Select Committee on Constitution Sixth Report


APPENDIX 7: Committee Visit

Summary of evidence taken by the Committee in Brussels Wednesday, 29 October 2003

Meeting with Mr. Jurgen TIEDJE, DG "Internal Market"

Mr Tiedje is Secretary of the European Securities Committee and desk officer for the "Transparency Directive" under the Lamfallussy procedure. He has worked on Securities markets in DG Internal Market since September 2001 and has worked in the Commission for 11 years.

Financial Services Action Plan (FSAP)

As part of the Lisbon agenda to make the EU the most competitive economy in the world by 2010, it had been agreed by the Council that the FSAP would be completed by 2005. Cross-border trade in equities had increased by 25% each year from 1996 to 2001. The need for a single market in financial services had become even more important with the introduction of the Euro.

Of the 42 initiatives of the FSAP, 38 had been completed, and the remainder should be completed by April 2004. The deadline for implementation was 2005. This was very rapid, especially compared to an earlier series of financial measures which had been discussed throughout the 1990s without reaching a conclusion.

This progress was partly a result of the Lamfalussy procedure: first the Council agreed a policy; second the Commission worked out the technical details under the comitology process; third the measure was implemented consistently through the Council of European Securities Regulators (CESR); and finally the measure was enforced. The third stage was still in embryonic form and the fourth was not yet developed. The first directive needed to be implemented by October 2004.

The Commission prepared a formal draft directive only once it had obtained technical advice from CESR—the Financial Services Authority (FSA) was the UK member. A qualified majority of National Ministry Supervisory Authorities (the Treasury for the UK) was then needed to adopt the draft. (The European Parliament was only consulted during this process. It had asked for the same rights as the Council, but this had been refused. The current system was, however, due for renegotiation in 2007.) The directives thus balanced the views of the regulators (whose role was to defend investors and market participants) with the views of the national ministries.

Consultation

Mr Tiedje said that the Commission consulted extensively. They had issued written consultations and held hearings for both the Investment Services Directive and the Transparency Directive. Consultation helped the Commission to identify the main issues and resulted in a gain in time later in the process. However, market participants often under-estimated the tight deadlines to which the Commission was working.

Mr Tiedje agreed that there was no real consultation of small retail investors as opposed to institutional investors. His unit was setting up groups of experts, but consumer representation was hard to achieve as they tended to have no expert knowledge and their demands were often unrealistic. He commended the FSA's system of industry and consumer consultative panels.

In response to the claim that the Commission was trying to do too much too quickly, Mr Tiedje reaffirmed the improvement in consultation procedures, for example by consulting industry experts before a consultation paper was issued. The amount of consultation was driven by the FSAP deadline of 2005—consultation was expected to reduce thereafter.

Regulatory Impact Assessments (RIAs)

RIAs, both ex ante and ex post were becoming systematic. The call for cost-benefit analysis of regulatory decisions was coming from the UK, but this would be difficult and expensive to do over 25 Member States—were it to be required it would paralyse the Commission. Assessing costs relied on information from market participants

Subsidiarity

The Commission looked for maximum harmonisation in some areas, such as the use of International Accounting Standards (which had been asked for by industry) and the Prospectus directive, which would ensure the automatic mutual recognition of prospectuses. In other areas the Commission sought minimum harmonisation: rules to prevent market manipulation and insider dealing were set by the Commission, but methods of implementation and enforcement were left to Member States.

Accountability

The Commission was ultimately responsible to the European Parliament and the Council, although Member States were accountable for the implementation of directives.

CESR used peer pressure to enforce implementation of directives, which could ultimately be enforced by the Commission. However, the Commission relied on joint working with CESR and Member States to police implementation. Of the complaints received, about 5-10% went to court and the Commission won 90% of cases. With enlargement, however, it was becoming more important not to win cases but to avoid them by increasing co-operation with CESR and Member States.

Consumers did not have direct right of challenge but could complain via the national regulator (the FSA for the UK) to bring matters to the Commission's attention.

National Regulatory Authorities

In the UK, as in Germany, Austria and Ireland, the National regulator was unified (e.g. the FSA). In the Netherlands, however, they adopted a functional approach with one authority for banking, another for consumer protection and so forth. In 2001 there had been 40 regulators for 15 member states. The trend was now towards having one national regulator per member state. National regulators could engage better with CESR to improve the development and implementation of policy.

Meeting with Mr. Dominique RISTORI, Director, DG "Energy & Transport"

Mr Ristori is the Director responsible for General Affairs and Resources covering Financial Resources; Human resources, training and IT; Interinstitutional relations, enlargement and international relations; Internal market, public service, competition and user's rights, and Information and communication.

Competition policy in Energy and Transport

Mr Ristori noted that energy and transport were two public service sectors that directly affected citizens. Previously both sectors had been controlled by monopolies but a turning point had been reached (particularly in energy) with the introduction of liberalising directives which were part of the programme to complete the single market.

The Commission initiatives required to install a proper legal framework had to be complemented by other initiatives which sought to change mentalities and promote harmonisation, particularly through the use of regulatory forums. The European Council of Energy Regulators formed in 2000 was a case in point, building on twice yearly meetings in both electricity and gas since 1998. The European Association of Transmission Operators also played a vital role. The Barcelona European Council 2002 addressed the finalisation of the internal energy market, and had agreed to open the energy market completely by 2007.

In effect, the Commission was incorporating a competition policy for utilities and network industries which had been first developed most fully in the UK. In preparing for these initiatives, representatives of industry and consumers had played an important part in helping to decide on the requirements, and to identify whether new European laws were necessary. This process of engagement was vital to achieve accountability, legitimacy and consent.

Public service obligations and competition

Mr Ristori stated that there was no necessary connection between black-outs and liberalisation. Regulators were equally concerned with competition and security of supply; this needed to be explained to the public, given consequences such as improving cross-border planning, information flows and procedures, and reinforcement of grids. Equally, the Commission recognised a third element of regulatory protection—social needs. Europe was not, therefore, following the United States model: there was a distinctive European model. Key elements of social policy (universal service, protection of vulnerable groups) were written into directives, but the details of implementation were left to Member States and national regulators. The Commission was pragmatic, seeking ways to integrate public service obligations with a pro-market stance. The whole endeavour was premised on the benefits to customers and citizens.

The growth in the EU to 25 Member States meant that there would be a continued need for regulation and for it to be independent of government, albeit fully accountable. The objective was to have 'competent' authorities in place (that is, political credentials alone were insufficient). The objective was effective competition—competitive prices rather than lower prices per se, although this could result as long as security of supply was achieved. One policy was to disengage gas from oil prices because oil prices were mainly set by a cartel. Reducing cartel power could be achieved by the EU using its negotiating power to demand greater transparency—the EU was the largest importer of energy in the world.

Public Consultation

Good regulation in the hands of competent authorities was the key to confidence building in liberalisation, but involved initiatives such as the 'Passenger Charter of Rights'. The absence of user representative bodies across Europe was recognised by the Commission. BEUC did not have the capacity to generate all the necessary responsible dialogue, and trade unionists were not true user representatives. The Commission wanted to facilitate developments in this regard and a new initiative was forthcoming, based on working through member states to promote and invite representative bodies to participate.

Co-ordination and harmonisation

Co-ordination was seen as essential to the development of the internal energy market (with reference made to the recent 'black-outs' in Italy). Harmonisation consistent with subsidiarity principles could result. The Florence conference had identified two common competencies for the EU: (i) fair access based on non-discrimination and (ii) control of the methodology for tariffs. Co-ordination of 'congestion management' was particularly important, and the policy was to reach the level of 10 % of electricity capacity on European interconnection to underpin security of supply.

If co-ordination and harmonisation led to acceptance of the need for pan-European regulation, then accountability would require a supervisory role for the European Parliament. Accountability of regulators to member state parliaments did not compromise independence, but helped to instil the right attitude in regulators and enabled them to be a permanent bridge between the technical and political realities.

Meeting with Mr. Alexander WILLAN, DG "Information Society"

Mr Willan has worked since 1999 in the Unit which deals with the implementation of the EU regulatory package for electronic communications (including telecommunications) and is the desk officer responsible for following implementation of the new framework in the UK. Prior to this, he worked to develop the EU regulatory framework for postal services.

The Regulatory Model

Mr Willan said that the UK and Finland were among the first countries to liberalise telecoms. Oftel had been very successful: it had a good reputation for independence and had anticipated events in most other Member States. The success of the independent regulatory model in the UK had helped to remove doubts about its effectiveness in other countries.

The key attributes of a National Regulatory Authority (NRA) were independence, impartiality and transparency. In holding the balance between the market and consumers regulators had to consult at both national and EU level and make clear their reasons for their decisions. The BRTF 5 Principles of Better Regulation informed the legal framework, but the principles themselves could not easily be enforced.

Appeals

The best accountability, however, was legal: the Commission had established a transparent legal framework regulating electronic communications which promoted the consumer interest, for example, with regard to universal service provision. The framework required dispute resolution procedures, but also established the principle of allowing appeal to independent bodies both on the merits of NRA decisions as well as on due process.

In terms of making this appeals system work, the framework only set objectives and principles: it was up to Member States to implement the administrative procedures. To prevent vexatious legal challenges, however, any NRA decision should in principle stand pending appeal. Consumers should not initially refer complaints directly to the Commission, but should first seek recourse at national level, particularly through NRAs.

Consumers

The Commission was reluctant to distort competition, even where it resulted in outcomes consumers did not like. The EU regulatory framework for electronic communications was based on minimum regulatory intervention and favoured the promotion of competition. In the case of the opening up of directory inquiries services in the UK, customer dissatisfaction was due to the poor quality of service from some providers. There was no regulatory solution to this problem; this was part of the bedding-in process. The EU could only create and enforce a level playing field for competition. Competition would eventually remove the poor providers and there would be long-term benefits.

Co-ordination

The Commission brought regulators together through the new Electronic Communications Framework. The Communications Committee involved Member States and NRAs in general discussions; the Committee had to be consulted before the Commission could adopt recommendations; and the Committee had a formal consultative role where the Commission vetoed measures taken by an NRA to implement directives.

In addition the Commission facilitated the European Regulators Group: this had no formal legal powers but was a discussion forum which could assist compliance through the exertion of peer pressure. The Radio Spectrum Committee was a specific group which was consulted by the Commission on harmonisation proposals for spectrum use.

In terms of promoting regulatory good practice, the Commission had issued a communication, but could do more.

RIAs

RIAs were part of the legislative procedure but were not given priority. There were, however, requirements for financial impact assessments, and the process of consultation and market analysis also identified potential costs. The directives establishing the electronic communications framework also contained provisions for the Commission to review the economic impact of implementation measures adopted.

Economic and Content Regulation

Economic and Content Regulation were often hard to separate in practice. There could be an advantage in one body considering both, but the nature of the activities was different. Content regulation was highly political, and there could be a risk that political considerations could spill over into areas of economic regulation.

Meeting with Mr. Emil PAULIS, Director, DG "Competition"

Mr Paulis has extensive experience in working in DG Competition in relation to Mergers, Legislation and relations with Member States. He is Director of Policy Development and co-ordination.

The dual nature of DG Competition

Mr Paulis spoke about the dual nature of DG Competition as both a law-making and a law-enforcing body. The Competition Commissioner (currently Mario Monti) had a special remit to conduct investigations to enforce competition law. The final outcome of any investigation, however, was made as a collegiate decision by the Commission as a whole. As the Commission had no budgetary power in these areas there was no conflict of interest: the Commission was independent. In theory any Commission decision to overturn the conclusions of DG Competition would not be made public; in practice events were often leaked to the press. This was an additional encouragement for the DG to operate in a transparent manner.

The advantage of this 'administrative justice' was that companies could discuss cases with the DG in advance. They could also criticise decisions and help the Commission to avoid repeating mistakes: following the Airtours decision, the media outcry helped to bring about reform within the DG. By contrast advance discussions with judges or criticism of their decisions were not permissible. There were advantages to both Judicial and Administrative justice: the key factor was the quality of the people involved.

Once the Commission had taken up a case, the Member State no longer had competence. The case would go to the ECJ if appealed.

Scrutiny of the Annual Report

The DG published an annual report and a forward plan. The Commissioner was called to give evidence on these every year by the Economic and Monetary Affairs Committee of the European Parliament. The Committee would then adopt the annual report together with their own recommendations. The Commissioner then replied to explain his position and his reaction to the recommendations.

Consultation

The DG consulted constantly with Member States. Advisory Committees met every week to discuss draft decisions. These Committees produced an opinion which was sent with the draft decision to the Collegiate Commission. This culture of co-operation had often led to changes in draft decisions. The European Competition Network obliged the Commission to consult Member States, but also vice versa.

Ninety-nine per cent of consultation took place with industry. Consumers were hard to access as they were not organised, had little expertise, and there was little incentive for an individual to respond to consultations. This gap was filled by the civil service impartiality of the Commission itself which took on the role of consumer champion to ensure a balanced view.

Decentralisation

Decentralisation had led to more work for the Commission, not less. The Commission gave general guidance on competition law; all draft decisions by Member States had to be notified to the Commission; and from 1st May the Commission was obliged to help the judges of Member States with specific queries in the field of competition law. This last obligation was potentially an enormous increase in workload.

Decentralisation did, however, result in faster decisions. The system of notification would have to end, and enforcement would be left to Member States. Local enforcement had the further advantage of greater acceptance of legal decisions.

Enforcement

Private legal action was essential to the enforcement of competition law—no central authority could be as effective. In the US companies feared private cases far more than actions brought by the state. This was because, if proved, losses were multiplied by three, punitive damages could be awarded, and costs were always awarded against the defendant. By contrast, in the EU it was almost impossible to be successful, although there were now some private actions in the UK (for example against the directors of Equitable Life).

It was theoretically possible that the Commission could have to pass judgment on itself as a regulator. However, Mr Paulis was strongly against the idea of a separate European Competition Agency. To ensure balance between Member States it would have to constitute itself as a mini Commission with representatives from all Member States. An Agency would be subject to strong political pressure. He would prefer a judicial system to a separate Competition Agency. As it was, the Commission gave judgment based on a European outlook, and did not take account of national interests.

Meeting with Mr. Tom Jenkins, Senior Adviser, ETUC

Mr Jenkins has only recently moved to ETUC. Prior to this post he worked for the TUC in the UK dealing with European issues.

Consultation

Mr Jenkins spoke about his experience in Brussels and Whitehall. In general the Commission was more open and consulted better. Formal structures such as the Economic and Social Committee advised the Commission and other institutions; there were a range of tri-partite Advisory Committees; and there were special procedures under the treaties for input by Social Partners on aspects such as Health and Safety legislation (for example with respect to the new Chemicals policy). There was also considerable informal discussion with the Commission. The Commission, however, usually ended up reflecting the views of Governments.

The ETUC would like to be consulted not just on labour market issues but on wider matters such as company law. The takeover directive would have a significant impact on workers but they had not initially been formally consulted. The ETUC was sometimes seen as a subsidiary body of DG Employment and Social Affairs. On social policy the ETUC had an impact, but this was less in other areas where they had to rely on lobbying the European Parliament and the Council.

The Executive Committee of the ETUC was formed by the leaders of national TUC bodies: their views were thus representative of their national members. The ETUC could also claim to represent the wider community as individual members often represented families. Their views also often coincided with those of consumer groups, and they worked with NGOs on specific issues: this was often more successful than working with general consumer groups (such as BEUC).

Role of the ETUC

The ETUC had difficulty in responding to all the consultations issued by the Commission as they only employed a small number of people. Much was left to national TUC bodies with offices in Brussels. The ETUC did, however, seek to harmonise the approach of national TUC bodies, and represented them before the institutions.

The ETUC in Europe, and the TUC in the UK, lobbied on specific pieces of legislation but not so much on decisions taken by regulators fulfilling their functions. Complaints were made to the Commission where governments were in breach of their obligations under EU law, and cases had been taken to the court.

Accountability

The Commission was gradually becoming more accountable to the European Parliament (although its drift to a free market ideology, driven by the Council, was not welcomed by the ETUC).

Citizens generally were not well-represented directly, except through the advisory Economic and Social Committee. Politicians had the main role in representing the interests of citizens. The Committee of the Regions had not been as successful as had been expected, and there had been tension between their representatives and the constituency representative to the European Parliament... Ombudsmen also had a role in protecting the consumer interest.

There was a balance between independence and accountability. The ETUC would like the European Central Bank to be more accountable, but there were at least procedures for dialogue with social partners which had no equivalent in the UK. Openness and transparency were vital to effective accountability.


 
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