Markets issue warning over Bolkestein’s disclosure plans

Date: 26/07/01

By peter Chapman

Frits Bolkestein wants all companies listed on European stock markets to sing from the same regulatory hymn sheet - so much so that he is willing to rehearse with industry leaders before finalising his proposals on financial disclosure. In fact, the commissioner's decision to open the matter to consultation, with a fast-track timetable, is as much in the news as the forthcoming plans.

He repeated the gesture this week, inviting industry to have its say in broader investment services rules. But such flattery of the EU's sanguine stock market community - one of the recommendations of Baron Alexandre Lamfalussy in his report on new EU securities legislation - will get the Commission nowhere. What matters is whether the executive actually listens to industry leaders' concerns - already they say some of the notes in Bolkestein's 17-page plan are decidedly off-key. The main logic of the proposals should be universally lauded, says Dirk Pirez, general counsel and company secretary for Nasdaq Europe - the Brussels-based arm of the tech-dominated US market. "The European capital markets are highly fragmented with 34 regulated exchanges, and even more public and self-regulatory organisations across Europe," he says. "A harmonisation of disclosure standards in Europe should strongly be encouraged."

Nevertheless, dissenters say some of the changes in the reporting rules could spell more red tape for firms and less power for the markets. Gregor Pozniak, deputy director-general of the stock market lobby FESE (the Federation of European Securities Exchanges) agrees with Pirez that the broad lines of the proposals are welcome. But he says the 'one size fits all' approach to reporting rules could impose extra burdens on firms listed in so-called second-tier markets where rules may be deliberately more relaxed to encourage small companies on-board. A case in point, say industry insiders, is the London Stock Exchange - its successful Alternative Investment Market (AIM) is attracting a clutch of new companies every month with its "specially tailored entry rules to suit growing businesses".

Nasdaq Europe's Pirez says his market's players must all surpass the Commission's information benchmark. For example they must already provide quarterly results containing not only a balance sheet, but also a profit-and-loss statement, details on the bankruptcy of any subsidiaries or associates, and "other events or information which the issuer deems to be of material importance to holders of financial instruments". However, he says the Commission's plan to empower separate public regulators at the expense of the markets could hurt exchanges which sell themselves on the extra strength of their tough rules and enforcement.

There is still scope, he insists, for self-regulation alongside rules mandated and policed by public authorities. "Exchanges, as commercial companies, have a commercial interest to protect their 'brand' and reputation, and cannot leave issues of integrity, security and fairness solely to local regulators," he says, adding that stock markets could achieve the goal of harmonisation perhaps faster by developing their own European self-regulatory standards. Pozniak doubts whether some regulatory bodies would be near enough to the markets to be effective at policing the new rules - a gripe voiced by FESE over the recent proposals on market abuse. "If you are shooting from a distance with a cannon you are not likely to hit a rabbit," he says, adding that markets should, if they chose to, have the right to operate their own procedures to check up on members.

Delve deeper into the text and another gripe is the likelihood that interim results could be subjected to a mandatory external audit by a firm of auditors - albeit less stringent than the annual audit. Many companies already opt to bring in the external auditors, adds Pirez. But for those who do not, the additional yearly costs of this requirement could easily mount to €250,000 or more. FESE's

Pozniak hopes Bolkestein will take account of the critical views en route to his officials' e-mails between now and the 30 September deadline for comments. He is not counting on it, however. "I don't want to spoil the impression that this consultation is a big step forward. But there have been bad experiences in the past." He adds that FESE's views were "ignored" when the Commission did a less ambitious consultation on 'market abuse proposals' launched in May. In any event, say the experts, the effectiveness of the plans will be lessened by faults elsewhere.

A case in point is a fudged proposal on rules for prospectuses that firms must give would-be investors before they raise capital on European markets. Touted as a 'one-stop shop' towards an initial public offering, this proposal does nothing to end the fragmentation of national markets which is increasing the cost of raising capital for European companies in Europe, says Pirez. "The proposal of the Commission to create a single passport for issuers still relies on the cooperation between national regulators, and does not lead to a truly European passport." The consequence, he believes, will be that European companies are driven to the US to raise capital. "Worse," he says, "it hinders economic growth and the creation of employment in Europe." In other words, Bolkestein has a lot more conducting to do before securities markets are singing in perfect harmony with the Commission.

Feature on European Commission proposals to reform some aspects of European stock markets.