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Western EuropeJuly 1 2007

Transparency Directive is clearly a dog’s dinner

The EU’s Transparency Directive is not functioning properly because most states have failed to implement it, and where it is in force it has been gold-plated to varying degrees.
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What is it?

It is the late and inconsistent implementation of the EU’s Transparency Directive (TD). It was supposed to have been implemented in January this year by every country in the European Economic Area (EEA) comprising the 27 EU members, plus Norway, Iceland and Liechtenstein. But only the UK and nine other states have done so.

What is more, those that have transposed the TD into national laws have imposed different additional rules, and those that have yet to transpose it are likely to do the same – because the directive sets minimum harmonisation standards, leaving countries free to “gold plate”.

Who dreamed it up?

The Internal Market and Services Directorate General of the European Commission (EC).

What are its main provisions?

The TD imposes new disclosure obligations on securities issuers admitted to trading on regulated markets in the EEA.

Its main provisions are that: issuers have to publish annual reports, half-yearly reports and (in the case of share issuers) quarterly management statements; the content, timing and publication requirements of those reports are more demanding than previously; investors must notify the listed company if their holdings pass certain thresholds; and all published information must be made available in electronic form.

What’s in the small print? 

The “Level 2” implementing measures explain how the new rules should work in practice.

What does the industry say?

The International Capital Market Association (ICMA), which represents 400 bond and equity securities underwriters and dealers in more than 60 countries, says “staggered implementation” of the directive “is likely to cause considerable difficulties to firms involved in cross-border activities”. It adds that the minimum harmonisation status of the directive will “lead to non-harmonised implementation”. Christian Krohn, head of implementation of the TD at the ICMA, says: “We are happy how the Financial Services Authority (FSA) has implemented it in the UK but less than happy about how it will be implemented elsewhere.”

Will it be cost effective? 

The FSA published a cost-benefit analysis on the directive last October and concluded that the benefits to UK firms would outweigh the costs – but that was assuming timely and consistent implementation across Europe.

What do the regulators say?

The EC claims that some states have been waiting for the implementing measures, which were not ready until March; and that others have delayed because they want to transpose the TD and Markets in Financial Instruments Directive (MiFID) as a single securities act.

It accepts that some states being able to impose more stringent requirements than those in the directive could “possibly lead to 27 different sets of rules in the EU” but “in practice… minimum standards are largely beneficial to investors and issuers alike”, says a spokeswoman.

The law of unintended consequences

The directive is supposed to help create a single capital market in Europe. Ironically, it is likely to prove difficult and costly for listed companies, investors and their advisers to comply with – “in which case, liquidity will stick where it is and we will not get the cross-border investing the EC wants”, says Mr Krohn.

Could we live without it?

Yes …but not if we want a single capital market.

Rating: 4 (but the implementation problems need to be resolved).

Rating scale:

5 = Essential;

4 = Useful;

3 = Neutral;

2 = Unnecessary;

1 = Waste of time

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Read more about:  Reg rage , Regulations , Western Europe