PRESENTATION AT SHEPHERD AND WEDDERBURN
30 MAY 2003

You probably recall the signing in 1985 of the Single European Act. This in fact came out of the Economic and Monetary Affairs Committee in the first elected European Parliament 1979-84. I am proud to have been a member of that Committee and of its sub-committee which dealt with Internal Market issues. Also on that committee were a former British MP Basil de Ferranti (Chairman of the sub-committee) and a German Christian Democrat MEP from Stuttgart called Karl van Wogau, who set up the Kangaroo Group to promote the abolition of frontier barriers - and which continues today. One day we were ploughing through two enormous dossiers which were attempting to harmonise the pedals on fork lift trucks and teddy bear fur! The purpose was to achieve a single European market in fork lift trucks and teddy bears.

I think I can claim the credit for saying in exasperation, "This is absurd! At this rate we will never achieve a single market for goods, let alone services. We should just set a date by which there would be free movement of goods and any items not by then harmonised would be considered to be in free circulation on the basis of mutual recognition of standards." If the product was OK by the standards of one Member State, it would be acceptable in all.

Boz Ferranti happened to be a close friend of our then UK Prime Minister, one Margaret Thatcher. The quid pro quo for getting "my money back" was the Single European Act. Under this she appointed Lord Cockfield as UK Commissioner responsible for the Single Market and the 1992 programme. So the single market for goods got underway well and truly and by the end of 1992 much of it was achieved.

But services, and financial services in particular, were not included in this process. This was both surprising and unfortunate. Surprising because Mrs Thatcher saw great opportunities for the UK, where financial services were particularly strong, to clean up in Europe. No doubt the target Member States thought likewise and were therefore less enthusiastic.

When it was decided to have a go at achieving a single market in financial services there were many obstacles to overcome, most notably the very different cultures and traditions in the various Member States. And so it was not until May 1999 that the European Commission adopted the Financial Services Action Plan. As it happened this fitted with the last European elections in June 1999 and the beginning of the current 5-year legislature. So processing and enacting legislation under the Financial Services Action Plan has been the dominant occupation of the Economic & Monetary Affairs Committee these last four years.

It was recognised from the start that this was an industry with many technical aspects for which it would be well nigh impossible to provide in the basic legislation, especially as this was an ever changing, innovative industry and given the extremely slow legislative process in the EU. This problem was studied by a special committee under a Baron Lamfalussy and from this comes what is called the Lamfalussy process. The EU's legislative process, where the Commission proposes and drafts and the Parliament and Council of Ministers decide, would concern itself with the basic and broad parameters - with the principles (Level 1). This would provide "framework" legislation in the form of directives or regulations. The detailed rules would be left to CESR, the Committee of European Securities Regulators, who would consult with the industry and recommend more technical regulations to the Commission for adoption (Level 2). CESR then prepares guidelines and common standards in order to ensure consistency of implementation by national regulators (Level 3). In Level 4 the Commission ensures compliance across the EU and may take legal action against Member States if they breach Community law.

CESR is expected to consult with market operators. You may have already come across such a consultation about the Market Abuse Directive. They have also beaten the gun in starting consultation on the Prospectus Directive, which has still not completed its passage through the Parliament and Council. Under a "formal/informal" undertaking by the Commission, the Parliament effectively has "call-back" rights if it feels the CESR and the Commission have overstepped their powers and encroached on the legislator's territory. There is also a sunset clause which requires renewal of regulations after 4 years.

The objective of the Financial Services Action Plan is to have a single market in financial services by 2005. The sub-plot is to make this a liberal but well-regulated market in order to provide the investor with choice of innovative products with a reasonable level of security. At the back of everyone's mind is the American structure which seems to provide capital for business, large and small, more readily than the European markets and yet produced ENRON, WORLDCOM and TYCO. Another factor is the dominance of the London/UK market in Europe set against the aspirations of the younger and smaller markets on the Continent. Yet another consideration are the demographics of the so-called pensions time bomb.

In March 2003 the European Council (EU Prime Ministers and Heads of State) called for rapid completion of the FSAP, including proper implementation of existing directives and adoption by the end of 2003 of the Pensions and Prospectus directives and by April 2004 of the Investment Services and Transparency directives.

So what are the areas which have been earmarked for legislation, where have they reached in the legislative process, and what are the problems?

• Last October Parliament adopted at 2nd reading the Market Abuse Directive to combat insider dealing and market manipulation. The Commission is currently drawing up the technical implementing measures. This is the first test of CESR and the Lamfalussy process. A controversial area concerned journalists who were worried that they could be held liable for innocent mistakes.
  
• The Prospectus Directive, harmonising the requirements for information connected with the issue of shares or bonds for investors, will be voted on at 2nd reading by the Parliament in July. The major concern at this stage is that the national ministers do not want to allow issuers of bonds in units under € 5000 to choose which national regulator and jurisdiction to use. The Parliament wants this to be €100 or zero. Member States also want to allow regulators to carry out on-site inspections. Language has been an issue of contention.
  
• Over the next few weeks we will also be discussing the Investment Services Directive. I have received a lot of emails on Article 18, which many private investors fear will put an end to low cost "execution only" share dealing. I and other members of the Committee have tabled amendments on this issue and I am hopeful we will agree to significant change in this article of the legislation. There is also much argument about Article 25 regarding internationalisation and pre-trade transparency, which could be more intractable.
  
• Progress in the Parliament on Takeover Bids has been temporarily postponed to allow the Council of Ministers to reach an acceptable compromise. The issue has been discussed over the past 9 years, but without success, and, in order to be able to come to an agreement, the Council is now considering removing two key aspects of the legislation - the obligations of the board of the offeree company and the prohibition of legal restrictions on the transfer of securities and multiple voting rights (i.e. the essential elements in creating a level playing field). It looks like this could end up as doing no more than protecting minority shareholders in a takeover.
  
• In response to ENRON and WorldCom, the Parliament adopted a report (November 2002) calling for better controls and Supervision of the EU's financial markets. The Parliament was in favour of creating supervision at European level. It was critical of excessive bonuses and compensation schemes to executives, which resulted in short termism, excessive risk taking and thereby market volatility.
  
• Clearing and Settlement is still at the "Green Paper" stage. The Commission wants common standards, harmonised technology, tax and legal systems. The Parliament opted for a non-profit user-owned service and a litany of common rules. We Conservatives felt this was too prescriptive at this stage.
  
• The Parliament will begin next month discussing its own-initiative report on Capital Adequacy, prior to the Commission's proposal for legislation. We will be looking at proposals to update the Basel I agreement on financial security in international markets and to make the new system more flexible and more risk-sensitive. The main areas of concern for MEPs with Basel II will be its impact on SMEs and the contrast between application in the USA to a few global banks while in Europe it could apply to thousands of financial institutions of all types.
  
• The Commission has adopted its proposal for legislation on minimum Transparency obligations for information which must be provided by publicly traded companies. For the moment, there is a dispute about which committee should be made responsible for producing the Parliament's report - the Economic Committee (responsible for financial services issues) or Legal Affairs (which covers legal aspects of the Internal Market). One area of concern has already come to light regarding a proposed requirement for quarterly financial reports which industry thinks will be a costly burden on companies with little benefit and more short termism.
  
• On taxation issues the Parliament only has a consultative role. We adopted a report on the Taxation of Savings in March 2002 which would require Member States to exchange information, with the exception of Austria, Belgium and Luxembourg who will be able to keep their information on investors secret but will levy a 35% withholding tax on interest. The Parliament wanted the same rules to apply to the UK's and the Netherlands' associated territories as well as some third countries, notably Switzerland and the USA. A final agreement has not been reached due to the opposition of Italy (for extraneous reasons) and because negotiations with Switzerland are still ongoing.
  
• Earlier this month the Council formally agreed the directive on Occupational Pensions, adopted by the Parliament in March, paving the way for pan-European corporate pension schemes. This should result in lower costs for companies and greater choice for employees. We were generally pleased with the final compromise, which follows the prudent person principle, is based on home state recognition and regulation, and allows payment for a temporary period or by lump sum.
  
• Implementation of the International Accountancy Standards (IAS) is in train for 2005. The main issue here is the relationship with the USA and US GAAP. We were making substantial headway with this and related issues, such as direct access by American investors to EU stock exchanges, until Mr Harvey Pitt was sacked and Sarbanes-Oxley appeared. We detect signs that the American authorities at both Congressional and SEC levels are beginning to have second thoughts and we are hopeful that a transatlantic open market could transpire in time.