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European Union

Commission adopts financial services communication

On October 28, the Commission adopted a communication entitled "Financial Services: Building a Framework for Action". The aim of the communication is to give the EU financial markets the possibility to support competition and resist financial instability. The strategy put forward to achieve this aim is to establish a capital market that meets the needs of issuers and investors, abolishing the barriers to cross-border provision of financial services such as mortgage loans, insurance and retirement services, with the view to offering the consumer a larger choice, and to guarantee higher levels of protection. The EU's financial services sector already accounts for some 6% of the EU's GNP, and it offers essential financial products to both industry, notably investment capital, and individual consumers, such as mortgages, pensions and insurance. It also accounts for 2.45% of EU employment and there is considerable potential for job creation in the sector. The communication highlights four areas of the sector in which action is required:

  • wholesale markets — the communication proposes a programme of action to smooth out remaining legislative, administrative and tax barriers to cross-border flotations and investment-related activities to complement the market-driven modernization of EU wholesale markets promoted by the single currency;
  • retail financial markets — despite the progress in the completion of a single financial market, the cross-border sale of traditional financial products to individual consumers remains the exception. Moreover, there are still wide price disparities between member states: if fixed commissions for private equity transaction fees are compared between the cheapest and most expensive member states then they are 17 times more expensive. The Commission aims to promote full financial market integration while ensuring high levels of consumer protection and consumer confidence;
  • supervisory cooperation — the Commission considers that structured cooperation between national supervisory bodies rather than the creation of new EU level arrangements would be sufficient to ensure financial stability. However, this cooperation is now organized on an ad hoc basis and will need to be strengthened. This is particularly the case with regard to securities markets supervision, because the Commission believes that present arrangements are unable to keep pace with the accelerated growth in market integration; and
  • taxation — the Commission is aware that the advantages of open and competitive financial markets can be offset by harmful tax competition on financial activity. The taxation package agreed by the finance ministers on December 1 1997 demonstrates the member states' willingness to consider EU-level solutions to address the tax distortions affecting the single market such as tax distortions to the allocation of savings and tax competition between financial centres. The Commission wants action to be taken in those areas where harmful tax competition is particularly disruptive. The communication also suggests that developments must be made in respect of key financial products, such as life insurance and pension funds, where tax treatment prevents cross-border marketing.

The Commission proposes that personal representatives of finance ministers should meet in a financial services policy group, chaired by the Commission. The group would suggest priorities among the measures outlined in the communication, to include the adoption of the draft directives on winding-up and liquidation. The group would also advise the Commission on how best to achieve other operational conditions needed to ensure the functioning of the single market. In particular, the group would serve as a focal point for collective monitoring of implementation and enforcement of financial services legislation.

The Commission states that the basic EU framework of prudential rules is satisfactory but that legislative techniques need to be more streamlined, flexible and faster. This is necessary to allow supervisory rules to be rapidly adapted to evolving market conditions. The communication also emphasizes the importance of enforcing existing rules, through better implementation by member states, stricter policing by the Commission and by clearer and more uniform interpretation of EU legislation. The communication proposes that differences in interpretation could be reduced by cooperation between member states' supervisory authorities to promote best supervisory practice and by interpretative communications from the Commission. The communication was requested by the June 1998 Cardiff European Council, and it will be presented to the Council of Finance Ministers, the European parliament and the Vienna European Council for approval.

Commission to propose directive on pension fund investments

On November 5, the Commission expressed its intention to propose a Directive on pension fund investments. This followed consultations in which the financial sector called for a single market for supplementary pensions. A communication can be expected early in 1999 outlining the next steps for the single market for pensions, followed by a proposal for a directive with the aim of allowing pension funds to invest anywhere in the single market and use approved fund managers from any member state. The Commission is also seeking to coordinate the member states' tax systems to tackle obstacles to the free movement of workers arising from supplementary pension arrangements.

The communication is expected to propose that supplementary pension funds should be allowed to invest freely anywhere in the EU and use the services of approved managers established in the EU. The supplementary pension funds should be able to respond to changing labour market conditions, the constant increase of migrant workers, and the expectations of business when running pension plans in several member states. The ultimate aim of the Commission is to allow cross-border membership of pension funds.

The Commission has already begun work on the accompanying coordination of member states' tax systems to ensure that workers are allowed to remain members of their home country supplementary schemes when they move from one member state to another. The Commission has set up the Taxation Policy Group which held its first meeting this summer. At this meeting, the member states' representatives demonstrated a willingness to reach an agreement on the removal of obstacles to labour mobility and the freedom to provide services. The Commission has stressed that the work under way in the supplementary pensions field should also be seen against the wider background of the efforts to coordinate the member states' direct taxation systems.

Michael Reynolds
Allen & Overy

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