By

Alexander Schaub

Director General, Internal Market Directorate General

European-American Business Council

Washington, DC

July 3, 2003

I. Introduction – The Changing Face of Europe.

Europe is undergoing a profound economic and political transformation. Two decades of unstinting effort to remove barriers to cross-border trade and competition are beginning to pay dividends. The euro has lent further impetus to integration of the 12 euro-zone markets.

Europe is enlarging to include 10 new countries. We are working on a new EU constitution to strengthen Europe's decision-making capacity and to enable it to better meet its global responsibilities.

Old ways of doing business are out – witness the breakthrough on CAP reform. Old taboos are being broken – all Member States [MS] are now implementing structural reforms in labour markets and pensions.

Not that everything is rosy. Far from it. The European economy – particularly Germany, Europe's traditional powerhouse – is faltering. European financial markets are recovering from market corrections which were more sustained and more pronounced than in the US.

Nevertheless, Europe is on a new trajectory. Nowhere is the sense of change more evident than in financial markets.

II. The European Regulatory Agenda for Financial Markets:

Member States have set themselves the ambitious target of creating a single financial market by 2005. Investors will be free to buy and sell financial instruments issued or listed in other MS. Intermediaries will be free to transact freely with clients in other Member States on the same terms and conditions as domestically. Issuers will be able to tap a deeper and more liquid market.

This will generate significant dynamic benefits: access to efficient and innovative service providers; availability of flexible and competitive financing for European corporate borrowers; a healthy rivalry between dynamic financial centres; state-of-the-art infrastructures.

The key to unlocking these benefits is the removal of regulatory and other non-tariff barriers to cross-border finance. An integrated single market requires that national regulatory structures be knitted into a coherent system which avoids legal conflict and duplication of supervision. At the heart of our policy is the concept of the "single passport" – a financial institution which is duly authorised and supervised in its Member State of origin should be considered fit to do business throughout the EU. We hope that Europe will surpass the degree of geographic integration attained in US insurance and banking markets – only 6% of US banks operate in more than 1 US state.

III. The EU's Financial Services Action Plan – Blueprint for Integration:

A “single passport” requires convergent regulation of the main risk-features of the financial system. Member State regulators will only waive local oversight if they believe that their investors are adequately protected and that incoming service providers will not prejudice market integrity and stability. Consequently, borderless finance within Europe is not synonymous with regulation-free Europe. In fact, our efforts have required far-reaching and comprehensive harmonisation to create a common base-line of regulatory protection.

Progress to date:  In 1999, new impetus was given to this process through the Financial Services Action Plan [FSAP]. Particular emphasis is placed on the liberalisation of corporate finance and the creation of a European securities rulebook. Thirty-five out of the 42 FSAP measures have now been agreed. We are close to the level of regulatory harmonisation needed to support effectively integrated financial markets.

Beyond FSAP:  However, the integration goal-posts are constantly moving. The assessment of what regulatory measures should be agreed collectively changes as market practice and structures evolve. As financial institutions take advantage of single market freedoms, they become less tolerant of the nuisance costs caused by remaining regulatory distortions. The integration of markets also intensifies the risk of cross-border contagion and calls for closer coordination of prudential oversight. So, new challenges are constantly arising for European financial law-making. This dynamic explains why the EU is now required to look beyond the FSAP:

– First, company law and corporate governance. There is widespread consensus on the need for effective action in this area to restore investor confidence. We want self-corrective measures on the part of industry, complemented by supporting measures at national or EU level where necessary.

– Second, the emerging Basel II Accord on capital adequacy will have to be implemented in the EU. Similar projects are underway to strengthen prudential safeguards for insurance and reinsurance.

– Third, create a policy environment which supports the market-driven restructuring of clearing and settlement. Investors must be able to settle cross-border financial transactions on the same terms as domestic transactions.

Impact in the marketplace: Does this regulatory re-wiring make a difference? The combination of the euro and the FSAP is facilitating a profound restructuring of the European financial landscape:

– the traditional "domestic bias" in investment strategies of institutional investors and banks has vanished;

– new European markets for corporate bonds, commercial paper and venture capital are thriving;

– consolidation of exchanges and the clearing and settlement infrastructure is underway;

– cross-border presence in the retail banking sector – particularly through direct/internet banking – is gathering pace.

These changes are driven by technology and commercial innovation. However, they would be severely curtailed in the absence of an EU-level programme to remove regulatory obstacles.

IV. The US Interest in EU Financial Reform:

Why should US market participants care about any of this? Europe remains a key strategic partner for the US. It imports more than 3 times as much from US as Japan, and 6 times as much as China. European efforts to reform its financial infrastructure will boost European growth and make it a more profitable place to do business.

More importantly, the way in which Europe regulates financial business will have a direct impact on US financial institutions and market participants which are active in the European financial marketplace. Europe is already a prime source of revenue for US financial institutions. US commercial interests are best served by well-regulated, open and competitive European financial markets. The European legislative system is open to US concerns – we operate a transparent approach to financial rule-making which affords US market participants the opportunity to influence regulatory design in Europe.

V. Europe and the US Regulatory Agenda:

It goes without saying that European financial institutions and regulators have a comparable interest in changes in the US regulatory environment. Our transatlantic relationship is a 2-way street: many leading European financial institutions and issuers are present in the US market. In fact, it can be argued that in certain areas, European markets and regulators are in the hands of US authorities. In credit ratings for example, the US is the leading market and the SEC [US Securities & Exchange Commission] may emerge as the de facto global rule-setter and overseer. Rather than seek to reinvent the wheel in Europe, EU regulators may be better served by seeking to ensure that the US regulatory system takes full account of European concerns.

However, financial interdependence also increases the risk that US regulation may generate unintended legal obligations for economic actors in Europe and vice versa. We have a live example of this problem on our hands with the auditor registration requirements under the Sarbanes-Oxley Act [SOA].

Since the publication of the Act and the implementation of the rules by the SEC, we have fought hard to ensure that European interests are fully respected. The SEC has been helpful up to now:  accommodating European concerns on auditor independence; on audit committees; on rules for lawyers, etc.

But now we have a harder nut to crack – the PCAOB's [US Public Company Accounting Oversight Board] foreign auditor registration requirements. We consider these rules burdensome; and they may result in a further concentration of global audit firms. If that wasn't bad enough – the rules also conflict with EU law, placing EU audit firms in an untenable position.

One of the key reasons for my presence in Washington this week is to meet with the new PCAOB Chairman, Bill McDonough. I remain hopeful that a solution to the auditor registration issue can be found if both sides approach the matter with an open mind.

VI. Living with Regulatory Interdependence:

Sarbanes-Oxley is becoming in European eyes a test case for a new model of regulatorycooperation. In globalizing markets there will be many more such cases in the future. What type of structures do we need to ensure a smooth and efficient resolution of regulatory concerns?

In the short-term, we need to defuse frictions arising from conflicting approaches to financial regulation and to minimize any unintended consequences of regulatory action. In this respect, the EU-US Financial Markets Regulatory Dialogue, launched in 2002, is proving its worth as a flexible and pragmatic structure for managing such tensions and promoting upstream convergence on the principles of regulation. The bilateral dialogue allows the participating regulators to explore issues which do not lend themselves easily to resolution through traditional trade mechanisms such as the WTO. To date, the main focus of discussions has been on:

· resolving concerns relating to extraterritorial implications of the SOA; and

· comparable US concerns regarding the assessment of US arrangements for group-wide supervision of US financial conglomerates.

However, the EU-US financial dialogue need not only be about damage limitation. There is also a "positive" regulatory agenda which will allow us to harness the full potential of the transatlantic financial relationship.

Recent economic analysis has estimated that removal of non-tariff barriers to EU-US trade in goods and services would boost US GDP by between 0.5% and 1% of US GDP. Reaping these benefits in financial markets will require mutual understanding of regulatory approaches and a process of regulatory convergence where divergences are identified. On this basis, "exemptive relief" could be provided from application of elements of the host-country regulatory regime. These ideas are not alien to the US regulatory system – US authorities have a history of granting "exemptive relief" where they consider it appropriate and not harmful to the interests of US investors.

VII. Conclusions:

The benefits of integrating financial markets do not stop at the borders of the EU: seamless transatlantic markets hold out the prospect of enormous benefits. Moreover, technology is no respecter of supervisory or institutional boundaries. Market participants are already using technology to globalise trading, investment and distribution strategies. Regulators on both sides of the Atlantic will have to confront this reality and facilitate such business – subject to effective but rationalised structures for supervision and enforcement. An effective division of labour between EU and US authorities – on the basis of agreed regulatory accommodations – will be indispensable. This implies new ways of thinking about old problems. It behooves regulators to rise to the challenge. Failure to adapt our regulatory mind-set means that important economic opportunities will go a-begging.

I am confident that regulations on both sides of the Atlantic are prepared to rise to the new challenge of globalisation.