15 FINANCIAL SERVICES
(27004)
13884/05 + ADD1
SEC(05)1398
| Commission staff working document: Cross-border consolidation in the EU financial sector
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| Legal base | —
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| Document originated | 26 October 2005
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| Deposited in Parliament |
17 November 2005 |
| Department | HM Treasury
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| Basis of consideration |
EM of 28 November 2005 |
| Previous Committee Report |
None |
| To be discussed in Council
| March 2006 |
| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
15.1 In September 2004 the ECOFIN Council asked the Commission
to examine possible explanations for the perceived low level of
cross-border consolidation in the Community's banking sector by
reviewing obstacles to cross-border mergers and acquisitions so
as to identify possible internal market failures, gaps or shortcomings.
The Commission extended this remit to consider cross-border consolidation
in financial services as a whole.
The Document
15.2 This document is a Commission working document identifying
the key obstacles to cross-border consolidation in Community financial
services. It is based partly on evidence from a public survey
directed at market participants by the Commission in April 2004.
15.3 The first part of the paper examines trends
in cross-border consolidation in the Community between 1999 and
2004 by comparing financial sector mergers and acquisitions with
non-financial sector mergers and acquisitions, domestic mergers
and acquisitions with cross-border mergers and acquisitions and
by looking at the geography of cross-border deals in this period.
The paper finds that cross-border consolidation in the financial
services sector in the Community is:
- less advanced than in other
sectors;
- more advanced in securities and post-trade activities
than it in institutions (banks, insurance companies and conglomerates);
- weaker cross-border than at the domestic level,
where deals are significantly larger; and
- taking place in regional clusters with large
capital flows into new Member States.
It concludes that "cross-border restructuring
is therefore not at a stage where it can lead to genuine pan-European
institutions".
15.4 The second part of the document is based on
the public survey on obstacles to cross-border consolidation.
The main obstacle to cross-border consolidation cited by more
than 80% of respondents was the lack of potential fixed cost synergies
resulting from a deal. The lack of cost synergies is seen to arise
from a number of factors according to the size and corporate structures
of organisations. The impact of other barriers is also considered
to be size specific, for example:
- larger institutions (with assets
over €100 billion) focused on obstacles related to the consequences
of supervisory requirements including the constraint of multiple
reporting requirements, divergence in supervisory practices and
the complexity of the supervisory approval process;
- small and medium sized institutions (assets less
than €100 million and between €100 million and €1
billion) cited consumer and employee negative perception of foreign
entities; and
- small institutions primarily identified the main
obstacles to cross-border consolidation as multiple reporting
requirements, difficulties in selling the same products across
countries — in particular due to tax differences, legal
impediments to corporate expansion and reorganisation —
resulting from differing taxation schemes for dividends or exit
taxes on capital gains, inter-group VAT — due to its partial
non-recoverability — and differences in consumer protection
rules and private law.
15.5 This section also considers responses in the
context of corporate structure. For instance share capital institutions
cited obstacles related to the overall environment of cross-border
transaction such as political interference, misuse of supervisory
powers and limits or controls on foreign participation and to
organising their business functions on a cross-border basis such
as employment legislation, legal structures rendering effective
merger or acquisition impossible and inter-group VAT issues. As
for cooperative and savings institutions, they focus mainly on
product- and reporting-related obstacles. But both groups also
cite employees' reluctance, cooperatives also cite consumer mistrust
and savings institutions taxation on dividends. Responses are
also examined in this section in terms of previous experience
of cross-border mergers and acquisitions noting the emphasis on
different obstacles placed by those institutions which have completed
a merger or acquisition and those which have failed to complete
or have decided not to attempt a merger or acquisition.
15.6 In the third part the paper suggests a range
of future options for discussion as a means of breaking down the
obstacles identified. It does not propose any policy action, but
rather suggests that further discussion should take place at a
political level. Issues identified for further discussion are:
- improving Community supervisory
structures and the supervisory review process for cross-border
consolidation;
- the legal impediments to corporate expansion
and reorganisation;
- difficulties in selling the same products across
countries;
- political interference and the misuse of supervisory
powers;
- legal obstacles to consolidation; and
- the consequences of perceptions of Community
foreign entities by managers employees and consumers.
The Government's view
15.7 The Economic Secretary to the Treasury (Mr Ivan
Lewis) says that this document is meant as preparation for a political
debate and thus has no current direct policy implications for
the UK. He tells us that initial discussions in the Council's
Financial Services Committee suggest a consensus that the Commission's
work needs much more analysis and that if the Commission proposes
policy action on the basis of this work, it should be in line
with the principles of better regulation.
15.8 The Minister also says the Treasury will consult
informally with market participants on the issues and would carry
out formal consultation on any official Commission proposal which
may emerge.
Conclusion
15.9 This document gives a preliminary indication
of matters on which the Commission may in time decide to propose
action, legislative or otherwise. Naturally we would examine such
proposals in due course, having regard, as the Minister implies
the Government would also, to the principles of better regulation.
15.10 Meanwhile we clear this document, but invite
the Treasury Committee to take it into account in its current
inquiry into European financial services regulation.
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