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Europe steps up tempo

One of the consequences of the raucous debate on the euro is that

other equally ambitious developments coming out of the European Union

are being overshadowed. For instance, as a step on the path to

European integration, the EU has set itself the bold and ambitious

target of having a single market for financial services by 2005.

The previous guiding principle for EU financial services legislation

was for “passports” to products regulated in the country of origin,

the new desire for convergence means a drift into EU-wide regulatory


Some businesses in this country have been caught napping by what the

European Commission itself refers to as a change in tempo.

FSA international policy and EU affairs co-ordination associate Nigel

Phipps says: “There is a tendency for people to underestimate the

extent to which this process impacts on the UK.”

The danger of complacency is that we end up with something that we do

not want. There are real risks in this process. We will not win every

argument and there will be things that we will not like.”

Phipps is candid about how decisively EU legislation is determining

the actions of the FSA. “If the Financial Services and Markets Act or

our Handbook contradict EU legislation, then they have to be changed

or adap-ted. But there is flexibility when it comes to

implementation,” he says.

The industry has been used to legislation making slow progress – for

instance, the Ucits directive took over a decade before eventually

getting approval at the end of last year.

But now the change in tempo, very much encouraged by the UK

Government, is reflected in the Financial Services Action Plan. To

achieve the 2005 deadline, the commission has set out all the

elements required in a menu with boxes that literally get ticked off

as they are dealt with.

While the single market for financial services is not dependent on

the euro, the people at EU who drafted the financial services action

plan clearly envisaged all members having relinquished their national

currencies. The Commission says it put forward the plan “to harvest

the undeniable opportunities offered by the single financial market

and single European currency”.

The FSA has a policy of not commenting on the euro.

Intermediaries in this country are already feeling the reach and

power of European legislation. It is one of the justifications the

FSA gave for recommending the scrapping of polarisation in

consultation paper 121. “A number of EU directives, both adopted and

proposed, notably those relating to insurance mediation, distance

marketing and e-commerce, have or will have some impact, albeit

indirect, on the polarisation debate.”

The Treasury&#39s decision for the statutory regulation of mortgages and

general insurance is widely thought to have been foisted on it by the

insurance intermediaries directive. After all the time and expense of

setting up the FSA, no sooner did the regulator got its full powers

at the end of December last year than the Treasury was forced to

include the regulation of general insurance and mortgages within its


From an IFA perspective, probably the most conten-tious directive

winding its way around the corridors of Brus-sels is the investment

services directive.

Much hinges on whether advice should be considered a core service and

whether it should be fee-only. Execution-only business could be

threatened by this directive, which Autif deputy director general

Sheila Nicoll describes as the “main plank” of commission thinking on

financial services.

Phipps points out the text of the directive is not finished, and says

the FSA is pushing for the commission to have a second consultation.

Aifa director general Paul Smee last week returned from Brussels,

claiming the commission had a better understanding of how the UK IFA

market worked and that inconsistencies would have to be ironed out.

He also says there was acknowledgement that the capital adequacy

requirement for IFAs could not be the same as for other investment


Capital adequacy in general has been difficult. Pro-gress on the EU&#39s

capital adequacy directive is dependent on the Basel II negotiations

trying to achieve international prudential banking standards. In the

meantime, the FSA has had to issue and consult on its own prudential

sourcebook, knowing it might have to change it significantly. “We are

damned if we do, damned if we do not,” says Phipps.

He claims there is a culture in this country of sitting back and

waiting for EU legislation to be set in stone and then throwing arms

up in horror at the outcome rather than trying to influence the


“UK-owned firms have not put as much resources into EU lobbying as

foreign firms. You need to make your voice heard. It will be gloomy

if we do not go in. The other countries will go for a different

model, based on their own structures and cultures. But it is not all

doom and gloom.” says Phipps.

He says the single financial market should also been seen as an

opportunity. “We could gain from a single market. With the most

advanced financial services, this country is set to benefit.”

Other items to look out for are proposals to allow cross-border

occupational pensions, and plans to allow the exchange of information

on cross-border savings, currently being resisted fiercely by

Luxemburg among others.

Beyond the EU, there are other international initiatives afoot. The

International Standards Organisation in Switz-erland is looking into

creating international standards for financial advisers.Phipps points

out regulation is only one aspect of a single market – there are also

cultural barriers.

What happens to the FSA after 2005, assuming a single market for

financial services is achieved? It could become a provincial

rubberstamper carrying out the European policy or it could be a

strong player in a network of European regulators.


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