The violent reaction of British banks. The European Commission's proposal at the Council and the European Parliament for a new directive on "investment services" (see our bulletin of 20 November, p.11) could cause a row much of the same mould as that caused by the first proposal of a common regime for public takeover bids. It affects powerful, specific financial interests, and when such interests are in question the effect is doubled: a) financial circles go wild and can count on part of the press which flatly echoes their positions; b) commentators wishing to reason with their heads, as well as MEPs (not to mention the public, which is totally lost in all this) find it difficult to find their way among the extremely technical details and understand where the general interest does in fact lie (as it is not necessarily that of the stock exchange and banking operators). Without going into all the details that are beyond me, and still less without seeking to reach a decision being opposing positions, I should like to do some modest didactic work - that is, clarify the political and economic stakes and the different interests.
At the present time, in a certain number of Member States (mainly France, Italy and Spain), stock exchange actions are centralised at the stock exchanges, whereas, in other countries (mainly the United Kingdom, Germany and the Netherlands), the banks can deal with their clients' stock orders themselves. A harmonised European system, or at least one that is harmonised in its main principles, is indispensable to move forward on the road toward the creation of an integrated financial market, which is the aim to be reached for end 2005, and which represents one of the major challenges of the "Lisbon Strategy". The Commission proposes that the existing restrictions in France, Italy and Spain should disappear but that, at the same time, obligations of transparency should be introduced for banks that are authorised to treat the orders of their clients directly. The result would be that the banks currently excluded from the stock market would gain access to it and that the banks already active in this field could act throughout the Union, thanks to a European "single passport", while being subject to additional transparency regulations.
British banking circles reacted with extreme violence to this, as they were practically certain, the day before, that the Commission would propose rule-free freedom. As long as we assume these circles had all the right contacts, then we can assume their information was correct, and that the initial project was along the lines of pure and simple liberalisation, without further obligations. But the Commission is a College, and changes (attributed by the British press to pressure from President Prodi and Commissioner Barnier) have been introduced. The final compromise was considered as sufficiently reasonable to be adopted at the end of the day by "consensus", that is, with the agreement of all Commissioners.
The impact of the project. The impression held by the profane, a category in which I include myself in principle, is that the impact of "liberalisation" is obvious as: a) the regulated markets will be in direct competition not only between themselves but also with the large investment banks; b) the "passport" for the banks and investment companies in general authorised to carry out stock exchange operations will be European as it will make it possible to act in all Member States; c) the obligation of transparency seems quite normal, given the amounts at stake and the volume of transactions. Frits Bolkestein, himself, who announced the project for which he assumes full responsibility, stressed that, for the first time, it aims to give the EU a complete regulatory framework that will govern the organised implementation of investment operations not only by stock exchanges but also by the other systems of negotiation and by investment firms. If adopted, the directive will increase integration and transparency of Union markets and will strengthen competition between the traditional stock exchanges and the other systems of negotiation, which will have the effect of encouraging innovation, reducing costs of negotiations and making additional capital available for investment, which, at the end of the day, will reactivate economic growth. It will therefore be a significant move forward towards this integrated European financial market which, according to a recent study, could bring additional growth of 1.1% and an 0.5% rise in total employment. In detail: the cost of financing by shares would drop by 0.4% and that by issuance of securities by 0.5%. Companies could therefore finance their investment at half the cost, which would entail 6% expansion of the overall investment and a rise of 0.8% in private consumption. A little too optimistic on the popular diffusion of the stock market, Mr Bolkenstein had added: "we must not miss this opportunity to put a little money in the pocket of every European".
It is easy to understand to what point the interests of such and such a category of bank are considered as of secondary importance when faced with these objectives and the effects that have been announced. Strengthening transparency and monitoring is necessary, according to Frits Bolkestein, to "get rid of the cheats and charlatans" but which should at the same time be "sufficiently supple for saving the good operators from the headache of fifteen different kinds of regulation". The balance between transparency and monitoring will provoke the majority of divergences. According to the financial communities in London, the a posteriori revelation of a buying and selling price bands for some shares, as laid down in the project is "useless and impossible to implement". The Secretary General of the EU banking federation is said to be disappointed by the formula that has been definitively approved by the Commission on this subject. Mr Bolkestein considers it inappropriate to focus attention on a single point, whereas the objective of the directive is much more wide-ranging and the Commission's proposal does in fact represent just a phase in the procedure; it's a basis for negotiations, the ball in now in the court of the European Parliament and Council.
MEPs must be on high alert. I'm primarily thinking of MEPs, who can't all be stock market and financial experts but who have to be alert to what is at stake behind the technical terms. My knowledge is obviously insufficient for me to take a position in favour of the British position or that proposed by the Commission. According to Mr Bolkestein, his project represents a balanced compromise that is acceptable to all Member States and Parliament. It is in any case absurd to present it as holding back competition (which is what London is asserting); the contrary is true, as the banks will be able to carry out their activities all over the EU, which is currently not allowed in several Member States. As for the new rule, "transparency does not affect competition" and is particularly necessary when the stock markets are seeking to regain the confidence of savers.
Euronext, the body bringing together the stock exchanges of Paris, Brussels, Amsterdam and Lisbon declared that "time would be needed for analysing the details of the text", before taking a position. But the "Financial Times" considered that an immediate response was necessary even before the Commission had approved its text, and what a tone it used! It was an outrageous tone, not in the information it provided (which in this case is objective) but in the "the Lex Column" section (1). Bankers are obviously well brought up people and good company but these qualities sometimes disappear as soon as their money is touched. The tone of this "Lex Column" should encourage the political authorities, notably parliamentarians to redouble their cautionary efforts. MEPs overall, took the time to reflect on the matter, except for Theresa Villiers, British Conservative, whose reaction was extraordinary given that she responded on the very same day, denouncing the last minute intervention of President Prodi, who introduced transparency obligations that were "impractical…whereby the consultation process becomes a deception" (see our bulletin 20 November), given that during this process the British banks were opposed to these obligations (but the French Banking Federation (FBF) thinks that they are still insufficient and discriminate against the stock exchange, which is subject to even tougher obligations).
The "Financial Services" project is situated in the context of global action to integrate the financial and stock markets, which include: the new directive on take-overs (which, according to the Commission, should be adopted in a single reading), directives on prospectuses and pension funds, the directive on financial conglomerates (which has just been adopted by the Parliament: see our bulletin of 21 November p 10) and the gradual putting into practice of the recommendations formulated by the Winter Group on company rights and enterprise governance. These recommendations cover the fields stripped naked by the Enron affair and the fallout that followed, including remuneration for CEOs, stock options systems, the role of external company administrators, accounting revision practices etc. The Commission is calling for all these issues to be "openly debated", in view of presenting an action plan in the first few months of next year. Frits Bolkestein is attaching great importance to it because "the scandals that have surrounded the Enron affair have demonstrated that any attack on investor confidence seriously undermines development in the capital markets and therefore impacts on economic growth". An explicit way of recognising that managers implicated in the scandals have a responsibility for the economic slowdown affecting Europe. (F.R.)
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(1) The verve and elegance of the "lex Column" in the Financial Times warrants a partial quotation. "Mr Prodi calls himself president of the European Commission but turns out to be merely an old-school political hack looking after Italian interests. The text to be put before the Commission, hurriedly rewritten after Mr Prodi's interference, is a dog's breakfast…The real victim is the Lamfalussy process, stabbed through the heart by Mr Prodi and French and Milanese conspirators".