The Financial Services Action Plan was supposed to lead to the creation of a single European market in financial services by this year. It will not. What went wrong and what is being done about it? 

The Financial Services Action Plan (FSAP), which was designed to integrate the EU’s financial markets, is supposed to be completed this year.

Unfortunately, not all the measures have been agreed yet and many of those that have been have missed their deadlines for being transposed into national law. Consequently, the European Commission’s Internal Market Directorate-General (IMDG) issued a green paper in May – Green Paper on Financial Services Policy (2005-2010) – stating what it intended to do about the failure and announcing its financial services policy until 2010.

In July, the IMDG organised the Exchange of Views on Financial Services Policy 2005-2010 conference. More than 450 people took part in the one-day event, which was billed to include an explanation of what it proposed to do about the late running of the FSAP.

The IMDG is between a rock and a hard place on the FSAP. On one hand, it is criticised for the slow progress of the plan and for not doing enough to bring down more barriers. On the other hand, many of those critics – national supervisors and financial services practitioners – are the ones responsible for the delays and for ensuring many of the obstacles remain in place.

Charlie McCreevy, the internal market commissioner, gave the keynote speech at July’s conference. He accepted that more needed to be done. “The framework of the FSAP is now largely in place,” he said. “[But] there are a number of loose ends that still have to be tied: the capital requirements directive, the solvency II framework, payments and possibly clearing and settlement. Major projects, all of them.”

Implementation laggards

Yet it was the slow transposition into national laws of the existing measures that was the major problem, said Mr McCreevy, who was blunt in pointing the finger of blame at some members of the audience. “I am not very happy about the rate of transposition as it stands,” he said. “In fact, the situation is lamentable. That is why we have now started to regularly publish a transposition scoreboard online. At the moment, the worst offenders have a transposition rate of just about 50%. That is simply not good enough.

“I will spare naming the laggards today. But we will be deploying all the means at our disposal, and if necessary the Court of Justice, to get these texts implemented and working. Anything else would be a shameful dereliction of duty.”

Mr McCreevy outlined other aspects of policy. “We also have to avoid unnecessary provisions being added to EU directives during implementation. Better regulation at the European level becomes a futile exercise when it is foiled by excessive regulation at the national level. The gold-platers should be put on immediate rehabilitation.

“To further increase the transparency and coherence of the European legal framework, we have also taken up the idea of a single ‘financial services rule book’ in our green paper.” The idea is to investigate the potential for getting rid of regulatory overlaps, conflicts, duplication and ambiguities. “In short, we need an overall consistency check,” said Mr McCreevy.

Despite the many new rules in the green paper, Mr McCreevy claimed that better regulation was at the core of his agenda. New legislation must have “clear added value”, address the needs of all market participants, be done with wide consultation and with thorough impact assessments, he said.

Critical voices

Most speakers and delegates seemed broadly in favour of Mr McCreevy’s objectives. But there were plenty of critical voices. Peter Schütze, head of retail banking at Nordea, who sat on a panel to discuss cross-border mergers, was one of them. He said that there were still major barriers to further banking integration in Europe. Banks trying to sell products cross-border faced a minefield, he said.

“The consumer legislation, although it is in general based on the same EU directives, is implemented very differently from member state to member state. So you run a high risk of not complying with the local law. Add to that different languages and traditions and it is easy to understand why most banks abstain from this option,” said Mr Schütze.

The other option is to buy a bank in another country, which has worked for Nordea. But there are still obstacles, the two biggest ones being VAT laws and the wide differences in national deposit guarantee schemes. These are preventing Nordea from transforming itself into a European company, said Mr Schütze.

A Nordea unit in one EU state had to pay VAT when buying internal services from a Nordea unit in another EU state. In financial services only a minor part of the VAT could be reclaimed. “The result becomes a cross-border VAT on our internal services that adds an extra cost of up to 25% compared with competitors operating only nationally or outside the EU,” he said. To get round this, Nordea had built up branch structures for specific services to avoid the penalty but even that measure may eventually be challenged by the authorities, he warned.

“I do not really understand why the VAT issue is not discussed more openly. Who is willing or able to pay an EU penalty of 25% to integrate the internal services in institutions cross-border?” he asked. His suggested solution was to let financial institutions arrange VAT groupings across borders, whether or not they operated branches or subsidiaries, so that VAT is not paid. “I am still an optimist. But for me it is rather strange to listen to all the nice words of financial integration, cross-border mergers and benefits for consumers and then in the real world see that the two real barriers – rooted in EU policy – are still there.”

Graham Bishop, an independent analyst on European financial affairs, asked whether it was possible for the European Commission (EC) to conduct accurate impact assessments of each measure, as FSAP is an integrated package. “Can you really break it up and assess it in bits?”

Richard Britton, a consultant at the International Securities Markets Association, said this was a valid criticism of impact assessments but they should still be attempted. “It’s so important that the measures are developed in a framework that looks at costs and benefits. I would not want to see the EC moving away from that,” he said.

Supervisors’ response

Supervisors at the event were generally supportive of the green paper but had some criticisms. For example, Jean-Claude Trichet, president of the European Central Bank, supported the need for the EC to forge ahead with its proposal for a directive on securities clearing and settlement, which was long overdue. “A directive will help remove residual barriers – as identified by the Giovannini Group [which identifies inefficiencies in EU financial markets and proposes practical solutions to improve integration] – to efficient EU clearing and settlement arrangements, and will also provide a legal basis for clearing and settlement systems,” said Mr Trichet.

However, he had one minor reservation about the paper, which was its suggestion that in the management of financial crises there should be a review of emergency liquidity assistance (ELA) by all relevant parties. “I would like to note that the provision of ELA is a central bank function and an agreement already exists…on how this facility operates in the euro area. It is my perception that there are no specific issues relating to the provision of ELA which need to be addressed at EU level.”

Rule book reservations

Margaret Soden, a director at the British Bankers’ Association (BBA), later told The Banker that the BBA also has some reservations about the green paper. “The idea of a single financial services rule book is something that would need widespread consultation. We are not sure it would add anything to the objective of greater integration in financial markets, and would increase costs for banks,” she says.

The BBA is also concerned that too much regulation is being planned in the retail financial services and asset management sectors. “Legislation is not always the way,” says Mrs Soden. “There could be more self-regulation.”

Nevertheless, she says the UK banking industry supports the key objectives of the green paper, especially efforts to speed up the transposition of the FSAP into national laws and ensure the measures are enforced, all within a framework of better regulation.

Green paper pros and cons

Official submissions from banking associations across the EU in the green paper consultation process are thought to have much in common. They generally support what the IMDG is trying to do but contain strong arguments against several of its proposals, including those for a new directive on securities clearing and settlement, to expand the scope of the Single European Payments Area, to bring forward legislation on ratings agencies and financial analysts and to modify the Hague Convention on securities transactions law.

Discussions will continue behind closed doors during the next few months. In November, the EC will unveil its financial services policy programme and how it proposes to bring about a true single market within a reasonable timescale.


 The FSAP was drawn up by the IMDG in 1999. The objective was to integrate the EU’s financial markets, thus improving efficiency, aiding economic growth and creating jobs.

The intention was that all the measures – nearly 50 directives, regulations, recommendations and communications – would be adopted (that is, agreed) by the European Parliament and Council of Ministers by 2005, after which they would be transposed into national law by each member state, enforced by the supervisory authorities in those states and be continuously evaluated for their effectiveness.

The plans have gone astray, however. Almost all of the measures have been adopted at EU level but several have not and may not make the 2005 deadline. This is due to the late addition of some measures and stiff opposition in certain areas by national supervisors and financial companies.

Measures that are still in the pipeline include three directives: the 10th Company Law Directive on cross-border mergers, the 14th Company Law Directive on cross-border transfer of seat (a company’s headquarters) and the Capital Requirements Directive.

A bigger problem, though, is the slow transposition of adopted measures into national law. For example, of the 22 directives so far adopted, only three – on information exchange, insurance company solvency and savings tax – have been transposed by every state.

To name and shame the laggards into speeding up the process, the IMDG publishes Rate of Transposition of FSAP Directives: View per Member State. The latest version shows that the Czech Republic, Greece and the Netherlands have implemented 50% or fewer directives by the required deadlines.

The UK, France, Italy and others have managed about 65%. Even the best performers – Denmark, Ireland, Austria, Germany, Estonia and Malta – have managed to implement only 78%.

Naming and shaming is not enough. Enter the ‘Green Paper on Financial Services Policy (2005-2010)’. Released in May, the paper’s objectives are to complete the FSAP process quickly by getting the outstanding measures adopted at EU level, and the existing measures implemented at national level; and to propose new laws and ways of co-operating with national regulators and financial institutions to bring about further integration of EU financial markets over the next five years.

“Sequels to even the best originals tend to exhaust people’s enthusiasm, so there will be no FSAP2,” said internal market commissioner Charlie McCreevy in May. Yet FSAP2 is, essentially, what it is.

Specific proposals, which Mr McCreevy admits could involve more legislation if co-operation does not work, include:

 The public consultation period on the green paper ended on August 1. The final financial services policy programme (the white paper) is due to be published in November.


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