited  number  of  intensive  ICT-using 
services  which  account  for  much  of  the  overall  US-EU  gap  in  productivity  growth 
since  1995.  More  specifically,  the  US  showed  rapid  productivity  expansion  in 
securities  trading23.  According  to  a  study  by  McKinsey  Global  Institute,  the 
introduction of pro-competitive regulations played a significant role in this remarkable 
performance.  Very  recently  both  the  Sapir  report24  and  the  Kok  report25  have 
stressed  the  importance  of  completing  the  single  market  for  financial  services 
because  of  the  role  that  financial  services  play  both  on  the  supply  and  on  the 
demand side of the different national economies. 

23 

24 
25 

Bart  van  Ark,  Robert  Inklaar,  Robert  H.  McGuckin  “Changing  Gear”  Productivity,  ICT  and 
Service  Industries:  Europe  and  the  United  States”,  Paper  for  ZEW  Conference  2002  on 
Economics of Information and Communication Technologies, June 24-25, Mannheim. 
Sapir et al. “An Agenda for a growing Europe”, Oxford University Press, March 2004. 
Kok et al. “Facing the challenge: the Lisbon strategy for growth and employment”, Report to 
the Commission, November 2004 

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Despite  the  fact  that  it  will  take  a  considerable  time  before  the  overall  financial  and 
economic  impact  of  the  FSAP  measures  can  be  assessed  directly,  the  case  for 
creating  integrated,  open  and  efficient  EU  capital  and  financial  services  markets 
remains as strong as ever. This view is supported by the economic literature. 

Consecutive studies calculated the economic benefits of financial integration: 

– 

– 

– 

the  Cecchini  report  of  1988  estimated  that  the  integration  of  the  financial 
markets  of  8  Member  States  would  increase  the  value–added  of  their 
financial services by 0.7% of GDP26; 

the  London  Economics  study27  (end  of  2002)  focused  on  the  benefits  from 
integration  by  calculating  the  static  efficiency  gains  from  deeper  and  more 
liquid  equity  and  bond  markets  in  EU15.  The  study  concluded  that  fully 
integrated  markets  would  lower  the  cost  of  capital  for  companies  by  0.5% 
and increase the GDP-level over time by 1.1%; 

the  CEPR  study28  (end  2002)  looked  at  the  relationship  between  financial 
integration  and  growth  from  a  micro-economic  point  of  view.The  study 
concludes that, in a scenario in which manufacturing companies would have 
the  same  access  to  finance  as  the  US  companies,  value-added  growth  in 
European  manufacturing  is  estimated  to  increase  by  0.75-0.94%  on  a 
durable basis. 

Quantifying  the  costs  and  benefits  of  financial  integration  is  very  difficult  and  is 
subject to significant data, statistical and model uncertainty. Accordingly, the results 
of  these  studies  can  be  considered  only  as  indicative  of  the  potential  benefits  of 
European  financial  integration.  Nevertheless,  the  results  of  these  and  other  studies 
underscore  the  validity  of  European  policy  on  financial  integration.  All  future 
proposed regulation will be accompanied by an impact assessment aimed at showing 
the economic benefits of the proposed measures. 

26 

27 

28 

Markets” 

This  estimate  was  based  on  first  round  effects  only  and  did  not  take  dynamic  effects  into 
account, which were expected to have generated a higher figure. 
London Economics (2002), "Quantification of the Macroeconomic Impact of Integration of EU 
Financial 
at: 
http://europa.eu.int/comm/internal_market/en/finances/mobil/overview/summary-
londonecon_en.pdf. 
Giannetti  M.,  L.Guiso,  T.  Jappelli,  M.  Padula  and  M.  Pagano (2002),  “Financial  market 
Integration, Corporate Financing and Growth”, DG ECFIN Economic Paper N° 179. available 
at:http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpaper
s179_en.htm. 

Commission 

Available 

web-site 

the 

in 

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Annex  I,  Section  II  -  Better  regulation,  transposition,  enforcement  and 
continuous evaluation 

The  benefits  from  financial  integration  can  only  be  delivered  if  the  European 
institutions,  supervisory  authorities  and  market  participants  can  ensure  that  the 
existing  rules  are  consistently  applied  and  enforced.  The  Commission’s  priority 
measures to make this happen are outlined below. 

Preparation of initiatives. 

Open and transparent policy making 

The  Commission  will  continue  to  apply  the  most  open,  transparent  and  evidence-
based  policy-making  in  line  with  the  Lamfalussy  process.  Thorough  and  wide 
consultation  and  economic  impact  assessments  will  continue  to  ensure  that,  where 
legislation  is  necessary,  sound  rules  will  be  drawn  up  with  clear  and  demonstrable 
added-value  for  Europe’s  markets  and  consumers.  The  Commission  favours 
publishing all responses to open consultations.Summaries of consultation procedures 
will be drawn up by the Commission and published. Responses to the recent public 
consultation  on  the  Commission’s  working  paper29  evaluating  the  Lamfalussy 
process30, strongly endorsed the Commission’s general approach. 

Simplification 

Although the Commission has tried to keep the FSAP legislative framework as simple 
as  possible,  there  is  room  for  improvement.  Simplification  and  consolidation  of  the 
existing  rules  (codification)  is  a  continuous  objective  and  will  be  factored  in  when 
preparing any new piece of legislation. 

Legal coherence 

A  robust  and  clear  legal  framework  is  necessary  for  the  efficient  operation  of  both 
financial market participants and the public authorities responsible for regulation and 
supervision.  The  Community  framework  of  law  for  the  European  financial  markets 
and  services 
increasing  cross-border  activity  and 
integration.  New  market  practices  can  sometimes  raise  uncertainties  or  discussions 
as to how the existing law will apply or as to how it should develop. The Commission 
has  already  put  in  place  arrangements  to  identify  and  analyse  these  areas.  For 
example,  in  January  2005  the  Commission  launched  the  Legal  Certainty  Group 
dealing with cross-border securities rights and transfers.In conformity with its aim of 

is  now  highly  developed, 

29 

30 

See  “The  application  of  the  Lamfalussy  process  to  EU  securities  markets  legislation:  a 
preliminary assessment by the Commission services” - SEC(2004) 1459. 
European  regulatory  and  supervisory  process  via  a  four-level  approach:  (1)  framework 
legislation  adopted  in  co-decision  (between  Council  and  European  Parliament)  at  “level-1”, 
concentrating on the core political principles; (2) “level-2” implementing measures to fill in the 
details of “level-1” legislation subject to precise constraints fixed in that legislation; (3) day-to-
day  cooperation  by  national  supervisors  and  regulators  to  ensure  consistent  implementation 
and enforcement; and (4) more effective enforcement of Community law.  

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promoting  better  regulation,  the  Commission  will  consider  whether  it  should 
encourage more actions in this domain. 

Full co-operation among the supervisory committees (CEBS, CEIOPS and CESR) is 
needed  to  ensure  consistent  application  of  European  rules  across  the  board.  Also, 
further work on convergence of reporting, organisational and other requirements for 
businesses  will  help  create  homogenous  business  environments  throughout  the 
Union.  Cooperation  at  level  3  must  take  place  in  a  carefully  modulated,  open  and 
transparent environment that fully respects institutional boundaries and the need for 
political accountability. 

The  Commission  intends  to  carry  out  an  exercise  to  read  across  the  connected 
(existing  and  proposed)  directives  to  ensure  consistency  and  internal  coherence  of 
terminology and effect31. Launching a feasibility study in the securities area might be 
helpful to find out if over time all rules (at European, and also national level) can be 
fused  in  one  body  of  consistent  law,  a  “Financial  services  rulebook”.  Some  texts 
could  be  simplified,  or  even  repealed;  a  number  of  reviews  will  be  carried  out  (see 
below). If needed, changes to the legislation could be proposed – with the flexibility of 
the Lamfalussy process, this could be achieved in reasonable time. 

Transposition 

Regrettably, the rate of transposition by Member States within the agreed deadlines 
is worsening32 (for example in the transposition of the Market Abuse Directive). What 
can be done to improve the situation? The following actions could help. 

Renewed political commitment 

tables  -  preferably 

Member States should demonstrate their commitment by providing clear and detailed 
transposition 
the 
in  one  of 
Commission33.  The  Commission  will  enhance  monitoring  and  control.  To  give 
visibility to the state of transposition, the Commission will be bringing forward an on-
line FSAP transposition matrix – showing which texts have been implemented by the 
Member  States,  when  and  how,  with  hyper  links  to  the  Member  States’  own 
texts.Where available, transposition tables will also be provided. A special chapter in 
the Internal Market Scoreboard34, planned for July 2005, will be devoted to this. 

languages  of 

the  working 

Realistic deadlines for transposition 

Allocating  sufficient  time  to  Member  States  and  market  participants  to  apply 
Community  rules  is  important.In  the  future,  more  care  is  needed  to  work  out  the 

31 

32 

33 

34 

See  ‘European  Contract  Law  and  the  revision  of  the  acquis:  the  way  forward’  -  COM(2004) 
651 - for an explanation of the development and role of the Common Frame of Reference in 
reviewing the contract law acquis. 
An  overview  of  transposition  deficits  will  be  put  on  the  Commission’s  website,  see: 
http://europa.eu.int/comm/internal_market/en/finances/actionplan. 
See  “Recommendation  from  the  Commission  on  the  transposition  into  national  law  of 
Directives  affecting  the  Internal  Market  -  SEC(2004)  918,  12.7.2004  -  suggesting  that 
correlation tables should be attached to the notification letter.  
http://europa.eu.int/comm/internal_market 

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necessary time for implementation of Directives and the implementing measures. The 
Markets  in  Financial  Instruments  Directive  is  an  example  where  the  deadline  for 
transposition  needed  to  be  extended  after  adoption35  -  something  that  should  be 
avoided in the future. 

Transposition workshops 

A  continuation  of  transposition  workshops  with  Member  States  and  European 
regulators to iron out, ex-ante, the main problems by providing explanatory guidance 
to  the  Member  States,  regulators  and  markets  if  needed,  while  fully  respecting  the 
role  of  the  European  Court  of  Justice.  The  Member  States  have  a  duty  under  the 
Treaties36  to  implement  and  apply  Community  law.  However,  the  Commission  –  as 
guardian of the Treaties – will remain vigilant in addressing any shortcomings and will 
launch infringement proceedings swiftly if this obligation is not carried out properly. At 
the  same  time,  market  participants  and  regulators  should  help  the  Commission 
identify any flagrant failures and address any shortcomings to national courts. 

The  Lamfalussy  arrangements  should  also  play  an  important  role  in  the  continuous 
monitoring of consistent transposition and effective enforcement. Peer group reviews, 
benchmarking and efficient mediation mechanisms within the level of the supervisory 
networks  could  help  find  agreement  on  implementation/enforcement  problems  and 
help raise standards and best practises. Good work has already been done by CESR 
in a number of areas (e.g. transitional provisions for UCITS III). 

Mediation and alternative dispute resolving 

However, at the same time, Europe needs to strengthen its enforcement mechanisms 
further  –  to  ensure  legal  consistency  and  predictability.  Mediation  and  alternative 
dispute  resolution  schemes,  such  as  the  already  existing  SOLVIT  and  FIN-NET 
networks37,  offer  considerable  potential.  Other,  additional  complaints  and  mediation 
procedures  –  in  particular  within  the  supervisory  committees  (Lamfalussy  level  3) 
need to be developed and could be very effective. 

CESR’s recent paper38 illustrates a number of urgent day-to-day problems that CESR 
thinks  could  arise  under  Directives  currently  being  agreed  and  implemented  in  the 
securities  sector  (e.g.  how  to  supervise  the  conduct  of  business  rules  of  an 
intermediary  organised  on  a  trans-national  basis,  with  branches  in  several  Member 
States; or how to apply a particular International Accounting and Financial Reporting 
Standard to a market operation). Similar problems could arise in other sectors, such 
as  banking.For  example,  a  branch  could  have  a  significant  impact  on  financial 
stability  in  the  host  Member  State  –  where  the  branch  represents  a  major  player  – 
while  being  much  less  significant  in  size  in  the  home  Member  State  where  it  is 
supervised.Non-binding mediation is one idea – but further reflection is needed within 

35 

36 
37 
38 

The Commission came forward with a proposal for a one year extension – to be agreed upon 
by Council and European Parliament. 
EC Article 10. 
http://europa.eu.int/comm/internal_market 
http://www.cesr-eu.org/consultation_details.php?id=48 

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current  institutional  boundaries.  Similar  pan-European  enforcement  issues  arise  in 
the area of audit oversight. 

Whatever  alternative  dispute  solving  mechanisms  are  developed,  they  cannot  be  a 
substitute for ultimate proceedings before the European Court of Justice. 

Ex-post evaluation 

While  consistent  transposition  and  enforcement  of  European  legislation  is  key  in 
creating  the  benefits  of  a  level  playing-field,  the  more  fundamental  question  as  to 
whether  the  rules  actually  achieve  what  they  were  meant  to  achieve  must  be 
addressed. The Commission will continue to report on an annual basis on the state of 
financial  integration39,  also  addressing  competitive  structures  in  Europe,  the 
efficiency gains of integration and related financial stability issues. 

With the FSAP having reached its closing chapter, the logical next step is to evaluate 
its  impact  on  financial  markets  and  institutions  as  well  as  on  the  consumers  and 
users. Ex-post evaluation of the FSAP and of all new legislative measures will in the 
future be a top priority for the Commission. The Commission plans to carry out a full 
evaluation  of  the  FSAP  in  the  course  of  2006-2008,  when  all  measures  are 
implemented  and  the  empirical  and  possibly  the  first  economic  effects  start  to  be 
measurable40. The Commission will also carry out a number of reviews mandated by 
legislation  adopted  under  the  FSAP  -  e.g.  on  large  exposures,  own  funds, 
commodities dealers, regulated markets and regarding the Financial Conglomerates, 
Insurance  Groups  and  E-money  Directives  -,  with  a  view  to  achieving  greater 
coherence and more effective supervisory tools. 

Not all measures need to deliver direct economic benefits. Measures can be needed 
to improve consumer protection, strengthen financial stability etc. However, if – over 
time  –  careful  assessment  and  analysis  reveal  that  specific  legal  texts  have  not 
worked – and will not produce their desired effect in the years to come – they will be 
modified  or  even  repealed  entirely.  The  Commission  would  be  interested  to  learn 
from stakeholders which measures could be repealed and why. 

Moreover,  the  Inter-institutional  Monitoring  Group41  has  so  far  proved  a  useful, 
independent  mechanism  for  evaluating  progress  on  achieving  the  objectives  of  the 
Lamfalussy  report.A  new  Group  has  recently  been  furnished  with  a  mandate  to 
provide  annual  reports  until  the  end  of  2007.  The  mandate  has  been  expanded,  in 
line  with  the  extension  of  the  Lamfalussy  process,  to  cover  banking,  insurance  and 
occupational pensions as well as securities law. 

39 

40 

41 

http://www.europa.eu.int/comm/internal_market/finances/docs/cross-sector/fin-integration/sec-
2004-559_en.pdf. Each year’s report will focus on specific issues; in 2005 these issues will be 
reflected  in  special  features  on  financial  consolidation,  retail  financial  services  and  new 
Member States. 
This  exercise  will  require  careful  preparation  and  fine-tuned  calibration.  To  that  end,  the 
Commission envisages the organisation of a workshop with economic experts in mid-2006. 
Composed of 6 people, made up of 2 representatives nominated by the European Parliament, 
Council and the Commission respectively. 

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Annex I, Section III – Efficient and effective supervision  

Challenges 

Cross-border  penetration  of  financial  services  and  capital  markets  in  Europe  is 
increasing. Delivering efficient and effective supervision remains a key issue for the 
further  development  of  the  Single  Market  for  financial  services  in  Europe.  The 
Economic  and  Monetary  Union  (EMU)  and  the  FSAP,  almost  complete,  have  acted 
as  catalysts  for  change.  This  poses  challenges  for  supervisory  systems,  which 
remain nationally-rooted. 

Financial systems have increased their interoperability and become more integrated, 
providing  services  across  borders.  Large  firms  have  shifted  from  country-based 
structures to structures focused more on business lines with centralised management 
functions. There is demand for supervisory arrangements that better reflect the way 
in which risk is managed and business is done. In the integrating European market, 
effective supervisory cooperation is essential, both in terms of day-to-day supervision 
and in the event of a crisis. More consistency between regulators and supervisors is 
important  to  avoid  market  uncertainty.  Firms  are  demanding  more  streamlined  and 
less  costly  cross-border  and  cross-sectoral  supervisory  arrangements.  Concerns 
exist  about  the  lack  of  equivalent  powers  and  tools  in  exercising  European 
supervisory functions. 

A three-step, evolutionary approach 

Rushing  into  a  debate  on  a  future  supervisory  model  for  Europe  without  first  laying 
down  the  necessary  groundwork  would  be  counter-productive  and  not  deliver  the 
desired  results.  Looking  ahead  at  supervisory  developments  over  the  2005-2010 
horizon,  an  evolutionary  approach  is  needed  that  strikes  the  right  balance  between 
ensuring  effective  supervision  and  financial  stability,  and  minimising  the  regulatory 
burden for firms, systems and markets.The Commission proposes the following three 
steps: 

Step 1: Agreement on overall policy objectives 

The Commission’s policy objectives for the coming five-year period are two-fold: 

– 

– 

to  advance  the  Lisbon  agenda  by  enhancing  the  competitiveness  of  EU 
financial markets and institutions. To the extent possible, activities should be 
subject  to  the  same  supervisory  requirements  both  on  a  cross-border  and 
cross-sectoral basis. All Member States must ensure in their implementation 
processes that their supervisors have the necessary powers to supervise and 
cooperate as required in the Directives. Avoiding unnecessary duplication in 
regulation and supervision will reduce industry burdens and foster expansion 
of cross-border financial services; 

to  maintain  the  highest,  most  up-to-date  standards  of  regulation, 
oversight  and  supervision  for  EU  financial  institutions,  systems  and 
integrity  and  consumer 
markets 
protection. Supervisory requirements should accurately reflect the risks run in 

financial  stability,  market 

to  ensure 

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the market while converged supervisory practices and powers are crucial to 
ensure a level playing field and to avoid regulatory arbitrage. 

Step 2: Maximise current framework, identify gaps and develop existing tools 

Convergence  of  supervisory  practices  in  all  financial  sectors  is  one  of  the  key 
functions  of  the  recently  established  Lamfalussy  process.  The  second  Lamfalussy 
review expected in 2007 is a milestone in this regard. Existing supervisory tools and 
the  potential  of  CEBS,  CEIOPS,  and  CESR  should  be  exploited  to  the  maximum 
extent. All possibilities to cooperate under the existing framework should be pursued, 
within the contours of existing institutional boundaries and in full respect of ensuring 
democratic  accountability.  Factual  evidence  needs  to  be  gathered  to  see  whether 
and where there are difficulties in day-to-day supervision in the various sectors, the 
efficiency  of  current  supervisory  networks  should  be  assessed  and  gaps  effectively 
filled.  Particular  attention  should  be  paid  to  cross-sectoral  issues,  by  providing 
through 
greater  clarity 
convergence  of  supervisory  practices.In  addition,  a  number  of  practical  features 
could be developed to help improve supervision in European financial markets and to 
enhance  cross-border  regulatory  and  supervisory  cooperation,  e.g.  common 
reporting  templates,  effective  dispute  settlement  procedures  etc.  Future  legislative 
proposals  (e.g.  post-trade  and  insurance  solvency)  will  need  to  anticipate  specific 
solutions  for  supervisory  cooperation.  More  consolidated  supervision  is  a  legitimate 
demand  from  industry.  However,  this  should  be  a  long-term  objective.  We  should 
give  the  new  supervisory  committees  a  few  years  before  they  deliver  their  full 
potential,  instead  of  rushing  into  a  more  integrated  supervisory  system  at  a  time 
when markets are not yet really integrated. Targeted EU-level action may be needed 
to underpin supervisory cooperation in the following three strands: 

the  roles  and  responsibilities  of  supervisors  and 

to 

(i) Removing inconsistencies within and between Directives,  paying particular 
attention  to  cross-sectoral  issues.  The  Commission  will  review  overlapping, 
conflicting  or  outdated  supervisory  requirements  in  the  directives,  e.g.  whether 
exceptions  to  the  home  country  prudential  control  principle  are  still  justified. 
Regulation should set the ground rules for an environment that allows well-run firms 
to  succeed  without  encountering  unnecessary  supervisory  barriers.  Present  and 
programmed  Directives  could  create  overlapping  or  conflicting  supervisory 
requirements (e.g. Financial Conglomerates, Insurance Groups and future Solvency 
Directives).  Working  with  stakeholders,  an  ongoing  cross-sector 
review  of 
supervisory approaches will be carried out and any necessary adjustments made to 
ensure coherence, clarity and supervisory efficiency. However, changes should only 
be  considered  after  sufficient  practical  experience  and  after  having  maximised  the 
current supervisory potential. 

(ii) Greater clarity in the roles and responsibilities of supervisors. Home country 
control remains the core concept for supervision in Europe. The role of supervisors is 
now  slowly  starting  to  follow  the  way  in  which  firms  organise  and  manage 
themselves. In banking, for example, the Capital Requirements Directive proposes in 
some areas decision-making powers for supervisors that apply also to subsidiaries in 
other Member States, thus avoiding multiple decisions and reducing burdens. Before 
extending  these  powers  to  other  areas,  the  respective  roles  and  responsibilities  of 
supervisors  need  to  be  reinforced  and  a  number  of  key  underlying  and  interrelated 

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issues  should  be  addressed  (liquidity,  crisis  management,  lender  of  last  resort, 
deposit guarantees, and winding-up and bankruptcy proceedings). In insurance and 
securities markets, similar issues may require attention. As a matter of priority, work 
will commence with all interested parties to determine how to optimally address the 
nature, location and supervision of risks in cross-border operations. 

(iii)  Convergence  of  supervisory  practices.  The  three  supervisory  committees 
(CESR,  CEBS  and  CEIOPS)  are  focusing  on  promoting  cooperation  and  seeking 
similar  responses  to  similar  issues  (e.g.  developing  common  reporting  rules  and 
formats to reduce regulatory costs, peer pressure/mediation, and sharing information 
and  data).  In  doing  so,  any  new  differences  between  supervisory  powers  and 
approaches  which  could  impede  proper  market  functioning  should  be  identified  and 
addressed.  Possible  solutions  are:  a  review  of  divergences  stemming  from  national 
legislation;  enhanced  cooperation 
through  Memoranda  of  Understanding; 
coordinated or joint investigations; or coordinated group supervision. This should be 
done  in  a  transparent  way  that  respects  institutional  boundaries  and  democratic 
accountability.  All  tools  underpinning  supervisory  cooperation,  including  non-binding 
standards  agreed  between  supervisors,  must  of  course  be  fully  compatible  with 
binding European legislation and must not prejudice the political process. 

Step 3: Development of new structures 

New structures should only be developed if all possibilities for cooperation under the 
current  framework  have  been  exhausted  and  if  there  is  compelling  evidence  that, 
once  fully  implemented  and  developed,  this  framework  cannot  fulfil  its  financial 
stability and integration objectives or meet the requirements of European legislation. 

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Annex I, Section IV – Barriers to cross-border consolidation 

Background 

The  Informal  ECOFIN  Council  in  September  2004  in  Scheveningen  (NL)  discussed 
findings that suggest that cross-border acquisitions in Europe are less common in the 
financial sector (particularly banking) than in other sectors of the economy. 

Eliminating  or  at  least  reducing  unjustified  barriers  to  cross-border  investment  and 
economic  rationalisation  within  Europe  will  strengthen  the  competitiveness  of  the 
economy at large – and foster growth and job creation. However, consolidation is not 
an end in itself, and takeovers and mergers will not automatically produce improved 
economic  performance.Rather,  market-driven  consolidation  will  enable  European 
financial  service  providers 
their  effective  potential  and  compete 
internationally – via economies of scale and scope. 

reach 

to 

Possible explanations 

There are a number of possible explanations why in the financial sector cross-border 
acquisitions  in  Europe  are  less  common,  e.g.  factors  related  to  structural,  cultural, 
language and taxation issues, which weaken the business case for consolidation. It 
was also suggested that inappropriate intervention by national supervisory authorities 
and political interference are reasons for banks’ failure to consolidate significantly on 
a  cross-border  basis.  This  debate  is  not  about  the  overall  level  of  ‘foreign’ 
participation  in  individual  Member  States’  financial  sectors,  which  depends  on  a 
range  of  factors  (such  as  profitability,  cost  effectiveness,  etc.).  It  is  rather  about 
whether or not national supervisors use solely prudential criteria to assess the merits 
or demerits of a particular merger or acquisition. Supervision should not be misused 
for protectionist purposes. 

The Commission’s approach 

In  January  2005,  the  Commission  issued  a  call  for  advice  to  CEBS  notably  on  the 
criteria  used  by  national  supervisory  authorities  when  reviewing  acquisitions  of 
qualifying shareholdings (cf. Article 16 of Directive 2000/12/EC).Many of these issues 
are  also  pertinent  for  other  financial  sectors,  where  similar  provisions  exist.  In  the 
insurance sector, the Commission issued a call for advice to CEIOPS on the “fit and 
proper”  concept  in  December  2004.  In  the  UCITS  area,  the  industry  is  calling  for 
cross-border mergers to be facilitated in order to increase size and reap economics 
of  scale.  Transparency  in  the  bond  market  and  how  government  debt  markets 
function  have  also  been  raised  as  areas  where  integration  would  be  beneficial. 
Cross-sectoral consistency will need to be checked regarding these outcomes. 

In addition, the Commission will analyse the reasons for the low level of cross-border 
consolidation  to  date  and  investigate  whether  there  are  unjustified  obstacles 
hampering  the  proper  functioning  of  an  internal  market.  In  parallel,  the  Commission 

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will review the application of the Treaty-based freedom of capital movements (Articles 
56-60) in the area of cross-border bank mergers and acquisitions42. 

In  particular  regarding  its  ongoing  review  of  Article  16  of  the  Banking  Directive,  the 
Commission  considers  that,  at  the  very  least,  more  clarity,  transparency  and 
disclosure  are  needed,  based  on  a  set  of  well-defined  common  prudential  criteria. 
Supervisors  ought  to  make  explicit  the  criteria  they  apply  when  reviewing  qualifying 
shareholdings and their decisions should be made within a reasonable timeframe.  

Supplementary  action  through  competition  policy  is  an  important  complement  to 
financial  integration  measures.  In  line  with  its  proactive  approach  to  enforcing 
antitrust rules, the Commission will undertake sectoral enquiries in the areas of retail 
financial  services  and  business  insurance,  with  increasing  focus  on  market 
monitoring. The objective will be to implement selective competition screening, and in 
particular  to  enhance  competition  in  certain  European  retail  financial  services 
markets.  Special  attention  will  be  given  to  the  identification  of  obstacles  to  the 
provision of cross-border services and entry barriers, both in the form of regulation as 
well as “typical” antitrust issues. 

42 

The  Commission  will  present  a  factual  report  on  obstacles  to  the  ECOFIN  Council  by 
September  2005  along  with  recommendations  stemming  from  its  review  of  Article  16  of  the 
Banking  Directive.  It  also  intends  to  prepare  a  Communication  on  the  application  of  the 
Treaties based freedom of capital movements this summer. 

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Annex I, Section V – External Dimension 

Future enlargement and neighbourhood policy 

The  Commission  will  monitor  carefully 
their 
responsibilities  in  the  financial  services  area  and  assess  whether  they  are  ready  to 
play their role as full members of the Union. As with previous accessions to the EU, 
the Commission intends to take a pro-active approach by asking candidate countries 
to apply existing rules already before their accession. 

that  candidate  countries 

fulfil 

Regarding the countries with which Partnership and Cooperation Agreements are in 
force and which fall within the framework of the European Neighbourhood policy, the 
Commission  will  seek  to  ensure  adherence  to  the  main  principles  of  the  European 
rules. 

Global dimension 

Enhancing  European  influence  on  the  global  stage  and  ensuring  the  global 
competitiveness  of  the  European  financial  sector  should  remain  a  priority.  Financial 
services are a global business - developments in one jurisdiction have an impact on 
others. 

Three regulatory objectives can be identified: 

(1) 

(2) 

(3) 

the  need  to  remove  barriers  to  open  and  competitive  financial  services 
markets  worldwide  and  to  ensure  market  access,  based,  where  appropriate, 
on equivalent regulatory approaches; 

the  need  to  manage  major  structural  changes  on  the  global  stage  –  seeking 
cooperative solutions where possible; 

the need to protect the international financial system from instability, fraud and 
financial crime. 

Good  progress  has  been  made  in  building  open,  ex-ante  regulatory  dialogues  - 
exchanging  information,  identifying  potential  regulatory  problems  upstream  and 
seeking mutually acceptable solutions. With the United States, a number of important 
regulatory  understandings  (e.g.  on  the  cooperative  model  for  the  implementation  of 
the  Sarbanes  Oxley  Act  and  on  financial  conglomerates)  have  helped  reduce 
transatlantic friction. Working as far upstream of the political process as possible to 
converge 
regulatory  and  supervisory  principles  minimises  compliance  and 
adjustment costs in the different jurisdictions. 

Recently,  the  Commission  has  had  a  first  successful  macro-economic  and  financial 
sector regulatory dialogue  with China – which will be repeated in the near future. A 
number  of  important  areas  for  cooperation  and  regulatory  dialogue  in  the  financial 
services area have been identified, such as accounting and the experience with the 
Lamfalussy  regulatory  model.  The  Commission  also  would  like  to  deepen  financial 
relations with Japan, and, if possible, also with India over the next five years. 

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The  Commission  is  committed  to  an  ambitious  opening  of  global  financial  services 
markets,  as  modern  and  efficient  financial  markets  are  a  prerequisite  for  further 
economic  development  in  these  countries.  This  commitment  will  therefore  be 
reflected in the WTO negotiations on financial services. 

The  Commission  would  like  to  deepen  further  these  regulatory  dialogues,  more 
particularly the EU-US dialogue which is already well on track – working closely with 
the  Member  States,  the  European  Parliament  and  the  private  sector.In  the 
Commission’s  view,  the  informality  and  practicality  of  the  dialogue  are  proven 
strengths.  The  current  participants  should  thus  not  be  changed  –  although  experts 
could be included on an ad-hoc basis. 

Important themes for the EU-US regulatory dialogue in the coming years are: 

– 

– 

– 

– 

– 

– 

– 

– 

work  towards  equivalence/convergence  between  IAS  and  US-GAAP  – 
agreeing a roadmap and timetable are now urgent. The Commission intends 
to  take  a  decision  on  equivalence  of  the  major  third-country  accounting 
systems  (required  under  the  Transparency  and  Prospectus  Directives)  end 
2006 or early 2007; 

facilitate deregistration from US securities exchanges; 

increase  co-operation  with  the  US  insurance  supervisors  and  remove 
collateral requirements for EU reinsurers; 

ensuring that the Basel Capital Accord (in Europe the Capital Requirements 
Directive) is implemented on time and in a way that effectively delivers a level 
playing field between Europe and the US; 

cooperation on a policy response for Credit Rating Agencies43; 

work toward a cooperative model in supervising auditors (in cooperation with 
the US Public Company Accounting Oversight Board); 

closely  follow  the  Securities  and  Exchange  Commission’s  market  regulation 
review and facilitating placement of trading screens of EU exchanges in the 
US; 

look into the governance, financing and participants of international standard 
setting bodies. 

43 

See also Section 3.1. 

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Annex I, Section VI – Asset management 

Alongside  pension  funds  and  insurance  companies,  investment  funds  play  an 
increasingly  important  role  in  European  financial  markets  -  mobilising  household 
savings  and  channelling  them  towards  productive  investments.  The  European  fund 
industry  currently  manages  some  €  4.7  trillion  of  assets  on  behalf  of  a  growing 
segment of the European population - in some Member States, over 20% of the adult 
population  hold  UCITS44.  A  cost-effective  fund  industry  will  diversify  risk  more 
efficiently, allow retail investors to earn higher returns and make capital available for 
investment projects. 

Investment  funds  will  assume  greater  importance  as  public  sector  pensions  remain 
under funding pressure and occupational pension funds shift to a defined-contribution 
basis.  Small  differences  in  net  return  on  investments  in  funds  can  make  a  huge 
difference  to  the  accumulated  value  of  capital  at  pay-out  date.  A  cost-efficient  fund 
industry, where gains are passed on to end-investors, can be part of the solution to 
Europe’s pension deficit. 

The  1985  UCITS  Directive  seeks  to  facilitate  the  cross-border  offer  of  investment 
funds to retail investors. It has provided a focal point for the development of the fund 
industry  in  Europe.  However,  cross-border  sales  remain  constrained:  the  'product 
passport' continues to encounter difficulties and fund managers  have not been able 
to export their expertise. UCITS legislation may entail significant missed opportunities 
for  the  industry  if  it  does  not  provide  for  effective  exercise  of  other  single  market 
freedoms by fund managers, or respond to the reality of a fast developing business. 
This  may  translate  into  higher  costs  and  a  more  limited  range  of  investment 
opportunities for investors. 

The  Commission  services  will  publish  a  comprehensive  review  of  UCITS  legislation 
this  summer.  This  will  identify  concrete  steps  to  improve  consistent  transposition  of 
existing UCITS legislation and to ensure that it delivers its intended effects. The focus 
will be on consolidating and enhancing the UCITS framework. However, the growing 
importance of this business warrants a longer-term reflection on whether the UCITS 
framework  is  capable  of  harnessing  the  full  potential  of  this  industry  -  taking  into 
account  the  need  for  appropriate  protection  of  retail  investors  -  or  of  responding  to 
profound structural changes affecting the asset management business 

On the basis of this review, the Commission services will prepare a Green Paper on 
asset management for publication in July 2005. 

44 

UCITS  are  harmonised  collective  investment  undertakings  that  can  operate  throughout  the 
EU. 

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Annex I, Section VII – Retail Financial Services 

Retail Financial Services integration is needed 

The post-FSAP stocktaking process identified the market for retail financial services 
as an area requiring further attention. A number of important factors have increased 
the  need  to  consider  encouraging  future  integration  in  the  retail  financial  services 
markets: 

– 

– 

– 

– 

the  introduction  of  the  euro  has  resulted  in  price  transparency  and 
exchange rate stability; 

technological  innovations,  such  as  Internet,  are  providing  new 
opportunities  to  sell  financial  services  at  a  distance  and  hence  cross-
border; 

increased  consumer  mobility  of  European  citizens  is  driving  demand 
for efficient cross-border financial services45; 

there  is  a  growing  need  for  more  efficient  long  term  financial  services 
products to complement state welfare provision. 

The way forward 

integration  of  retail  markets 

However, 
is  complex  and  demanding.  Product 
characteristics, distribution systems, consumer protection, contract law, differences in 
consumption culture or other  economic or structural realities play a more prominent 
role in this area – and create considerable complexity for cross-border supply. 

Integration of retail financial services should not only enable consumers to purchase 
products  cross-border,  but  also  facilitate  the  sale  of  products,  developed  in  one 
domestic  market,  throughout  Europe  without  the  need  for  substantial  modification. 
This would deliver more choice and better prices to consumers. 

The  Green  Paper  should  help  to  identify  the  most  significant  cross-border  barriers 
and  risks  for  consumers  so  that  the  Commission  can  carefully  prioritise  a  limited 
number  of  actions  where  there  is  a  business  case  for  further  retail  integration  and 
tangible results can be achieved.  

Supplementary  action  through  active  application  of  competition  policy  is  therefore 
important.  Accordingly,  the  Commission  will  undertake  sectoral  enquiries,  with  a 
focus  on  market  monitoring  (see  Section  3.3  of  the  Green  Paper  and  Annex  I, 
Section IV). 

45 

For  an  analysis  of  factors  which  affect  consumers’  propensity  to  buy  from  firms  in  another 
country see Optem survey on cross-border shopping for financial services carried out for the 
Commission, available at   
http://europa.eu.int/comm/consumers/cons_int/fina_serv/cons_experiences/index_en.htm 

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Future measures should be based on an appropriate policy mix between harmonised 
rules  and  mutual  recognition.  Such  measures  must  neither  erode  well-founded 
consumer protection measures, nor stifle or distort competition. 

The consumer perspective 

The Commission is committed to listen to all interested parties before coming up with 
new  initiatives.  The  Commission  is  committed  to  ensure  the  consumer  and  user 
perspective  is  heard46,  and  that  the  consumer  interest  is  prominent  in  the  major 
debates. The consumer and user perspective can be further developed with the help 
of  representative  organizations  which  need  to  continue  efforts  to  improve  their 
organisation  and  their  knowledge  and  experience  in  the  area  of  financial  services. 
Additional  action  to  promote  and  support  consumer  awareness  might  be  needed  – 
starting at Member State level. 

European  legislation  emphasises  the  importance  of  information  provision.  However, 
unless  consumers  themselves  develop  the  skills  and  knowledge  needed  to 
understand  increasingly  complex  financial  products,  consumers  cannot  make  well-
informed (investment) decisions on the basis of this information.  

Redress systems could help to increase consumer confidence in the market so that 
the full benefits of integration can be realized. The out-of-court complaints network for 
financial  services,  FIN-NET,  already  provides  some  assistance  for  cross-border 
disputes.

46 

One  of  the  initiatives  already  taken  is  the  establishment  of  the  FIN-USE  forum  of  financial 
services experts, providing the Commission with valuable input from a user perspective, see 
http://europa.eu.int/comm/internal_market/finservices-retail/finuse_en.htm. 

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