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European Union

Settlement Finality Directive

The draft Directive on settlement finality, incorporating amendments proposed by the European parliament, was approved by the Council of Ministers at the end of April 1998. It provides for legislation to deal with the position of cross-border payments when a bank or securities firm cannot meet its obligations. It aims to cut the systemic risk in payment and securities settlement systems and to minimize the disruption to a system caused by insolvency proceedings against a participant in the system.

The draft Directive defines when transfer orders become final, thereby ensuring that they are legally enforceable and binding on third parties in the event of insolvency proceedings against a participant in a system. It ensures collateral security provided in connection with participation in the system will not be affected by insolvency proceedings against the person providing the security.

An article detailing the implications of the Directive will appear in the July issue of International Financial Law Review

Proposed new Directive on taxation of cross-border savings income

The Commission has submitted a proposal for a Directive to ensure a minimum level of effective taxation of savings income in the form of interest paid to individuals within the EU. It is intended to tackle economic distortions within the EU resulting from the non-taxation of cross-border interest payments to individuals. The proposal is based on a coexistence model, which requires each member state either to provide information to other member states on interest income from savings or impose a withholding tax of at least 20%. To avoid double taxation, the member state in which the individual is resident would be obliged to credit withholding tax paid in another member state.

Implementation of the proposed measures would rely on the cooperation of market operators, normally banks, who actually pay out the interest to such entities which would be obliged either to provide the information about the interest or to levy the withholding tax itself. The proposed Directive does not seek to achieve total harmonization of the taxation of interest income within the EU, because it is limited to income in the form of interest paid in one member state to individuals resident in other member states. It is intended as the first step towards effective taxation of savings income throughout the EU.

Commission clears accountancy merger

On May 20 1998, the Commission announced its decision to approve the US$13 billion merger between the two accountancy firms, Price Waterhouse and Coopers & Lybrand. The Commission concluded, after an investigation, that the merger would not create a dominant position in any of the markets in which the firms are active. The Commission's analysis focused on the provision of audit and accounting services to large national and multinational companies. It noted that such companies depend on the big six accountancy firms, because only they have the necessary depth of resources, expertise, geographic spread and reputation.

The Commission concluded, on the basis of market shares and the evidence of competitive bidding activities entered into by the big six over a period of years, that the merged firm will be constrained from dominating the market by the competitive behaviour of the remaining four large accounting firms. The Commission considered that the market has many elements conducive to a condition of collective dominance: the slow growth of demand, lack of sensitivity to price, homogenous service, the interlinking of services through self-regulatory professional organizations and the fact that clients tend to be locked to incumbent auditors for long periods . It also found no conclusive proof that the merger would create or strengthen a position of collective dominance in view of the post-merger existence of no fewer than five suppliers.

A key factor in obtaining approval for the merger was the decision earlier this year by rivals KPMG and Ernst & Young to abandon their merger plans. In its press release the Commission noted that one reason it had found that collective dominance had not been established was the "non-emergence of two clear leading firms" post-merger. KPMG and Ernst & Young are the world numbers two and three in terms of business volume and a company created by their merger would have been 50% larger than any rival.

Approval for state aid to Crédit Lyonnais

On May 20 1998, after protracted negotiations, the Commission approved the grant of supplementary state aid by France to Crédit Lyonnais of between Ffr53 billion (US$8.9 billion) and Ffr98 billion. The exact figure for the aid is uncertain because it depends on the future losses of the Consortium de Réalisation (CDR), the bank charged with re-packaging and disposing of non-performing assets of Crédit Lyonnais in the wake of an earlier Ffr45 billion rescue plan in 1995. The Commission described the total amount of aid received by the bank, estimated between Ffr102 billion and Ffr147 billion, as "unique in the history of the European Union".

In concluding that the aid is compatible with the common market, the Commission stated that it considers the bank to be viable and noted that it is contributing as far as it can to the financing of the restructuring plan. Approval was only granted, however, on the basis that Crédit Lyonnais agree to strict conditions aimed at ensuring such a large amount of aid does not result in the distortion of competition.

Crédit Lyonnais is required to ensure that it reduces its balance sheet by Ffr310 billion in Europe and worldwide. Taken together with reductions imposed on the bank in 1995, this involves a reduction in its balance sheet of more than one-third since December 31 1994. It will also have to reduce to 1,850 the number of branches it operates in France by the year 2000. According to the Commission, these measures "must result in a very significant reduction in the commercial presence of Crédit Lyonnais".

Further, the French government has committed itself to privatize Crédit Lyonnais before October 1999. This means the bank will be able to seek any additional resources it needs on the market. After privatization, the French government has undertaken to restrain the bank's expansion to 3.2% per year up to 2001. In addition, the bank must distribute 58% of its net surplus in the form of dividends until the year 2003. These arrangements will be subjected to strict supervision by the Commission, which has required the French government to provide regular reports.

Michael Reynolds
Allen & Overy

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