European securities regulation: Trojan horses

Date: 15/02/03

Europeans cannot agree on the future of cross-border financial supervision

IT LOOKS like just another spat between Little Englanders and the devious French. In fact, it is more complicated than that. At issue is how to oversee the fast-growing pan-European securities markets. Should supervisors continue to rely on co-operation and mutual recognition among the European Union's 15 national securities regulators (soon to become 25)? Or should there be a single central supervisor of trading in European securities, and perhaps of banking and insurance as well?

Current practice points to the first answer. Two years ago a group of “wise men” under Alexandre Lamfalussy, a Belgian ex-central banker, mapped out the future of European securities markets. It proposed a system of committees and consultation to speed up the development and enforcement of securities legislation; but it stopped short of recommending a single pan-European regulator. Yet logic favours that choice - or so argue French logicians.

Even the severest critics of a single supervisor admit that it may come one day. For now, though, national regulation has staunch defenders, the loudest of them being in the City of London. Competition between regulators is a good thing, they say. Investors must in any case be protected by national laws. A single securities supervisor would need cross-border enforcement powers; yet this is hard without harmonised civil and criminal law, as American experience shows. Thus it would be premature even to think about a European equivalent of America's Securities and Exchange Commission (SEC).

The first law using the speeded-up Lamfalussy procedures, on market abuse, should come into force throughout the European Union in September. Others, on prospectuses and investment services, are in the pipeline. But it will be five years, say the Lamfalussy system's defenders, before it can be judged to have succeeded or failed. And only if it fails should more centralised oversight be considered.

Federal creep

Some retort that the Lamfalussy system is already showing signs of weakness. Norbert Walter, chief economist of Deutsche Bank, argues that the experience of one Lamfalussy body, the Committee of European Securities Regulators, shows that members need to rotate jobs to understand each other's markets properly. It would make far more sense, he says, to have a single command structure.

Indeed, there are already movements towards one. Last November the Economic and Monetary Affairs Committee (EMAC) of the European Parliament adopted a resolution for a treaty amendment that could, in future, give the European Central Bank (ECB) powers of financial supervision, or create a single superregulator - along the lines of Britain's Financial Services Authority (FSA). To be sure, it is a long way from a parliamentary resolution to a treaty change. Still, Theresa Villiers, a British committee member who defiantly led her conservative group against the resolution, detects “creeping federalism”. Such ideas tend to be slipped in surreptitiously and then enacted in an “incremental, gradualist way”, she says.

Also creeping federally is Eurofi 2000, a mainly French group of financial-industry heavyweights. In November it published a survey claiming wide support for a more centralised system of financial supervision in Europe. Its blueprint favours three separate supervisory pillars for securities, insurance and banking, rather than one super-regulator; bank supervision would go to the ECB.

The EMAC resolution and the Eurofi report together were enough to spark paranoia across the Channel. The Corporation of London, the City's local authority, rallied support from banks and their trade associations to draft a response in support of the Lamfalussy process. It called for more enlightened rulemaking and better enforcement. Unobjectionable?

Up to a point. It began with the words: “Markets are created and developed by market participants, not by rules and regulations.” That drew a fiery response from Christa Randzio-Plath, the German MEP who chairs EMAC. “Markets do need regulation,” she said. It was odd, she added, that after all the recent scandals in America the City wanted to head “in the opposite direction”.

Meanwhile, City notables have been discussing their own ideas for centralised supervision, as an alternative to Eurofi's Trojan horse. They know the debate on Europe-wide supervision will not go away. If the Lamfalussy system fails, they will need their own blueprint - preferably modelled on the FSA.

Creating a European super-regulator might be so difficult that it could be self-defeating. Europe-wide banking supervision would seem to require a Europe-wide lender of last resort, which the ECB is not. Changing the ECB's status to match would have wide constitutional and fiscal implications. And centrally administered investor protection is unlikely to serve the investor as well as national regulation.

Ruben Lee of Oxford Finance Group, a consultancy, argues for a softer approach to creating a single securities supervisor. There should be no European SEC with powers to impose sanctions and fines; any such body should focus instead on corporate disclosure and enforcement by suasion, not prosecution. But Mr Lee predicts that the Lamfalussy system will fail because of national protectionism.

Such pessimism enrages those on the Lamfalussy committees and in the European Commission. It is too early to condemn a process that has hardly begun, they say. But Mr Lamfalussy and his wise men themselves foresaw a transition to a single supervisory structure. And prophecies of the system's failure may become self-fulfilling. If a handful of national interest groups want failure, they can be obstructive enough to make it happen.

EU Member States cannot agree on the future of cross-border financial supervision.

• Primary Source