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More efficient financial markets are crucial to Europe's economic future. In the last few years, the European Parliament has approved a steady flow of legislation aimed at integrating financial services industries throughout the EU while seeking to reconcile two different goals: increased competition in the industry and better protection for investors. Parliament listened carefully to the views of industry and consumer representatives, an approach which in the end produced more balanced and workable legislation.
Integrated Europe-wide financial markets should bring benefits to business, investors and consumers. Companies will find it easier to raise capital in other Member States and employees will be able to belong to a pension fund managed by a company in another Member State. More competition will lead to cheaper capital, which will in turn foster growth and employment in the real economy. But this market opening must go hand in hand with a stronger supervisory and regulatory framework, to avoid market instability and fraud. The integration of EU financial markets is expected to boost GDP by 1.1% over a decade (130 billion euros) and increase jobs by 0.5%. The integration of equity markets should reduce the cost of capital by 0.5%.
In May 1999, at Parliament's prompting, the Commission presented a Financial Services Action Plan containing 42 measures designed to integrate national financial markets into a single Europe-wide market. The Lisbon European Council set 2005 as the target date for completing the plan and almost all the measures have since been adopted. Parliament backed these efforts to open up markets, while also calling for stronger investor protection. In one case - takeover bids - Parliament forced a complete revision of the proposal, after rejecting the first draft which it felt did not take sufficient account of the implications for some Member States, in particular Germany.
The impact of this new legislation is already being felt. The industry has begun to rationalise and restructure. Cross-border trading has grown and financial institutions have stepped up their presence in other Member States. And wider options for investment and savings have diminished companies' dependence on bank lending.
Tackling insider trading
One directive approved by Parliament was designed to outlaw the manipulation of financial markets, for instance the placing of investment orders with the aim of creating a false perception of demand, or spreading false information or rumours to influence prices. The directive also bans people with insider information from dealing in financial instruments whose price could be affected by such information. These rules, which must be enacted by the Member States by October 2004, are essential to boost investor confidence in a more open financial sector.
Another directive is intended to make it easier for companies to raise capital in other Member States, with the introduction of a single Europe-wide document (or "passport") for issuers of securities so that a company prospectus recognised in one EU country will be valid in the others. To keep red tape to a minimum, Parliament made sure that this directive allows exceptions for small companies: share offers of less than 2.5 million euros a year are exempted. Also, as Parliament demanded, issuers of high denomination bonds will be free to choose their regulator. The Member States must enact this law by July 2005.
The aim of another law, the investment services directive, is to create liquid, competitive and transparent markets for the execution of orders, e.g. for buying and selling shares. Banks or investment firms will be able to match buying and selling orders internally or against their own capital without going to a regulated market. In countries such as the UK, where this is already allowed, big institutions and investment firms internalise between 15% and 30% of orders. This opening of markets goes hand in hand with stricter requirements for price transparency. Parliament was instrumental in clarifying the original proposal, adapting it to make it more workable in different market situations, distinguishing between professional and retail clients and getting exemptions for execution-only businesses.
A directive on transparency lays down minimum rules on the information to be published by all publicly traded companies at European level. The aim is to promote investor confidence in companies whose shares are traded in other countries, which is essential for encouraging cross-border financial investments. Company annual reports will include audited financial statements, a management report and statements by the person responsible for the information. Half-yearly reports are also obligatory, but less demanding than yearly ones. At Parliament's request, quarterly accounts will not be compulsory.
Takeover bids: two bites at the cherry
The purpose of this directive was to establish standard EU-wide rules for the acquisition of majority stakes in traded companies. The directive includes a common definition of an equitable price as well as strict information clauses. The protection of minority shareholders became a key issue.
The directive has a long history. After more than 12 years of negotiations, Parliament in 2001 rejected by the narrowest of margins an agreement with Council which did not take into account big differences in company law among Member States. MEPs voting against the directive believed the compromise did not provide for a level playing field. It limited the possibility of defensive measures which are normal in some markets, such as Germany, but left in place the possibility of multiple voting rights, which are standard in Nordic countries and can function as a de facto defensive measure.
After its first directive was rejected, the Commission came forward with a new proposal that still fell short of Parliament's demands and was then substantially modified following negotiations between MEPs and the Council. The final compromise approved in December 2003 recognises differences in national legislation and market practices of Member States and allows them to opt out of some provisions. In practice, Member States can still allow companies to keep defensive measures. The directive also deals with the issue of multiple voting rights, which the Commission did not include.
A further measure to protect investors was the directive on the prudential supervision of financial conglomerates. This will close a loophole in the existing legislation, which does not cover transactions within such a group. The new rules will limit the risk of financial difficulties being faced by such conglomerates, defined as companies at least 40% of whose assets consist of financial entities. Some of them are among the largest financial groups in the world and a crisis would affect not only individual investors but the whole financial sector. The directive will apply to accounts for the financial year from 1 January 2005 onwards.
The creation of an internal market for insurance mediation is the aim of another directive. Since December 2003, an insurance broker registered in one Member State has the right to sell its services in other Member States. At present 50% of insurance policies are sold by intermediaries, but few of them offer their services outside their own country.
Lastly, progress was achieved on the internal market in company pension plans. Under a new directive, to apply from mid-2005, a pension fund registered in one Member State will be able to manage the pension plan of a company established in another country without the need for further registration. This will, for example, make it easy for employees of multinational companies to transfer their pensions from one country to another.
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