Capital markets proposals are fine-tuned

Date: 17/09/1998

By Renée Cordes

THE European Commission has begun honing its strategy for opening up the EU's capital markets following hearings with leading representatives from the financial services industry in Brussels this week.

The aim of the meeting between Commission officials and bankers, insurers and government experts was to determine how best to remove the remaining barriers to pan-European securities markets as the single currency approaches.

It marked the latest round in the EU's efforts to lay the groundwork for what is set to become the world's largest bond market and, if the equity markets integrate, a top-four stock market.

The move comes after Union leaders urged the Commission to establish a so-called 'framework for action' for financial services at the Cardiff summit in June. The institution will present its plan, which may include new legislative proposals, to December's Vienna summit.

“The legal and fiscal regimes in each member country are very different and the technical challenges of operating and managing funds on a pan-European basis are extremely demanding,” said Paul Waller, chairman of the European Venture Capital Association (EVCA), who took part in the hearings.

“It is far from a single market at the moment.”

The birth of the euro in January will eliminate some of the obstacles to a pan-European stock and bond market by, for example, cutting out currency risks. However, the Commission argues that capital markets will remain fragmented for a long time in the absence of a new regulatory framework.

The issue is also coming under the spotlight in the European Parliament as its intergroup on financial services prepares to hold a meeting next Tuesday (22 September) on the future of Europe's financial markets in the age of the euro.

The euro-zone will have the world's largest bond market, worth 2.6 trillion ecu, compared to the US' 2.5 trillion ecu. Excluding the UK, Europe has a 25&percent; share of stock market capitalisation, compared to 49&percent; for North America and 17&percent; for South East Asia.

The Commission warned in a paper published in April that regulatory, fiscal, economic and cultural hurdles to a European capital market “need to be addressed as a matter of urgency”. It added: “Developing risk capital in the European Union, leading toward the development of pan-European risk capital, is essential for major job creation in the EU.”

While the US has three main stock markets and ten regional ones regulated by one agency, the EU still has more than 30 regulated markets overseen by 18 agencies. The result, argues the Commission, is that many small and medium-sized companies have become dependent on bank loans and overdrafts for seed-corn financing - a practice which can be costly and inflexible.

Waller, who helps manage about 5 billion ecu in funds for the company 3i Investment in London, said he had to consult at least 12 sets of legal and tax advisers when setting up his first pan-European fund.

He added that, while European venture capital funds invested last year grew by about 40&percent;, the long-term growth rate was “questionable” without a change in the regulatory environment.

The Commission is also seeking ways to create favourable conditions for the growth of private sector pension and insurance funds, which are the lifeblood of all large stock markets.

Among Internal Market Commissioner Mario Monti's reform plans is a proposal for harmonising prudential rules which he intends to submit next year. These relate to the obligation of fund managers to diversify their portfolio.

The Netherlands, the UK, Ireland, the US, Canada and Australia all have such legislation. The proposed directive will be aimed at harmonising prudential rules as well as fund asset allocation rules.