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The European Union’s Financial Services Action Plan - current status, issues and prospects Back  
While considerable progress has been made to date on the implementation of the FSAP, the ultimate success of the plan is dependent on the political will of the EU to achieve a genuine Single Market in financial services writes Philip Woolfson and Ailsa Sinclair.
The European Union’s Financial Services Action Plan (the ‘FSAP’) was initially launched by the European Commission in May 1999. It identifies 42 measures, which must be adopted in order to create a fully integrated Single Market in financial services by 2005.

There have been a number of recent high-profile successes. On January 15th, 2003, Directive 2002/92 of December 9th, 2002 on insurance mediation entered into force on its publication in the Official Journal. This provides for minimum professional standards for the registration and supervision of intermediaries by their home Member State, allowing them to carry on cross-border business in the EU. In other words, it introduces the ‘single licence’ and ‘European passport’ for intermediaries on terms similar to the regimes for insurance undertakings, credit institutions and investment firms.

EU Member States must adopt implementing measures by 15 January 2005 and many are already in the process of taking initial steps in this regard.

On December 3rd, 2002, the Council approved at second reading the proposal for a Directive on insider dealing and market manipulation (market abuse), thereby allowing for its definitive adoption.

The proposal would extend existing EU legislation prohibiting insider dealing (where an individual uses information which is not publicly available to others to his own advantage or the advantage of others) to include market manipulation (where an individual distorts the price setting of financial instruments or disseminates false or misleading information).

The proposal has caused controversy as journalists who inadvertently report misleading information originally fell within its scope. Under the final text, only journalists who deliberately or negligently pass on false information and then profit financially or otherwise from having done so will now be subject to the Directive.

Following its formal signature by the Council and the European Parliament, Member States must implement the proposal within 18 months of its publication in the Official Journal.

In another significant development, the Parliament approved the proposal on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate on November 21st, 2002, thereby enabling its final signature.

The proposal aims to address the supervisory issues that arise from the blurring of distinctions between the activities of firms in each of the banking securities, investment services and insurance sectors.
Member States must implement the proposal within 18 months of its publication in the Official Journal, expected shortly.

Further progress was made on November 5th, 2002, when the Council reached political agreement on the proposal for a Directive on prospectuses. The Proposal would introduce a new ‘single passport for issuers’.

Once approved by the competent authority in one Member State, a prospectus would have to be accepted throughout the EU for public offer and/or admission to trading on regulated markets. However, in order to ensure investor protection, that approval would only be granted if prospectuses meet common EU disclosure standards.

Once the Council has adopted a formal common position on the basis of the political agreement, the proposal will be forwarded to the Parliament for Second Reading.

On November 19th, 2002, the European Commission adopted a proposal for a new Directive on investment services and regulated markets.
The proposal, which would replace the 1993 Investment Services Directive, would impose:
• Clearer and more precise rules on the conduct of business;
• Reinforcement of ‘best execution’ obligations;
• New rules for handling client orders;
• An obligation for large dealers and broker-dealers to make public firm bid and offer prices for a specified transaction size in liquid shares (‘quote disclosure’ rule); and
• More extensive requirements for managing conflicts of interest.

The proposal has been forwarded to the Parliament and the Council for adoption under the co-decision procedure.

On October 2nd, 2002, the European Commission adopted a new proposal for a Directive on takeover bids, following the rejection of the previous proposal by the Parliament in July 2001.

The proposal lays down the same basic principles as its predecessor, but also introduces:
• A common definition of the ‘equitable price’ in a mandatory bid;
• A ‘squeeze-out’ right enabling a majority shareholder to require the remaining minority shareholders to sell him their securities;
• A ‘sell-out’ right enabling minority shareholders to require the majority shareholder to buy their securities following a takeover bid;
• Greater transparency concerning companies’ capital structure and control and the defensive mechanisms they have put in place; and
• A ‘break-through’ rule whereby structural defensive measures are neutralised following a successful takeover bid.

The proposal is currently before the Council and Parliament for First Reading.
A significant step forward was taken on January 21st, when EU Finance Ministers finally reached political agreement on the tax package, which comprises:
• A proposal for a Directive on the taxation of savings;
• the Code of Conduct on harmful business taxation; and
• A proposal for a Directive on the taxation of interest and royalties payments between associated companies.

The proposal for a Directive on the taxation of savings has proved to be the most controversial element of the package. The original Proposal of June 4th, 1998 was based on the ‘co-existence model’. After protracted negotiations, in June 2000 the European Council agreed to information exchange as the ultimate objective of the proposed regime, following a seven-year transitional period in which the co-existence model would apply (2004-2011). Austria and Luxembourg only backed this compromise on the condition that a number of third countries (Switzerland, Liechtenstein, San Marino, Monaco, Andorra and the US) agree to the adoption of ‘equivalent measures’.

However, negotiations with Switzerland, which is fiercely protective of its banking secrecy rules, ran into difficulties and ultimately the UK was persuaded to soften its approach on information exchange, in return for an increase in the rate of withholding tax (to 35 per cent in 2010). While information exchange remains the stated objective of the proposal, the transitional period will only come to an end if the EC concludes agreements with Switzerland, Liechtenstein, San Marino, Monaco, Andorra and the US to exchange of information upon request as defined in the 2002 OECD Agreement on Exchange of Information on Tax Matters, in addition to continuing to apply withholding tax. This may mean that Austria, Belgium and Luxembourg continue to apply withholding taxes indefinitely, although at a much higher rate than preferred. The European Council is expected to approve the tax package in March 2003. Member States would then have to implement the Proposal on the taxation of savings by the beginning of 2004.

On November 5th, 2002, the Council reached a common position on the proposal for a Directive on occupational retirement provision. The proposal seeks to establish a legal framework for ‘institutions for occupational retirement provision’ (‘IORPs’) by establishing common prudential rules throughout the EU, relaxing national restrictions on investment policy and creating a single license regime for IORPs.

The common position confirms the use of the prudent person rule. It would however permit host Member State authorities to ask home Member State authorities to apply certain quantitative rules to the assets corresponding to the pension scheme run on a cross-border basis, provided the host Member State applies the same (or stricter) rules to its own domestic funds. The common position has now been forwarded to the European
Parliament for a second reading.

Although approximately half of the envisaged measures are now in place, much work still has to be done within a tight schedule. A number of crucial Proposals have still to be approved, and, in the case of the envisaged proposal for a new EU framework governing capital requirements for banks and investment firms, even its presentation by the Commission has been postponed to early 2004 to take account of the revised process for finalising the Basle Committee’s Capital Accord. The EU legislative process is notoriously lengthy. The bulk of the legislative initiatives under the FSAP are in the form of Directives, the majority of which are subject to the co-decision procedure, where the Council and the Parliament share the legislative role. This gives rise to ample scope for disagreements.

Even when definitively adopted, Directives still have to be implemented into national law. Completion of the FSAP effectively implies their definitive adoption by mid-2003, as implementation usually takes around 18 months. The success of the FSAP is dependent on the political will of the EU to achieve a genuine Single Market in financial services. Whether progress is made may well depend on favourable economic conditions - EU integration having always been rather a ‘fair-weather’ phenomenon.

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