The emergence of Euroland has persuaded some commentators to argue that Europe needs a tough capital markets policeman, an equivalent to the US Securities and Exchange Commission (SEC). At the same time, moves towards greater capital markets integration have given their case added urgency – the Paris, Amsterdam and Brussels stock exchanges are to amalgamate as Euronext; there is talk of London’s Stock Exchange merging with Frankfurt’s; and it is rumoured there may be a European deal with Nasdaq .
But while the current European capital markets regulatory framework is regarded by many as fragmented and inadequate, an influential new piece of research* suggests that setting up a euro-SEC is the wrong way to go.
Professor Karel Lannoo, a senior research fellow at the Centre for European Policy Studies in Brussels, says creating a European SEC would be ‘putting the cart before the horse’. He acknowledges that advocates see the SEC as a ‘powerful instrument for market integration’ but argues: ‘Regulation needs to follow the market, not lead it.’
The nub of Lannoo’s argument is that capital markets in the US and Europe are fundamentally different in character. He notes that while the bank market is most highly developed in Europe, the bond and equity markets are more important in the US. Lannoo says: ‘Different financial systems require different regulatory set-ups. A market-based system requires control of market information, accounting standards and market integrity, whereas a bank-based system needs tight supervision of the banking sector.’
In the US system, there is greater awareness of the risks that can create a ‘credit crunch’ and high transparency makes lenders aware of problems early and encourages wider credit spreads in which high-risk corporate borrowers pay more. In the bank-based markets, lenders perception of risk is much lower. Risk does not have such an immediate impact because the loans on banks’ books are not marked to daily market rates. This doesn’t mean that the euro capital markets don’t need some form of regulation – just that it should be of a different kind to that administered by the SEC.
Lannoo identifies six key areas in which European regulation has already been partly harmonised between EU members, but where further progress is needed. These are:
regulations for listing companies;
mutual recognition of listings between member states;
disclosure and trading rules;
regulation of intermediaries and markets;
regulation of investment products;
comparability of disclosed information in areas such as reporting standards.
Lannoo acknowledges that developing a pan-European view of current regulation is not a simple matter. ‘Differences in the institutional structure of supervision, the division between regulation and self-regulation, the reach of the securities market regulator, and the powers of legal interpretation and enforcement make any cross-border comparisons very difficult or almost impossible.’
The problem with this confusing set-up is that it doesn’t encourage regulators to swap information. In fact, as Lannoo ruefully notes, regulators don’t always exchange information within their own territories – which makes encouraging them to do it across borders seem an optimistic hope.
Yet there has been some progress. For example, the Forum of European Securities Commissions (FESCO), set up by the European Economic Area in 1997, facilitates information exchange between national securities commissions and aims to provide mutual assistance to improve market surveillance and enforcement against abuse. FESCO members agreed last year to create ‘a pan-European regulatory framework to provide the broadest possible mutual assistance between the competent authorities of member states’. The agreement covers insider dealing, disclosure of interests, competent intermediaries, clearing and settlement and administration and custody of securities.
All this is useful, and Lannoo argues that the EU itself has more to do if it wants to make its Financial Services Action Programme credible. In particular, it needs a high-level securities committee with implementing powers. However, the EU’s investment services directive has already introduced cross-border access to regulated markets across the EU, so a licensed market can already provide facilities through remote terminals in other EU countries. Far better then, Lannoo says, to build on this structure and for national markets to be regulated by national regulators who are close to them. A euro securities cop is not wanted here. l
* Does Europe Need an SEC? (European Capital Markets Institute, +34 91 589 20 69.)
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