Select Committee on European Union Forty-Fifth Report


By the Select Committee appointed to consider European Union documents and other matters relating to the European Union.




The Desirability of a Single Market in Financial Services

We, and our witnesses, agree that a single market in financial services would benefit the European Union and the United Kingdom. It should lower the cost of capital and borrowing, increase the range of choice for borrowers and investors and ought to provide protection for the investor/consumer.

The Financial Services Action Plan (FSAP)

The FSAP provides a major impetus towards the creation of an internal market but it raises many important issues. We recognise that deadlines are important to achieve political milestones but we do not believe that they should be the determining factor. Quality of legislation is vital. Financial markets carry an inherent systemic risk. Over-regulation could stifle innovation and lead to higher costs.

There will be major burdens for the Commission, the Committee of European Securities Regulators (CESR), Member States and Companies in transposing the framework regulation. We do not think that the extent of the potential burden has been fully recognised.

The Global Context

It is essential that any changes to the regulatory system in Europe take account of the global nature of financial markets. Business can move elsewhere. We think this must be a key criterion against which to test all proposed EU regulation.

The Position of London

London attracts envy and admiration in other Member States. There has been a misunderstanding about the nature of the financial markets located in London. They are not an exclusive UK asset. London is a global market not a national one; it should be regarded as a EU asset. If over-regulation or poorly drafted legislation drives business away from London, it will not go elsewhere in the European Union but to international markets where the regulatory touch is lighter.

The Investment Services Directive (ISD)

The Council decision on 7 October 2003, when the UK and four other Member States were outvoted, represents a step backwards. We urge the Government to make every effort to achieve an acceptable outcome.

Implementation and Enforcement

The Lamfalussy process is designed to accelerate the creation and subsequent implementation of framework legislation and to provide appropriate detail and guidance for industry. There is tension at the heart of this system between the light touch need for flexibility and the desire and intention of the regulators to achieve as much harmonisation as possible in order to bring about a level playing field.

Abstract (continued)

Parliamentary Accountability

We support a "call-back" requirement for legislation at Level 2 to be scrutinised by the European Parliament. The Lamfalussy process relies on comitology to accelerate the implementation of legislation but this must not be accompanied by a loss of parliamentary accountability.

A Single European Regulator

While the Lamfalussy process faces enormous challenges, we believe that it must be given time to see if it will work effectively in providing the regulatory framework that will enable a European single market to flourish. We found no support for the concept of a single European regulator.

Clearing and Settlement

Although not part of the Financial Services Action Plan there is a need for a Europe-wide, cross-border, efficient and effective clearing and settlement system. We did not examine this in detail and cannot make a recommendation for a specific means of achieving this. We support the Giovannini process. We urge the European Union at all levels to consider quickly whether legislation is required or whether the markets can create a pan-European, cross-border clearing and settlement system without the need for EU legislation.

International Accountancy Standards (IAS)

Negotiations on these are moving ahead and the International Financial Reporting Standards (IFRS) are due to be implemented in 2005. It is essential that the remaining difficulties (on IAS 32 and 39) be resolved soon and that mutual acceptability be achieved with other international systems such as the United States Generally Accepted Accounting Principles (GAAP).

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