Select Committee on European Union Forty-Fifth Report

CHAPTER 5: the fsap in a global context

105. The degree of fragmentation in the European capital market still compares unfavourably with the US. In theory, the FSAP should encourage greater convergence and integration and, in time, competitiveness. But there is a careful balance to strike in regulating financial services. The FSAP may equally undermine the competitiveness of the European market if, for example, legislation hinders the development of some markets or drives them abroad[64].

106. The FSAP is essentially a European mechanism to bring about the creation of an internal market in financial services across the European Union - but in the nature of the global economy, whatever happens in Europe is bound to have repercussions in the major financial services markets elsewhere, most notably in the United States of America [Q. 520].

107. The three most important equity wholesale sectors are London, New York and Asia-Pacific (Tokyo/Hong Kong/Singapore). The most important debt markets are centred in London, New York and Luxembourg. Europe is also an essential time zone in the global economy. The most important retail financial industries can be found in those countries with high disposable incomes and an appetite for sophisticated products, for example, the United States. Continental Europe has lagged behind the UK in its appetite for equity investment in pension funds which is reflected in the relative sizes of the stock exchanges.

108. Many of the witnesses, particularly the UK witnesses, expressed concerns that there had not been a sufficient awareness of the global aspect among legislators, particularly from those Member States that had not traditionally been exposed to the international capital markets. Clearly, a Member State that has financial services primarily concentrated in the retail sector, will be less concerned with international capital movements than those Member States that participate actively in the global financial services markets.

109. It is important that as Member States implement the measures constituting the FSAP, they should be aware, individually and collectively, of the need to remain competitive when measured against New York or the Asia-Pacific centres.

EU/US Dialogue

110. The Commission was aware of the need to manage EU/US relations both at a political level and in the construction of a single market. In his written evidence to the Committee, the Commission's Internal Market Director noted that:

"therefore it is very important in parallel with the construction of a convincing European system to keep a clear eye on the transatlantic angle[65]".

The Sarbanes-Oxley Act 2002

111. Referring to the American reaction to the Enron scandal - the introduction of the Sarbanes-Oxley Act 2002, Dr Schaub said:

"the lesson to be learned from it is that we have to make sure that we do not ignore the transatlantic/global dimension but keep one eye on our internal process and, in parallel, work on the international prolongation" [Q. 320].

112. The Committee has already sought to monitor the impact of the US Sarbanes/Oxley Act in relation to the issue of reinforcing the statutory audit in the EU[66] and the need to register EU audit firms in the US. The Minister of State at the Department of Trade and Industry wrote

"our understanding is that a constructive dialogue is taking place but that it is too early to speculate on the outcome with confidence[67]".

113. In her evidence to the Committee, the Financial Secretary to the Treasury confirmed that the Government had sought to help establish and to promote a dialogue between the EU and the US in order to broaden and deepen discussion and to make it more forward-looking and proactive [Q. 516].

114. The Committee is encouraged that the Government has been actively engaged in current discussions between the EU and the US and strongly supports the Commission's role in encouraging a transatlantic dialogue. Inevitably, a single European market in financial services could provide a major challenge for New York. The dialogue will have to be handled carefully but the benefits to the global market in financial services are so great that any form of protectionism on either side of the Atlantic should be eschewed.

US Protectionism?

115. The Federation of European Securities Exchanges (FESE) was critical of the unilateral way in which the US had acted in the context of the transatlantic capital markets, in particular, in denying access to the United States of foreign trading screens. The FESE argued that the issue was essentially one of protectionism and a refusal on the part of the Americans to recognise the separate European regulatory authorities. Attempts to engage the United States in dialogue had, according to the FESE, only been partly successful [Q. 373].

The Position of London

116. The Committee also considered the consequences of FSAP legislation on the markets located in the City of London. We found that UK witnesses were mostly nervous fearing that the implementation of the FSAP would be slewed by political negotiation and that this would adversely affect the very large and vibrant capital markets that have emerged in London[68]. Witnesses also felt that the capital markets located in London were regarded by other Member States as a UK asset rather than as a resource that benefited EU industry as a whole and that, as a result, attempts were being made to use the legislative tools of the FSAP to "repatriate" business to other Member States[69]. Other witnesses thought that the FSAP's attempts to harmonise regulation would prove burdensome and have the effect of driving away non-EU business[70].

117. Continental witnesses tended to see things differently. Mr Michel Prada, Inspecteur Générale des Finances, Ministry of Economic and Financial Affairs, argued that:

"the City of London is old, strong and rich and open and innovative enough not to worry about the consequences of financial integration in Europe".

118. This is a view echoed by the Federation of European Securities Exchanges who thought that the removal of barriers to cross-border trades could only benefit those service providers (in the UK and elsewhere), who understood and implemented the play of competition better than others[71] - a view supported by a UK witness, ProShare[72].

119. We believe there has been increased awareness in other Member States about the importance of the London markets to the EU economy as a whole. Nevertheless, there are still, in part, residual, protectionist inclinations. These come more clearly to the fore in the Council rather than in the Commission or the European Parliament as was evident by the vote in ECOFIN on 7 October 2003.

120. We were heartened by the catalytic effect that CESR has had in the implementation process that has led to an increasing awareness of the different systems that need to be brought into some form of harmony. We gained the distinct impression from our discussions with witnesses in Brussels and Paris that the views expressed by some of the UK witnesses may well have applied in the early stages of the FSAP but that there had been, in the intervening period, a change in attitudes as the complexity of regulating these sophisticated markets was borne in on the national regulators and finance ministers in other Member States.

121. The Committee recognises the fears of the practitioners in the UK market. London is, undoubtedly, successful and this attracts both admiration and envy from less successful markets. A single market in financial services can only be to the benefit of an efficient and competitive dominant market player. Nevertheless, it will be important for the Government and the financial services industry to monitor closely the implementation of Directives as the Lamfalussy process evolves and to be prepared to intervene at an early stage if EU legislative proposals contain elements that might seriously inhibit the ability of the markets in London to continue to attract non-EU issuers and participants.

64   Written evidence from the Royal Bank of Scotland - Page 217, paragraph C3. Back

65   Written evidence from DG Internal Market - Page 94, paragraph 4. Back

66   Chairman of the Select Committee on the European Union's letter of 18 September 2003 to the Department of Trade and Industry - Doc 10739/03 Communication from the Commission: Reinforcing the statutory audit in the EU. Back

67   Letter from the Rt. Hon Jacqui Smith MP dated 7 October 2003 to Lord Grenfell. Back

68   CEBR-City's importance to the EU economy (Jan 2003). Back

69   Written evidence from LSE - Pages 1 and 2, paragraphs 6 and 7; written evidence from Michel Prada - Page 208 and written evidence from Lachlan Burn - Page 77, paragraph 3.3. Back

70   Written evidence from LIBA - Page 16, paragraph 11. Back

71   Written evidence from FESE - Page 110. Back

72   Written evidence from ProShare - Page 35, paragraph 16. Back

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