COMMENT: The legislative agenda for the EU financial market

By bne IntelliNews June 11, 2009

Bernhard Speyer of DB Research -

As a rule, financial market regulation is not exactly one of the policy areas that thrusts parliamentarians into the spotlight. That, however, is not the case with the European Parliament and certainly not at this time, when no one needs convincing of the particular relevance of financial markets and their regulation for the common good.

The Parliament has performed admirably over the past few years to preserve and deepen the EU's single financial market. In doing so, it has always adopted an explicitly European perspective - unlike many member states. This needs to be maintained especially in the next few years as the crisis, its repercussions and the reactions to it by EU member states mean that the threat of a refragmentation of the single EU financial market cannot simply be dismissed.

The legislative agenda of the Parliament at the start of the next parliamentary term is likely to be dominated by the initiatives to bolster financial market stability and regulate financial markets which have been prompted by the financial crisis. In substantive terms, the focus will, on the one hand, be on the institutional structure of financial regulation in the EU.

The European Commission has just issued a proposal based on the recommendations of the expert group chaired by Jacques de Larosière. The Commission proposal recommends firstly the formation of a new macro-prudential supervisor, the European Systemic Risk Council, and secondly, the creation of a European System of Financial Supervision, which is intended to strengthen cooperation with the national supervisory authorities and enhance the position of the current Level 3 Committee. While the former meets with broad approval, the latter looks set to face widespread opposition from within the ranks of the member states. On this issue the majority of the Parliament did - to its credit - express its support for the creation of a truly supranational supervisory structure at EU level at a very early stage, so it is to be hoped that it will bring its influence to bear in the upcoming negotiations.

Go global

On the other hand, some regulatory dossiers are already in the pipeline. These include amendments to the Capital Ratio Directive (CRD), which is currently being debated by the Basel Committee. In this area, European lawmakers need to resist the temptation to establish standards in the EU that differ from the international consensus. Basel II has to remain a common global standard. This requires, among other things, further regulatory measures pertaining to derivatives markets and a bolstering of the preventive intervention rights of the financial supervisory authorities. In both cases, just as with capital requirements, this means that the EU should align itself as far as possible with the international consensus in order to prevent an inappropriate restriction of the range of innovative financial products available to EU investors and companies as well as competitive disadvantages for EU-based financial services companies. In this light the deliberations about the Commission's recently unveiled proposal on alternative investment products (including hedge funds, private equity funds and closed-end real estate funds) are also likely to be critical, as the Parliament is calling for even more stringent regulations than those already proposed by the Commission. Here as with other dossiers, there should be a return to the strategy of "better regulation" that was successfully implemented during the last parliament; in other words, any legislative activity should be preceded by a fact-based cost/benefit analysis taking into consideration all the alternative courses of action.

Besides these projects that are closely connected with the financial crisis, the Parliament will continue to hammer away at the major impediments to effective financial market integration. This applies especially with regard to retail financial markets, where the barriers to market integration are to be found less in financial market regulation in the strictest sense of the word, but more in the lack of harmonisation of data protection legislation, consumer protection along with civil and contract law. As it has already done with supervision, the Parliament has also made a name for itself in these areas as a pioneer advocating truly European approaches. In the interest of clients and financial service providers, it is to be hoped that it continues to do so. Here the key aspect will be striking a balance between the legitimate interests of consumers, on the one hand, and the commercial interests of providers on the other - otherwise the market for cross-border retail financial services will not develop. One example: the introduction of US-style class action lawsuits would certainly not be conducive to expanding the offerings of providers - neither in the cross-border business nor in business at the national level (and moreover not only in the financial services segment).

During the last parliamentary term the Parliament proved to be a competent and productive designer of the regulatory framework for EU financial markets on account of its committed approach and great expertise - especially in the responsible ECON Committee chaired by Pervenche Berès. It is to be hoped that it will play a similar role during the next parliamentary term.

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