Response of the European Financial Services Round Table to the consultation of the European Commission on the Green Paper on Financial Services Policy (2005 2010) COM(2005) 177 29 July 2005
The 20 Members of the European Financial Services Round Table (EFR), Chairmen or Chief Executives of leading European banks and insurers, warmly welcome the initiative of the European Commission to present its preliminary views on the envisaged financial services policy over the next five years and the opportunity to comment on the Green Paper. 0) Introduction The EFR believes that it is of high importance for Europe s economy to further integrate the wholesale and retail financial services markets. Markets have to be open, competitive and efficient to be able to contribute to a stronger Europe as envisaged under the Lisbon Agenda. Remaining barriers not only, but especially in the area of retail financial services have to be tackled over the next five years (and probably more) to establish an appropriate framework in which the single market for financial services can develop. At the present stage the Commission is right in proposing a carefully selected range of targeted new initiatives in retail financial services. Within the 2005-2010 phase the Commission should initially focus its efforts on the consistent implementation and enforcement of the Financial Services Action Plan across the EU Member States. Only a level playing field will be of benefit to both providers and consumers. The EFR strongly supports the approach of the Commission that any future legislative action will be subject to the better regulation principles, in particular to conduct rigorous cost-benefit analyses before issuing legislative proposals and to consult stakeholders at all levels in a transparent and open way. The clear identification of market failures and articulation of the minimum measures needed to specifically correct those failures should be the rule. The EFR welcomes the Commission s intention in its Green Paper on asset management to find a way to consolidate and enhance the regulatory framework for this business. Such a framework could play an important role in helping to achieve the objective of integration and cost effectiveness at European level. The EFR supports the Commission s view that a well-functioning risk capital market has a part to play in promoting new and innovative firms and entrepreneurship and therefore deserves careful attention. Whether or not any further prioritised initiatives at European level should be taken, must definitely depend on the clear evidence of market failure and that any measures taken in this area will provide significant economic benefits in terms of efficiency and stability in Europe and that they are the minimum necessary to deliver this. The following comments do not attempt to cover all questions raised in the Green Paper but rather aim at highlighting specific concerns of EFR Members. European Financial Services Round Table 2
1) Supervisory Framework The Commission has rightly recognised that supervisory cooperation is key in underpinning financial integration and should be strengthened. 1 The EFR fully believes that an efficient and effective supervisory architecture is essential for the future development of the financial sector. In its paper published in June 2005 2 on the supervisory framework the EFR advocates a lead supervisor concept which would be a positive step to achieve this goal. The lead supervisor, which is the supervisor of the parent company, would be fully empowered to conduct the entire prudential supervision over all operations of a financial institution within the EU. The interests of the supervisors from the host member states should be taken adequately into account by their being represented in the college of supervisors. This set-up would bring efficiency gains for the supervised and the supervisors, but it would also bring the supervisory set-up in line with market practice, and in that way, create more transparency. A more transparent setup for the respective institutions involved should also make occasional crisis management also more effective. It is encouraging to see that the current proposal of the Capital Requirements Directive (CRD) 3 by the Commission, for instance, through the improved role for the consolidated supervisor, goes in the direction of a more streamlined supervisory regime for multi-country financial institutions. But it is also clear that this is only a first step, which does not fully eliminate the risk of inconsistency in the phase of implementation. The EFR regrets that the role of the consolidating supervisor under the CRD is limited to the validation of models and is not further extended to other areas, for example pillars 2 and 3. We share the view that the Lamfalussy bodies can play a key role in streamlining supervision, and should further gain experience. We seriously hope that they make use of all possibilities to cooperate under the existing framework 4, which also includes the possibility to delegate supervisory tasks regarding banking subsidiaries to the supervisor of the mother company. The Lamfalussy level 3 committees are already contributing to a more consistent implementation of legislation across the EU. We would like to see the committees working towards full convergence of supervisory practices and interpretation of rules, making choices about best practises, and removing hurdles for market integration as far as their mandates allows. The mandates and priorities of the committees have to be clearly defined in order to guarantee that they focus on the right issues so that confusion about the specific roles of the level 1, 2 and 3 in the Lamfalussy approach is avoided. In addition, there is room for improvement of the Lamfalussy process as such, in particular as regards the degree of detail in level 1 legislation, as regards a streamlining of consultation practices, and as regards the resources available to the Commission for level 4 work. The EFR believes that consolidated supervision should be the next objective of any reform initiative taken by the involved institutions. This objective should be realised within a well defined and acceptable time frame. There is no reason to further wait for reform, in particular in view of the upcoming revision of the Conglomerates 1 See Green Paper, 3.2, page 10. 2 On the lead supervisor model and the future of financial supervision in the EU, June 2005, see www.efr.be. 3 COM(2004) 0486. 4 Annex I, page 10. European Financial Services Round Table 3
Directive, or future Solvency II rules for insurance companies. The future supervisory framework must meet and must be assessed against objective criteria. We encourage the Commission to actively lay down such objective criteria against which various options for the supervisory structure should be assessed. This assessment should form the basis of an open and continuous debate. We believe that any such structure must: 5 create financial stability, while at the same time set a framework for a dynamic and competitive financial sector; be cost efficient for government and/ or administrative bodies as well as financial services providers within and outside the EU; be competitively neutral, i.e. ensure a level-playing field; be transparent, thereby increasing the general public s and industry s confidence in the stability of the financial system; provide for an effective and transparent framework for crisis management; foster market integration and efficiency and be responsive to the evolvement of market structures; provide for clear structures of political accountability. As the Solvency II project is one of the most important and most far reaching projects for insurers in the future years, it will put a considerable strain on the Commission's personnel and will require committing adequate human resources to it. In the context of the «better regulation agenda» the EFR recommends that the opportunity is taken to consolidate the existing insurance directives affected by Solvency II. This is also a priority sector for the implementation of the full lead supervisor. A consolidated supervision is of particular importance in the insurance industry: it is the only way to recognize and encourage the diversification of risks and its effects on the solvency margin, over the scope of the legal entity. Furthermore, companies will be allowed to use their own internal models related to their specific risks exposures. The technical contribution of the Chief Risk Officer (CRO) Forum is very valuable on material aspects of the subject of risk management like the measure of diversification, and internal models. Beside the consolidated supervision, a close coordination between lead supervisors is equally important to avoid any difference in the supervision of companies from different origins. A full harmonisation of solvency requirements at European level is not sufficient as long as practices of national supervisors are not coordinated. 2) Promotion of cross-border undertaking The EFR believes that it is necessary to facilitate the possibility for cross-border undertakings to optimise their legal organisation for business, legal, and/ or supervisory reasons. Nowadays companies have to face huge legal and fiscal difficulties when they wish to transform a subsidiary into a branch, or try to establish themselves under the "European company"- statutes. In order to identify and overcome the aforementioned difficulties the EFR proposes that the Commission, 5 On details of EFR s most recent recommendations On the lead supervisor model and the future of financial supervision in the EU, June 2005, see www.efr.be. European Financial Services Round Table 4
after consultation of the involved stakeholders, should conduct an assessment on this issue. 3) Retail financial markets and the role of consumer protection rules One reason for the fragmentation of retail financial services is that consumer protection rules for financial services products vary from Member State to Member State. The EFR fully agrees that consumer protection rules should be robust and provide consumers with a good level of protection across the EU but they should not hinder, rather facilitate the sale of products, developed in one domestic market, throughout Europe without the need for substantial modification 6. It must be the overall aim to strengthen the consumers ability to take an informed decision when choosing a financial services product. The EFR supports the activities of many European governments to increase consumers education regarding financial services products in particular lending products - at national level. The EFR believes that a targeted full harmonisation of key requirements across the EU is indispensable. Agreement on common rules for important and essential issues / features regarding financial services products at EU level is a necessary first step in ensuring that markets will be able to integrate. European customers will find it easier to compare products at EU level. A useful starting point should be a qualified analysis of existing consumer protection rules. If agreement on the targeted full harmonisation of the key requirements is reached, the important question remains how to deal with the non-essential rules. Doing nothing is not an option because those non-essential rules can also be an obstacle to the provision of financial services across the EU. Since companies have to comply with those differing non-essential rules as well, it would be vital to at least aim at a convergence of those rules as far as possible. The EFR encourages the Commission to investigate i) to what extent the mutual recognition principle could be applied to the non-essential rules, and ii) to what extent a convergence (not harmonisation) of national rules could be helpful to achieve mutual recognition and iii) to what extent against this background the Rome Convention and possibly the Brussels Convention would need to be revised, also in order to enable consumers to fully opt into the provider s home country law. 4) 26 th regime As described above national consumer protection rules have developed independently and are embedded in national legal systems. It cannot be expected that those differences in approach will be overcome fully let alone quickly. The 26 th regime could be a last legislative resort to resolve obstacles which turn out to be insurmountable by all measures of harmonisation and mutual recognition. A deep commitment to the result (and not only efforts) of creating meaningful European-wide retail markets should not exclude dealing with obstacles which have been identified as particularly difficult but rather include in its toolkit a possibility the mere existence of which might help in the end to achieve further and decisive breakthroughs for harmonisation and mutual recognition. 6 Annex I, Section VII, page 17. European Financial Services Round Table 5
The EFR therefore strongly welcomes the proposal of the Commission to have a constructive debate on the 26 th regime, a regime of rules governing the financial services provision contract and in which the contracting parties could opt into. Such a regime could exist alongside national rules and might help to overcome the differences without forcing Member States to change their national rules. 7 We are supportive of the proposal to conduct a feasibility study and to convene Forum expert groups to further investigate this possible approach both in principle and specifically in the areas of consumer credit and of pension plans where we see a particular potential for such a tool taking into consideration the intricacies and complexities of the national legislations involved. Nevertheless the feasibility study should not be limited to the relevance of such 26 th regime only in the context of B to C products but also assess the merits of this approach in the case of business lines devoted to the needs of corporates and SMEs (B to B) like, for instance, equipment leasing. However the 26 th regime must not require product harmonisation since it would stifle competition and innovation which would be highly undesirable. Such a regime should rather provide a framework for certain types of products under which specific products or business lines could be developed and compete. 5) Pensions One of the freedoms granted by the EU Treaties is the free movement of people within the EU. One of the important consequences of this right should be also that people have access to sustainable pension solutions at the 2 nd and 3 rd pillar that secure an adequate life-long retirement income and are portable across borders within the EU. Otherwise, the mobility of workers within the EU will be impeded. Differing national social security systems and tax rules are the main obstacles to a genuine European market for pensions. The measures the Commission has put forward, like the IORP Directive and the Open-Coordination Method for instance, have been steps in the right direction. But the EFR believes that more radical alternatives to traditional approaches are necessary to create the conditions under which a single EU pension market can develop and flourish. 8 The EFR has come up with a proposal to create a single regulatory regime, a pension structure which could operate alongside and complement existing national pension structures, which would be left undisturbed. 9 In autumn this year the EFR will provide further details of its proposal. The EFR would welcome a wider debate on the possibility of creating such an optional regime which could exist alongside the national regimes. 7 The UN Convention on Contracts for the International Sale of Goods from 1980 could be seen as an optional set of legal rules which governs the contract between parties. 8 EFR Creating a Common Structure for Pan-European Pensions, September 2004. 9 EFR Creating a Common Structure for Pan-European Pensions, September 2004. European Financial Services Round Table 6
6) Feasibility study on a Financial Services Rulebook Regarding the idea of a feasibility study on simplifying and consolidating all relevant European financial services rules 10 ( Financial Services Rulebook ) the EFR can agree with the concept of a study but suggests for practical reasons to limit such an exercise to Securities Markets rules initially. As a first step one should identify technical inconsistencies of securities rules. The second step should be to evaluate any missing pieces, substantial contradictions and areas of overregulation in the existing body of law. The study should evaluate costs, benefits, coverage and all practical details of removing any unjustifiable inconsistencies and contradictions. The main principle guiding the whole process should be the clear benefit for the market. Since the implementation of several FSAP-measures is not finalised yet, the timing of the feasibility study has to be carefully evaluated. 7) Avoidance of gold-plating The EFR believes that a consistent implementation of measures across the EU is an important element of creating a single market for financial services and therefore Member States should abstain from gold plating when transposing measures domestically. Besides making use of their formal powers in the case of unlawful gold plating we encourage and support the Commission to undertake a number of practical steps in this area: organise workshops with Member State legislatures to ensure common understanding of how the Directive should be transposed; scrutinise proposed legislation from Member States before it is enacted with a view to highlighting instances of mis-transposition; write to Member States who appear to be about to enact inconsistent legislation pointing out necessary changes to make the proposals compliant [we recognise that the Commission does not have the formal power to intervene before legislation is enacted but believe the strongest indication should be given where mis-transposition appears about to happen]; analysis of Member State legislation together with a published indication of whether or not it appears to be compliant; formal legal action against Member States. 8) Cost-benefit analysis and high quality legislation Any future measures taken at the EU level should first undergo a thorough ex ante cost benefit analysis demonstrating the benefits of the legislation versus implementation costs for industry and other stakeholders. It will be important however that the methodology of the analysis is sound and will take into consideration all relevant factors for the evaluation. If the cost-benefit analysis has demonstrated the need for further legislation at European level it is then necessary to ensure that the proposed measure(s) are of high quality. A good consultation process with all stakeholders is vital to achieve this aim. 10 See Green Paper, page 8. European Financial Services Round Table 7
Financial services concern a range of different policy fields of the Commission including internal market, consumer policy, social policy, and taxation. Hence the quality of legislative proposals will also depend on good cooperation and a sound common approach of the involved directorates-general of the Commission in the process, with DG Internal Market having the main responsibility. 9) VAT In line with the European Banking Federation the EFR considers it disquieting that VAT issues have not been covered in the Commission s Green Paper. Since the adoption of the 6 th VAT Directive and particularly over the last decade, the lack of neutrality of the VAT treatment of financial services and the lack of legal certainty of the current system have turned out to be more and more problematic for banks and insurance companies. Any introduction of VAT for insurance products would require the abolition of other indirect taxes such as the Insurance Premium Tax. Financial business is mostly not subject to VAT. As a result, financial institutions are only able to recover a percentage of the VAT that they incur on their own expenses. In this respect financial institutions and services are treated very differently from businesses such as manufacturing and retailing where VAT incurred is fully recoverable against VAT charged to customers. The current system is particularly harmful because any attempt to achieve synergies and to improve efficiency (for example those arising from centralising back office activities) is blocked, due to the cascading effect of VAT. The current VAT system, which notably penalises intragroup transactions, prevents EU-located banks from adopting structures which would enable them to realise cost savings and to maintain their competitiveness on global financial markets. Besides the non-neutrality issues, there are concerns in terms of legal certainty. There is in particular a need for a revised definition of the financial exemptions from VAT. Clarifications about the VAT treatment of cross-border intra-company transactions are also necessary. Resolution of the problem of lack of neutrality would be achieved by introducing VAT grouping even cross-border and uniform exemption rules for cost sharing. 10) The external dimension To negotiate the opening of third markets in the financial services sector is very important, whether on a multilateral basis or via EU-Third Countries agreements. But the quality of implementation of theses agreements is of equal importance. Supervision authorities in several emerging economies are reluctant to apply international agreements and to act in a non-discriminative way toward European financial services operators. The European Commission has the responsibility to monitor closely the follow-up of these agreements. European Financial Services Round Table 8
11) Conclusions The Green Paper is a first important step to identify the next issues which have to be tackled to further strengthen retail but also wholesale financial services to make Europe more competitive. This can only be achieved if not only consumers but also the European financial services industry are able to benefit from more integration. It will be important that the European Commission lays down a coherent and accurate roadmap for its strategy towards this goal in its upcoming White Paper for the 2005-2010 phase. The EFR would welcome the opportunity to discuss these comments further in the ongoing consultation process. ---------- The European Financial Services Round Table (EFR) has 20 Members, Chairmen or Chief Executives of leading European banks and insurance companies. The purpose of EFR is to provide a strong industry voice on European policy issues relating to financial services. The objective is to support the completion of the single market in financial services. Chairman of the EFR is Pehr G Gyllenhammar. EFR - European Financial Services Round Table 5th Floor Rond Point Schuman 6, Box 5 B-1040 Brussels Belgium Tel: +32-2-234.78.06 - Fax: +32-2-234.79.11 secretariat@efr.be www.efr.be European Financial Services Round Table 9