Building bridges

Financial services have come a long way since 1998 when EU leaders agreed in Cardiff, Wales, to push for integration of markets.

That year, the European Commission was invited to draft a framework for action to develop a single market for financial services. The resulting 42 measures covering sectors such as banking, insurance and securities, together formed the financial services action plan (FSAP).

Getting the elements of the FSAP agreed as legislation was a lengthy process and many are only now taking effect. The sheer weight of investment made by the financial services industry, psychological as well as material, means that the stakes are extremely high. Overall, the measures are widely regarded as a success, but it remains to be seen how markets emerge from the shaky implementation phase that is now in progress. Regulating risk in a changing environment will be a challenge for all concerned (see Page 22).

Transformation of markets will come not only from within. Over the past year, two US exchanges have made bids for EU exchanges.

The forthcoming marriage between the New York Stock Exchange and the Paris-based Euronext will create the first transatlantic equity market, linking bourses in Lisbon, Paris, Brussels and Amsterdam with the US. Towards the end of last year NASDAQ made a bid for the London Stock Exchange.

Worried observers are now asking if this is the endgame for European exchanges. But those with a longer-term perspective say that the future survival of EU exchanges will, in fact, depend on international consolidation. The markets in financial instruments directive, which is about to take effect and which will introduce more competition among exchanges, is a contentious case in point. (see Pages 18-19).

Integration of the banking sector is currently exposing the fragilities of the EU financial system. New rules on capital adequacy were introduced at the beginning of this year under the so-called Basel II banking accord. Without measures in place to provide emergency liquidity in times of crisis, however, the future looks decidedly precarious (see Page 20). Efforts are now underway to bolster supervisory co-operation. The European Commissioner for the Internal Market Charlie McCreevy has threatened legal action against regulators that fail to co-operate effectively.

The insurance industry is eagerly awaiting one of the most important pieces of legislation under the FSAP.

McCreevy is set to propose this summer a draft Solvency II directive, which aims to create a new regulatory framework for the industry. The directive will aim to strengthen EU insurance companies’ defences, setting out capital requirements and encouraging cross-border cooperation on the definition of risk categories (see Page 21). Unprecedented in terms of scale and scope, the directive could prove to be a global trendsetter.

On mortgages, expect to see little by way of legislative proposals in the second half of this year. All, bar the consumer, would appear to back McCreevy’s view that less is more (see Page 19). Market forces should be sufficient to ensure greater market opening. The sector’s local outlook is, however, unlikely to change unless stricter enforcement of the voluntary code of conduct governing the availability of cross-border data for consumers is introduced.

This year will see intensified debate on whether citizens get a fair deal from market integration.

Dutch MEP Ieke van den Burg plans to draft an own-initiative report on this point in the next few months. While markets are slowly becoming more efficient, real benefits in terms of lower costs for consumers have yet to make themselves felt.

Developments such as the advent of the single euro payments area, which will eliminate the cost of cross-border payments, are not to be underestimated.

This type of consumer-oriented integration goes beyond grey financial markets. Consumers enjoying the benefits of faster, more efficient services across borders, may well, as a consequence, feel more European.

At a time when policymakers are struggling to prove the relevance of the EU to its citizens, this would be a welcome gain.

Financial services have come a long way since 1998 when EU leaders agreed in Cardiff, Wales, to push for integration of markets.