Memorandum by the Centre for European
Policy Studies
EXECUTIVE SUMMARY
While we are generally positive on the functioning
of the single market, we found it difficult to make in short an
overall evaluation of the functioning of the single market. We
have therefore preferred to focus on two sectors on which we feel
we are capable to make a well-informed judgment: financial markets
and telecommunications.
Within the area of financial markets, progress
has been enormous over the last years, and has evidenced new priorities:
the integration of retail financial markets and the strong monitoring
of free competition. As regards telecommunications, some issues
still need to be tackled in order to achieve a single market for
electronic communications in Europe. More detailed reports on
those subjects are available on the website of CEPS.
1. A SINGLE FINANCIAL
MARKET
The EU has made enormous progress in creating
a more integrated financial market over the last years. Years
of work at the regulatory and supervisory level have resulted
in a more integrated, sound and market-based financial system.
The introduction of the Euro has certainly been one of the major
factors in increasing the attractiveness of the European financial
market, as the year 1999 is a clearly distinguishable trend break.
The Financial Services Action Plan (FSAP), launched in 1999, had
the clear benefit of raising the awareness of the issues at stake,
and of putting Brussels on the map in financial regulation Worldwide.
The adoption of the "Lamfalussy" approach in 2001 has
resulted in a much stronger degree of cooperation amongst supervisory
authorities.
We will in this brief overview discuss the current
state of adoption and implementation of the FSAP, its impact on
markets and institutions, the remaining problems and barriers,
and some future priorities.
Current state of adoption and implementation of
the FSAP
The EU managed to stick to its timetable regarding
the adoption of the FSAP, as by the end of 2005, 39 of the 42
measures were adopted, and in the meantime, another two measures
followed, meaning that only one measure remains outstanding, which
is of lesser importance, and will probably be withdrawn. According
to the latest league tables published by the European Commission,
the implementation of these measures is progressing steadily,
and almost complete. More than 90% Directives for which the deadline
of transposition was passed were implemented (as of 15/06/2007).
The European Commission has certainly learned from the after 1992
period, when it failed to monitor implementation sufficiently.
It now publishes implementation league tables on a very regular
basis, and does not wait to warn member states when they are behind,
or to start infraction procedures, if needed, even in an EU of
27 member states. The now well established structure of cooperation
amongst supervisory authorities is also useful in this regard,
as the regular meetings of the different Committees is an opportunity
for the European Commission to exercise peer pressure and remind
those member states which are behind.
One of the most important measures of the FSAP,
the Market in Financial Instruments Directive (MiFID), remains
a weak spot, as most members were behind on the implementation
deadline of 31 January 2007, a fact that may negatively impact
the preparedness of firms, which have until 1 November 2007 to
be in line. MiFID will also be critical in enforcement, as it
introduces a totally new concept in legislation, "best execution"
of securities transactions, which will be a challenge to monitor
for supervisory authorities. This contrasts to the implementation
of the new but complex Basel Committee framework for the capital
requirements of banks in the capital requirements Directive, which
was done in time, this is January 2007, by most member states.
Enforcement remains a challenge for the European
Commission, even more in an EU of 27 member states and of close
to 500 million citizens. Financial markets are evolving extremely
rapidly, and new financial products are introduced at an accelerating
speed, sometimes urging member states to take legislative measures
which are not in line with EU law. Hence, the problem is to constantly
follow developments in 27 member states and check the consistency
with EU law.
The European Commission has also stepped up
its actions in the area of the application of EU competition policy.
It has started inquiries on the functioning of the single market
in retail banking, insurance and the credit card sector.
Market impact
European financial markets and institutions
have realised a remarkable growth over the last years, which can
be called historic. On several indicators, the EU has realised
a remarkable growth, and has in some sectors even overtaken the
United States. Whether this is due to the single market measures
and the FSAP is difficult to say, but it is certain that the creation
of a much larger single currency zone, and probably more adapted
monetary policy have played a positive role. It is also clear
that some measures, which were seen to be too burdensome, did
not have a negative impact on the markets, on the contrary.
Over the last 10 years, bond issuance more than
doubled, equity market capitalisation tripled and equity market
turnover and the total amount of derivatives contracts written
increased six-fold in the EU. Total corporate bond issuance has
overtaken the US, whereas the value of bonds outstanding as %
of GDP has come very close to the US figure. Most historic is
probably that the initial public offerings (IPO) market has overtaken
the US as well in number as in total volume since 2005, albeit
with a dominant role of the London Stock Exchange (LSE).
A clear impact of the successful completion
of the FSAP is that it has put the EU, and in particular the European
Commission, on the map in financial regulation. The European Commission
is recognized at international level for its role in financial
regulation, and is now consulted by regulators and market participants
from all-over the world. Specifically with the regulatory authorities
of the United States, the European Commission has started a regular
regulatory dialogue in 2002, in which it has managed to come to
tangible results, easing market access on both sides. Example
are the equivalence of rules for auditor oversight (March 2004)
or the equivalence of accounting standards (April 2005 and 2006)
for issuance on each others capital markets, on which a roadmap
was agreed.
Remaining barriers
Two remaining barriers stand out: the very limited
integration of retail financial markets in the EU, and the concentration
and scale enlargement effect of the single market, reducing market
access for small and medium sized financial institutions.
The EU has recognized the importance of integrating
retail financial markets, in some measures which have been proposed
in the context of the "post-FSAP", and in actions undertaken
by the European competition policy authorities. Measures undertaken
in this context can be expected to have a positive effect, but
it is too early to make any definite statements. It is sure, however,
that regulatory measures alone will not help to create a more
integrated retail financial market, but that investigation by
the European competition policy authorities are needed to detect
cartel-like behaviour, abuse of dominant position and price sitting
arrangements.
The latter actions are also needed to maintain
the contestability of European markets. One of the side-effects
of FSAP is that it has increased the regulatory burden, which
is on average more costly to absorb for smaller firms as compared
to larger ones. This has for example recently been proven in several
studies on the implementation of MiFID. The effect is then that
smaller firms are sold to larger groups, or that they disappear.
Another effect is that the creation of new banks or brokers becomes
more difficult.
Another often mentioned barrier is the clearing
and settlement of securities transactions. Whereas these systems
function effectively at national level, costs for cross-border
transactions are much higher, hampering market integration. The
European Commission has pushed the industry to implement a self-regulatory
code of conduct to increase price transparency and interoperability,
as a last resort to avoid a European Directive. The problem is
however that there is no harmonized regime for clearing and settlement
organizations in Europe, which means that basic rules differ from
member state to member state. In addition, there is the initiative
from the European Central Bank (ECB) to create a monopoly for
securities settlement, the Target 2 Securities project, which
according to our view goes in the opposite direction of the intentions
of the European Commission to bring more competition in the market.
A final remaining barrier is the cooperation
between authorities. While much progress has been achieved over
the last years through the creation of the "Lamfalussy"
type Committees, such as the Committee of European Securities
Regulators (CESR) or the Committee of European Banking Supervisors
(CEBS), the problem is that these committees have only advisory
powers, nothing more. In the context of growing market integration,
it may be useful to formalize the role of these committees, and
to allow them to mediate between supervisors, or to delegate supervisory
powers between the member states. Related to this is that more
attention is needed (and a budget) for the creation of common
supervisory tools at European level, such as a database on issuers
and issues in capital markets, on supervisory information about
banks, on transaction reports of broker/dealers.
2. A SINGLE MARKET
FOR TELECOMMUNICATIONS
The state of the art
Technological progress and convergence are leading
to a massive reshape of the environment in which industry players
compete. Especially with the ongoing migration towards Next Generation
Networks (NGNs), formerly separate markets are now merging into
a single, enlarged market where multi-product firms strive to
conquer the attention of consumers. Such changes have the clear
potential to lead Europe to achieve the overarching goals set
by the Commission in the i2010 strategy launched in June 2005.
In particular, the development of a number of alternative interactive
digital platforms where consumers can access a differentiated
set of services, applications and content will be made possible
by the proliferation of technologies that enable broadband access,
such as DSL, FTTx, WiMAX, 3G, HDSPA, and so on.
The recent 12th Report on the implementation
of the telecommunication confirmed this view, by observing that
"new players such as internet companies are entering the
market for IP telephony and are leveraging their large customer
bases to gain competitive advantage. They thus exert pressure
on traditional fixed and mobile providers to develop new strategies,
including investment in broadband and next generation networks
to create new, more lucrative, revenue streams from, for example,
content services".
Against this background, the 27 Member States
of the European Union seem to be growing at widely differing speed
in the field of telecommunications. Some countries—most
notably, the UK, Scandinavian countries and the Netherlands—exhibit
rapid growth and broadband penetration similar to that of the
US and Japan, whereas others, including Central and Eastern Europe
and some Southern European states, are experiencing a sometimes
dramatic delay in the deployment of modern communications infrastructure,
and as such will not be able to unleash the enormous potential
of broadband connectivity in the next few years. Hence, one could
fairly state that the conditions for full cross-border telecommunications
are not genuinely present in the European Union and that the EU
Internal Market for electronic communications has not been fully
achieved yet. This constitutes one of the main challenges facing
the ongoing review of the 2002 Regulatory Framework (RF) for electronic
communications.
Technological neutrality in the regulatory framework
The choice of a "technology neutral"
regulatory framework was welcomed by all commentators when the
RF was introduced, given that such an approach prevents the rapid
obsolescence of the framework and accounts for technological convergence
in light of future infrastructure-based competition. However,
it is important that decisions taken within the RF are applied
transparently by both the Commission and National Regulatory Authorities
(NRAs) to demonstrate that the principle is being adhered to consistently.
Moreover, the implementation of the technological neutrality principle
by NRAs has exhibited a number of problems over the past few years,
and therefore would need careful fine-tuning and more guidance
by the Commission.
In fact, there are specific difficulties in
applying the principle of technological neutrality: more specifically,
there seems to be a remarkable difference between designing a
technology neutral regulatory framework and designing a set of
rules that are likely to exert no asymmetric impact on existing
and potential new technologies. In most cases, technology neutrality
actually requires a pro-active technology policy by national regulators,
and this might be seen as falling outside the scope of regulatory
intervention. Informational problems and difficulties in accounting
for new forms of competition also challenge all attempts to realise
full technology neutrality.
Some of the main problems as regards the implementation
of technological neutrality in the RF are outlined below:
— Different technologies are still
subject to diverging obligations and remedies, which include universal
service obligations, finding of significant market power (SMP)
in retail services (only fixed-line), etc. This can prospectively
alter price competition, especially when the ongoing fixed-mobile
convergence becomes a reality.
— Although not directly regulated under
the current RF, spectrum is still rigidly allocated to specific
uses: only a few Member States have considered the introduction
of flexibility in the use of spectrum. While flexibility might
generate interference and should be reconciled with spectrum harmonisation
across Europe, greater emphasis on flexible spectrum usage and
technology/service neutrality should be aimed at.
— The Commission has issued different
rules for different technologies: for example, 3G, BPL, leased
lines, broadband, VoIP (voice services provided over internet-based
protocols), and so on, which are per se at odds with the
principles of technology neutrality.
— More generally, technological neutrality
is often at odds with a technology specific definition of relevant
markets: distinguishing between fixed and mobile services—as
occurs in the current list of relevant markets, will increasingly
prove wrong and will require careful assessment of both supply-side
and demand-side substitution on the side of NRAs. As a result,
the review of the Recommendation on relevant markets should take
ongoing technological convergence into account.
— Even when technology neutral market
definition would be appropriate, it may prove almost impossible
to achieve, unless NRAs engage in a thorough assessment of demand-side
and supply- side substitution for each service considered. For
example, the Commission's statement that "satellite provision
... because of its characteristics, is not substantially interchangeable
but rather complementary to terrestrial transmission" should
be verified when defining the relevant market, as it does not
only depend on technological characteristics, but is more significantly
linked to the possibility of demand-side substitution in case
of an increase in the retail price of service provided through
one of the technologies at hand.
— As it is currently interpreted, the
technology neutrality principle might short-circuit the provisions
on emerging markets contained in the 2003 Recommendation on relevant
markets. If this is the case, then the regulatory forbearance
for emerging markets provided for at Recital 15 of the Recommendation
on relevant markets is almost impossible to implement in practice
by NRAs. Not surprisingly, almost no emerging markets were identified
by NRAs since the entry into force of the current regulatory framework.
Suggestion for the modernization of the regulatory
framework
The current disparities in the development of
modern communications infrastructure across Europe inevitably
suggests that the reported positive results in EU e-communications
in the last three years might have occurred independently of the
RF. The main question then becomes whether it would be possible
to introduce changes in the current regulatory framework that
would facilitate the take-up of advanced communications services
in laggard EU member states, without stifling the satisfactory
growth achieved by leading countries. Such changes should also
make sure that the RF achieves its stated ultimate goal: the transition
from ex ante regulation to ex post competition policy.
The review of the 2002 Regulatory Framework
for electronic communications has now accomplished its first step,
as the European Commission is expected to adopt two proposed Directives
by October 2007. These proposed new pieces of legislation will
then have to be discussed by the European Parliament and the Council
within the co-decision procedure. As is widely known, the European
Commission has focused its attention on a number of potential
changes to the 2002 framework, most notably a stronger coordination
of spectrum policy, streamlined procedural requirements for market
analyses by NRAs, and a proposed extension of the Commission's
veto power on remedies proposed by national regulators.
Since the review of the NRF is not expected
to take effect before 2010, transitional measures should be adopted
to promote investment and growth in the EU communications sector:
— The list of relevant markets can
be shortened by removing all retail markets and some of the wholesale
markets.
— The treatment of emerging markets
under the RF leads to a short-circuit between the technology-neutrality
principle and regulatory forbearance for new services. The "three-criteria
test" should be clarified and strengthened, whereas the SSNIP
test[6]
should not be applied by national regulatory authorities when
defining emerging markets.
— The current proposal for the review
does not address the issue of how to encourage investment in NGNs.
To be sure, an optimal way to encourage investments in NGNs might
differ depending on national peculiarities; however, action should
be taken by NRAs to stimulate the roll-out of new infrastructures,
by providing regulatory certainty and commitment.
— The current framework misses the
broader picture: in line with the emergence of complex multi-product
digital platforms with unprecedented business models, issues related
to content applications and network neutrality should be addressed
within the RF. In addition, the development and deployment of
digital rights management (DRM) must remain voluntary and market-driven
and copyright levies should be removed for DRM-enabled services.
— Finally, non-linear services should
be taken out of the scope of the Television without Frontiers
Directive, as they are already regulated by the E-Commerce Directive.
As regards the future regulatory framework,
spectrum policy should seek a more coordinated, pan-European approach,
promote spectrum liberalisation and trading as a key driver of
growth and employment, while at the same time bearing in mind
that the availability of harmonised spectrum resources is crucial.
Existing rights should not be undermined in the transition; however,
as technology advances, the European Commission should pay increased
attention to unlicensed uses of spectrum.
In the future framework, the review of decisions
by NRAs should be streamlined in order to make the process more
efficient and attuned to the principle of subsidiarity:
— The scope of the Article 7 review
should be clarified and extended to spectrum policy.
— The RF should be amended in order
to avoid lengthy appeals procedures.
In addition, the "competition policy dimension"
of the RF may be significantly strengthened:
— The automatic application of remedies
on firms with significant market power (SMP) should be abandoned.
— The "three-criteria test"
should be awarded a higher status and included in the text of
the future Framework Directive.
— Multi-sided market issues should
be duly taken into account when assessing SMP in future markets.
Moreover, the "better regulation dimension"
in the RF should be strengthened by providing for limited use
of impact assessment by NRAs and by stronger compliance with the
principle of "no regulation without justification".
Finally, the scope of universal service should
be made less technology specific. The European Commission is likely
to move in this direction in the upcoming Communication on universal
service to be adopted at the end of 2007.
3 July 2007
6 SSNIP stands for Small but Significant and Non-Transitory
Increase in Price. Back
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