7.3 Single Market: financial services

The Cockfield White Paper (1985) identified the opening up of the financial services market, mainly banking, mortgage lending and insurance, as an essential element of the Single Market Programme. It was not until the late 1980s, however, that much progress was made in this area, with Directives on credit institutions, funds, solvency ratios and the provision of financial services - including the Second Banking Directive of 1989. There was, at this time, less harmonisation in the insurance sector.

In recent years the Commission has been very active in the area of financial services. In particular, there have been two major developments:

The Financial Services Action Plan (FSAP), which was launched by the Commission in 1999 and endorsed at the Lisbon summit (March 2000).
The development of the Lamfalussy committees.

The Financial Services Action Plan (FSAP) is a very extensive programme of measures, from binding regulations to voluntary codes of conduct and including an extensive list of Directives, covering the financial services sector.

The FSAP is the blueprint for the creation of the "single market" in financial services and is intended to bring about a greater degree of harmony and fewer barriers to cross-border business across the 27 countries of the EU. But firms, regardless of whether they are doing cross-border business or not, will have to alter almost every action and activity they currently undertaken, including how they trade and what they can offer their clients. Moreover, the FSAP's institutional coverage is extensive including private banks, stock-broking firms and investment managers.

There is concern in London that such extensive and wide-ranging changes will bring substantial compliance costs. There will, of course, be benefits too, but many expect they will be outweighed by the costs. For example Sir Callum Mcarthy, chairman of the Financial Services Authority, has expressed serious doubts whether the benefits will outweigh costs of the costly Market in Financial Instruments Directive (MiFID).

The FSAP affects both retail firms and, of especial significance for London, wholesale firms. Many in the City initially hoped that the Commission would focus on developing a single market in retail financial products and leave the regulation of London's big wholesale markets relatively untouched. But many of the FSAP's provisions such as measures on capital adequacy, on market abuse, on investment funds, on takeovers and prospectuses, bear on wholesale markets. Many City people feel that EU legislation makes insufficient allowance for the exceptional nature of the London markets and the light touch regulation that has created them. They are, therefore, concerned that the FSAP could damage the City's competitiveness rather than enhance it.

The table below is illustrative of the complexity and reach of the measures under the FSAP.

Financial Services Action Plan (FSAP) measures

Grouping	FSAP and related measures (with date of adoption)
Securities issuance and trading	The Market Abuse Directive (January 2003)
	The Prospectus Directive (July 2003)
	Revision to the 1993 Investment Services Directive (ISD) (proposed November 2002) - "ISD2" (Markets in Financial Services Directive (MIFID))
	The Transparency Directive (proposed March 2003)
Securities settlement	The Settlement Finality Directive (May 1998)
	The Collateral Directive (June 2002)
Accounting	The Fair Value Accounting Directive (May 2001)
	The Regulation (July 2002) endorsing the International Accounting Standards
	The Accounting Modernisation Directive (May 2003)
Corporate restructuring	The European Company Statute consists of (1) a Regulation (October 2001) enabling companies to set up under a European charter and (2) a Directive on employee involvement
	The Takeover Bids Directive (proposed October 2002)
	New Commission proposals for the 10^th and 14^th Company Law Directives
Insurance	Directive (November 2000) amending the Insurance Directives and the Investment Services Directive
	2 Directives (March 2002) updating solvency standards for life and non-life insurers
	The Insurance Mediation Directive (December 2002)
	Commission proposal on harmonisation the framework for reinsurance supervision
Long-term savings	2 UCITS (Undertakings for the Collective Investment of Transferable Securities, ie mutual funds) Directives (January 2002), amending earlier (1985) Directives.
	Distance Marketing Directive (September 2002)
	Pension Funds Directive (May 2003)
Retail payments	Communication on the EU Legal Framework for Payments in the Internal Market
Electronic money	The E-Money Directive (September 2000)
	The Electronic Commerce Directive (June 2000)
Money laundering	The Second Money Laundering Directive (December 2001)
	Proposal for a Third Money Laundering Directive
Financial supervision	The Financial Conglomerates Directive (December 2002)
	Proposal for a Risk-based Capital Directive
Corporate insolvency	The Insurance Winding-up Directive (March 2001)
	The Bank Winding-up Directive (April 2001)
Taxation of savings income	Taxation of Savings Income Directive

Source: FSA, HM Treasury and the Bank of England, The EU Financial Services Action Plan: A Guide, 31 July 2003.

The Lamfalussy report on the regulatory reform for securities (February 2001) identified several shortcomings in the system relating to EU financial services legislation for securities. It recommended the setting up of the European Securities Committee (ESC) and a Committee of European Securities Regulators (CESR) to improve the legislative system relating to securities. The specific function of the ESC was to advise the Commission on issues relating to securities policy. The functions of the CESR included advice to the Commission on the technical details of securities legislation. The ESC and the CESR were formally established in June 2001.

In December 2002, proposals to extend the Lamfalussy procedure relating to securities to other financial sectors were endorsed. These sectors were, firstly, the insurance and occupational pensions sector and, secondly, banking. CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors) was established in November 2003 and CEBS (the Committee of European Banking Supervisors) was established in January 2004.

The locations for the three "Lamfalussy regulatory committees" are:

Committee of European Securities Regulators (CESR): Paris.
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS): Frankfurt.
Committee of European Banking Supervisors (CEBS): London.

RL, February 2007