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Session 2003 - 04
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European Standing Committee B Debates

Integration of Financial Markets

European Standing Committee B

Wednesday 20 October 2004

[Mr. Nigel Beard in the Chair]

Integration of Financial Markets

[Relevant Documents: Oral and written evidence taken by the Treasury Committee on 16 September and 12 October (HC 1068-i and -ii), on the EU Single Market in Financial Services.]

2 pm

The Financial Secretary to the Treasury (Mr. Stephen Timms): Achieving a single market in financial services in Europe is key to the Lisbon goal of becoming, by 2010, the most competitive and dynamic knowledge-based economy in the world. It holds out the prospect of a more competitive marketplace, more innovation and less-costly products, which is good for customers and competitive providers. In 1998, it was reckoned that a fully integrated European market in financial services would increase the gross domestic product of the European Union by 1.5 per cent. In 2002, London Economics estimated that a single European market in financial services could reduce the real cost of capital by 50 basis points for EU businesses and result in a one-off 1.1 per cent. increase in EU GDP over 10 years. The prize of a genuinely integrated European single market in financial services is substantial.

For the past four years, the EU financial services action plan has been the legislative framework for developing the single market. It was endorsed by the European Council in Lisbon in March 2000, and 39 of the 42 FSAP measures have since been adopted in the EU. Since the start of the year, we have successfully ensured that a number of measures were adopted in a way that reflected UK concerns. The investment services directive has been adopted, including important amendments made by the European Parliament and supported by the UK Government. The transparency directive, which aims to increase transparency on EU capital markets, now includes recognition that mandatory quarterly reporting by firms with shares on EU markets is not necessarily the best way to achieve transparency. That again reflects key UK concerns.

With the legislative phase of FSAP drawing to a close, now is a good time to take stock, learn the lessons of the experience of the past four years and apply those lessons to the next phase of financial services integration. In many cases, FSAP measures have opened up cross-border competition, which is welcome. However, European Union legislation alone cannot secure changes in national custom and practice or overcome barriers caused by, for example, differences in language and culture.

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The view of the Treasury, the Financial Services Authority, the Bank of England and many other member states and people in the industry is that we do not want a second raft of new legislation, which is sometimes referred to as FSAP mark 2. Instead, we believe that new EU legislation should be considered on a selective basis and only when absolutely necessary. We are championing a new, strategic approach to financial market integration in Europe, and our approach is based around five priorities, which I shall bring to the Committee's attention.

The first priority is consistent and effective implementation of FSAP measures across the EU. That must not be viewed as a formality; it is essential if the measures that have been adopted are to have a liberalising impact and if their benefits are to be realised. The principle of effective implementation is at the forefront of the report of the Financial Services Committee, which is in front of the Committee this afternoon and which was endorsed by ECOFIN in June. It was also identified as the top priority by all four of the expert groups of market participants that the Commission convened to consider the next steps.

The second priority is that much greater emphasis must be placed on looking for alternatives to regulations. New legislation should be considered only once there has been thorough consideration of the alternatives to legislation, so that it becomes more of a last resort than it has been until now. Different national legal systems, different approaches to regulation and the emphasis on wholesale as opposed to retail markets all mean that a one-size-fits-all approach to legislating across the European Union cannot always meet the needs of local markets. That view is strongly held by people in the market and throughout the financial services industry. The Financial Services Committee report is right to welcome the important work that the Commission has been doing on non-regulatory initiatives, including tackling state aid and enforcing competition policy.

At times, cost-benefit analysis will show that legislation is needed—I do not exclude that possibility for a moment. When we regulate, we need to ensure that we regulate better, and the third principle in our approach is therefore better regulation. We will make more effective use of analysis to determine whether there is a market failure, and when failure is shown, cost-benefit analysis will be needed to determine whether the benefits of proposed regulation outweigh the costs. There will also be consultation with industry bodies and consumer groups, and competitive testing, building on the principles set out in the joint initiative on regulatory reform developed by the four presidencies—those of Ireland, the Netherlands, Luxembourg and the UK. Those aspects are key, and I am again pleased to say that that approach is reflected in the report.

Ensuring that the Lamfalussy arrangements work well is our fourth priority. They have been extended recently to banking and insurance, and we are seeing some promising developments as a result. They have drawn wide-ranging support from market participants. The report concludes that the

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Lamfalussy committee's recommendations offer a realistic, practical and cost-efficient way to achieve greater supervision between member states while maintaining the competencies of existing national supervisors. The committee also calls for those arrangements to be exploited optimally. I agree wholeheartedly, and I want to take this opportunity to welcome the Lamfalussy banking committee, which will open its offices in the City of London next week.

The fifth priority is recognising the global nature of financial markets. European Union markets are part of a much bigger, worldwide market, which means that the European Union by itself can only ever provide a partial policy response to challenges that are essentially global. The committee devotes a whole section of its report to the global challenges that face financial markets. It rightly emphasises the need to ensure that EU regulatory regimes take account of their impact on the competitiveness of EU financial institutions and centres operating in a worldwide market and the importance of considering global solutions to global problems. The report also notes that the European Union cannot credibly press for liberalisation elsewhere if it also creates new barriers to third country business. I welcome those points.

Those are the UK priorities for creating a single market in financial services following the completion of the FSAP. For the reasons that I have set out, I believe that they are the right priorities. They certainly have the support of participants in the market, and I am pleased that they are fully reflected in the report. Those outcomes have not happened by chance or accident. They reflect hard work and patient negotiation on the part of officials, with both Finance Ministries in member states and European Union institutions in Brussels. They also reflect a great deal of extremely valuable and welcome input from the industry itself. That is a dialogue and relationship that we want to continue and build on as we take matters forward from the current position.

The outcome that we have achieved is considerable, and I hope that the Committee will welcome it.

The Chairman: We have until 3 o'clock at the latest for questions to the Minister. I remind Members that these should be brief, and asked one at a time. There is likely to be ample time for all Members to ask several questions. After 3 o'clock, the Minister will move the motion and the formal debate will open, lasting until about 4.15 pm, when the Minister will sum up.

Mr. David Heathcoat-Amory (Wells) (Con): The Minister has given assurances about better regulation, including cost-benefit analyses, but last week in evidence to the Treasury Committee, Mr. Mullen of the British Bankers Association said that the third anti-money laundering directive is going ahead without any cost-benefit analysis at all. When I queried that, he was adamant that none had been carried out. Why is the Minister giving the usual assurances about better regulation, while introducing directives without any attempt to implement the idea in reality?

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Mr. Timms: It is certainly the case that we are not yet where we believe we should be. What is welcome about the report before the Committee is that it echoes the points the United Kingdom has made about a better approach and a more consistent use of cost-benefit analyses, the production of impact assessments, competitive testing and ensuring consultation with industry throughout the course of negotiating a directive. That has been picked up by the four-presidency initiative that the European Council endorsed and asked to be put into effect. I am pleased to say that we have seen some progress, because recent announcements have been accompanied by the sort of analysis we have called for.

I take the point, and the right hon. Gentleman is right to make it, that we are not yet as far ahead as we would wish to be. We have made some progress, however, and I am pleased that that progress is being encouraged and supported by the Financial Services Committee report.

Mr. Kelvin Hopkins (Luton, North) (Lab): My hon. Friend will detect some scepticism in my remarks. Throughout the documents, I find an undertone of qualification and caution on behalf of the Government and others. Is it possible that if the process of integration and harmonisation were pursued as the European Commission sees it, it could damage the strength of London as a financial centre, which is doing very well as a global centre? Would we see a drift of business to Frankfurt?


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