‘Wise men’ sidestep call for super regulator

Date: 02/11/00

By Tim Jones

WHEN French Finance Minister Laurent Fabius had the idea of establishing one of his countrymen's favoured groups of 'wise men' to look into the fragmentation of Europe's financial services, he had one key conclusion already written.

The team, headed by the highly respected Belgian central banker Alexandre Lamfalussy, was meant to find that what the EU needed was its very own Securities and Exchange Commission - a federal, judicial regulatory agency with responsibility for regulating firms engaged in buying or selling stock, people providing investment advice and investment funds. What is more, the plan was to put this new EU-wide agency in Paris.

Yet this is the one recommendation which almost certainly will not be made by Lamfalussy's 'committee of wise men on the regulation of European securities markets' when it publishes its draft report next Tuesday (7 November).

Committee member Luigi Spaventa, the outspoken former Italian budget minister, said as much in September when he warned that there was no 'legal base' for the creation of an

SEC-style institution. He added that such an initiative would have to start from scratch and "might draw attention" away from the urgent need to forge a true pan-European capital market.

The EU's financial markets rulebook is a mess and changing it takes too long. The fastest banking or securities legislation passed so far required 25 months to reach the statute books and that - a law to harmonise how banks calculate the market risk attached to complex financial tools - took so much time that Union banks lost business to their US competitors.

The wildfire spread of Internet-based banking and securities is coming up against a regulatory regime designed, at best, for the 1980s. The result is a risk of fostering 'regulatory arbitrage', with online providers setting themselves up in the least regulated country and using it as a launch pad to trade throughout the EU. In June, six chief executive officers from Europe's leading banks wrote to their respective finance ministers calling for a common strategy to supervise online banks.

Even when it comes to genuine stone-and-brick financial institutions, regulation is still national in character. This means that global conglomerates such as ING Group are supervised by their national bank - the Dutch in this case - even though they have a major presence in Germany, Belgium and the UK. "There is a genuine risk that the regulation of financial services in Europe will be unable to cope with the radical changes in the Continent's financial landscape," says Lamfalussy.

The group will recommend that EU leaders take a much more ambitious approach to catching up with market developments. The European Commission is preparing eight new laws in the coming months, as well as seven sets of guidelines on existing rules, with the aim of establishing a single market in financial services by January 2005.

This is not fast enough, according to Lamfalussy. "You just have to see what has been happening over the last six months to see that 2005 is, to put it mildly, not a very ambitious timetable," he says.

Since the spring, European financial markets have engaged in a merger frenzy, but one which has been hampered by insufficient conformity in the listing of stocks, admission to the market, trading standards, trade reporting and publication, and governance of the exchanges.

The London Stock Exchange's (LSE) seemingly perfect match with Deutsche Börse to form iX, which would have been Europe's largest exchange, foundered as the companies discovered how different they and their market standards were. Since then, Stockholm-based OM Gruppen has bid €1.5 billion to run the LSE, in its words, more efficiently.

This episode has highlighted vital issues for the Lamfalussy group. Some of these were outlined by the chairman at a behind-closed-doors presentation to a European Parliament committee last month and have emerged in answers to a questionnaire sent out by the panel to industry in July.

Much of the problem centres on the issue of competition in wholesale business. This means opening up the cross-border process by which mutual claims are settled between accounts of member deposit-taking institutions and exchanges.

Don Cruickshank, chairman of the LSE (still by far the EU's largest exchange when measured by market capitalisation), has warned that such national clearing and settlement systems "tend to natural monopoly with significant economies of scale, so raising questions of price regulation and terms of access".

Although any firm or exchange which wants to become a member of the clearing system can do so, there are limits to access by competing exchanges and clearing and settlement organisations. "To serve customers across Europe, the London Stock Exchange should directly, or through its agents - London Clearing House and Crest - have the right on fair terms to access Clearstream or Euroclear," said Cruickshank in a keynote speech last week.

Lamfalussy's team is investi-gating such a possibility, with some members convinced that even the threat of opening up this market would lead quickly to consolidation and a massive reduction in the cost base of European securities markets. "This would have to take the form of a recommendation to the Commission's competition directorate-general," said a source.

With the arrival of a Euro-SEC years away, Lamfalussy is likely to recommend the creation of an interim EU securities committee - with no federal powers - to match the long-established banking advisory committee, which allows supervisors to pool expertise and intelligence butalso give informed counsel to

Commission policy-makers. Panel members are still arguing over how to beef up the position of the Commission itself in policing the systematic implementation of financial services directives.

Once the Lamfalussy draft report has been published and passed to finance ministers on 27 November, disappointed French and Belgian ministers are likely to reassert, at the very least, the ultimate need for an SEC before the final text is published in the spring.

"At the moment, it is all very technical," said one EU official. "The French have been reluctant supporters of greater liberalisation of financial services and saw the Lamfalussy group as a way of delaying things and coming up with another agency. After publication, the politics will start to reassert themselves."

Major feature on the draft report of the 'committee of wise men on the regulation of European securities markets', due to be published on 7.11.00.