Cablegate: European Financial Market Regulatory

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: European Financial Market Regulatory
Infrastructure: Bigger Before it Gets Better; A European
Financial Services Authority a Matter of Time?


1. (SBU) Summary: The European Commission's November 6
launch of measures to extend the Lamfalussy procedures
beyond securities to banking and insurance means all
financial services governed at the EU level will be covered
by a combination of policy and supervisory committees. The
Committee of European Securities Regulators (CESR),
established just over two years ago, will expand its
coverage under the Commission's decision. New accounting
committees have been created and others are proposed for the
auditing area. Growing like topsy.

2. (SBU) The Lamfalussy procedures were to streamline and
facilitate rule-making, thereby being responsive to changes
in dynamic financial markets. To date, experience in the
securities area generally has been positive, but not
uniformly so. Too much detail in directives and
implementing measures detracts from flexibility, according
to the Inter-Institutional Monitoring Group that reviewed
the operation of the procedures to date. Market
participants shared that view and then some, criticizing (a)
rushed consultations as political agendas triumphed
technical considerations; and (b) lack of transparency in
the activities of the European Securities Committee. Some
of these criticisms will be overcome as committees work
through their start-up problems. Others will, no doubt,

3. (SBU) Longer-term, however, some observers believe the
multitude of committees, cumbersome procedures and inter-
relationship of banking, securities and insurance issues may
give rise to a European Financial Services Authority (EFSA).
To make this long-term goal a reality, its proponents would
like the Constitutional Treaty for Europe to contain an
enabling clause to allow for the creation of an EFSA -
whenever the time is right. End Summary.

Expanding Lamfalussy: Banking, Insurance and CESR Plus
--------------------------------------------- ------------

4. (SBU) On November 6 the European Commission launched a
package of measures to extend the Lamfalussy procedures to
banking and insurance activities. Four Commission decisions
would create two policy-level committees, the European
Banking Committee (EBC) and the European Insurance and
Occupational Pensions Committee (EIOPC), and two regulatory
committees, the Committee of European Banking Supervisors
(CEBS) and the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS). In addition,
two other Commission decisions would extend the purview of
the European Securities Committee (ESC) and the Committee of
European Securities Regulators (CESR) to include asset
management and investment funds.

5. (SBU) The Lamfalussy procedures, recommended by a group
of wise men chaired by Baron Lamfalussy, were adopted just
over two years ago for the securities sector. CESR was
established to provide the EC advice on legislation and
implementing measures as well as to coordinate
implementation and enforcement of EU securities legislation.
The ESC, composed of member state Finance Ministry
representatives, was created to approve implementing
measures proposed by the EC. In this way, the Commission
could adopt regulations (with immediate binding effect in
member states) or directives (required to be transposed into
member state law) without going back to the Parliament. The
Commission is about to adopt implementing measures, one
regulation and two directives, for the market abuse
directive. This marks the first time Lamfalussy procedures
have produced implementing measures.

6. (SBU) Two problems have arisen with the new expansion.
First, location. While Finance Ministers agreed on the need
for the new committees, they are having more difficulty
settling on the location. The UK wants the banking
regulatory committee (CEBS) to be in London, Germany wants
it to be in Frankfurt. One solution would be to have all
committees based in Paris. However, CESR is based in Paris
and the French have given no signs of yielding this morsel.
To date, stalemate.

7. (SBU) The other problem is the Parliament. The
Commission will suspend the decisions on the creation of EBC
and EIOPC and expanding the ESC and CESR's area of
competence until the Parliament passes a directive which
substitutes these new committee names for those of existing
committees, such as the Bank Advisory Committee. The
legislation would need to move quickly, before the
Parliament adjourns in April. The Commission's goal is to
have the new committees in operation by the beginning of
2004. The EBC would be tasked with a new proposed capital
adequacy directive and the EIOPC would similarly take up new
insurance legislation. The Parliament, however, is likely
to play hard to get.

Parliament: Conditional Blessing

8. (SBU) Parliament has not been comfortable with the
Lamfalussy procedures, fearing that the Commission and
Member States could adopt implementing measures beyond their
authority as defined by directives. Not having the "right
to call back" such legislation, Parliament has inserted
"sunset" provisions in securities legislation specifying
that the Commission's authority to adopt implementing
measures will expire unless renewed by the Parliament.
Parliament is angling for a call back right in the Treaty
via the proposed draft Constitutional Treaty for Europe
currently under consideration by the Inter Government
Conference. The recent draft gives them satisfaction. But
it is still a draft.

9. (SBU) The Chairman of Parliament's Economic and
Monetary Affairs Committee (EMAC), Christa Randzio-Plath
greeted the Commission's decision to expand the Lamfalussy
procedures with two conditions: (1) Finance Ministers to
declare publicly that the procedures foreseen in the draft
Constitutional Treaty for Europe will apply to the adoption
of implementing measures and enter into an agreement with
Parliament to that end pending entry into force of the
Constitutional Treaty; and (2) that the new committees have
"real functional and operational independence," and not act
as "mouth pieces for the Commission or the Council." The
former may be hard for Finance Ministers to swallow, but
within their power to do so. The second is so vague as to
be either no problem or an impossibility.

CESR et. al.

10. (SBU) Since its creation in June 2001, CESR has been
growing and busy. The Secretariat has grown to 15 and moved
into new quarters. Eight of the ten candidate countries
joined CESR in 2003 as observers.

11. (SBU) CESR Fin, a standing committee on financial
issues, has issued a standard on financial information to
develop a common approach to the enforcement of
International Financial Reporting Standards (IFRS) in
Europe. CESR Fin has also issued two drafts for public
comment, one for a recommendation on guidance regarding the
transition to IFRS (all EU listed companies must have their
accounts prepared according to IFRS for financial year 2005)
and the other for the coordination of standards enforcement

12. (SBU) CESR has two Expert Groups on implementing
measures, one on market abuse the other on the prospectus
directive. Both expert groups have issued consultation
papers, held public hearings, and delivered advice to the
Commission. Another Expert Group is being established on
the Investment Services Directive composed of three
subgroups (market regulation, rules of conduct of
intermediaries, and enforcement). CESR has worked with the
European Central Bank (ECB) to produce draft standards on
clearing and settlement. Getting a jump on the Commission's
decisions, on October 30 CESR issued a consultation paper on
how it sees its new role in the regulation of asset
management and investment funds.

13. (SBU) The Lamfalussy procedures, or at least the
committee structures, are being adopted in other areas
covered by the EU's Financial Services Action Plan. To
implement the International Accounting Standards Regulation
there is a policy level European Accounting Committee and a
technical committee called EFRAG, the European Financial
Reporting Advisory Group. On auditing, the Commission has
proposed to create an Auditing Regulatory Committee and to
rename the EU Committee on Auditing to the Audit Advisory
Committee, a forum of regulators. A new Financial Services
Committee, a re-worked version of the Financial Services
Policy Group but chaired by a member state representative,
is to give overall strategic guidance and set medium-term

14. (SBU) With Lamfalussy procedures spreading hither and
yon, it would seem like the procedures are really great.
Maybe in theory, but not yet in practice.

IIM and the Market: Good and Better, but A Long Way from
Best Practices
--------------------------------------------- ------------

15. (SBU) To shed light on whether Lamfalussy procedures
have been working well in the securities area an Inter-
Institutional Monitoring Group of independent experts made
an assessment and published an interim report in May.
Broadly speaking, the evidence they collected has been
"strongly supportive" of the procedures, though admitting
that there is a "learning by doing" experience underway
suggests room for improvement. The IIM highlighted some
important issues, including the possible sacrifice of
quality to meet self-imposed deadlines of the FSAP and too
much detail in directives that would impede flexibility in
implementation to respond to changing market conditions.

16. (SBU) Others, responding to an invitation of the IIM to
comment on its interim report, were less generous. A group
composed of the Federation of European Securities Exchanges,
the International Primary Dealers Association, the
International Securities Market Association, the London
Investment Bankers Association and the European Banking
Federation submitted joint comments. They asserted that the
process has yielded "far too much detail" in directives and
implementing measures that has resulted in decisions taken
by "politicians on matters that require detailed technical
knowledge" leading to political deadlock. Too much detail,
in the group's view, is incompatible with the diversity of
the European market and will present difficulties when the
time comes to update the measures.

17. (SBU) CESR consultations procedures look good on paper,
according to the group, but have been rushed in practice.
Time limits have "prevented satisfactory second rounds of
consultation and consultation documents are too long given
the time to respond to them." The European Securities
Committee, composed of member states, "has perhaps the
farthest progress to make to become sufficiently
transparent." This is in contrast to CESR, in the group's
view, which has adopted a charter with principles for
consultation and used both open public consultation and
expert groups to consult on its work.

18. (SBU) Finally, the group seconded the IIM's assessment
that CESR, the Commission and market participants all have
resource constraints in developing and enforcing legislation
and regulation. A possible way out, according to this
group, would be to reduce the level of detail in legislation
and implementing measures and "give greater weight to the
less politically-driven" implementation level of the
Lamfalussy procedures where national authorities coordinate
national implementation measures via CESR.

Enter an EFSA: A Matter of Time?

19. (SBU) The latter comment raises the question of whether
the EU would be better served by having a European Financial
Services Authority (EFSA). Such an organization, operating
under broad legislation proposed by the Commission and
adopted by the Parliament and the Council, might be just
want that group is looking for - at least on paper.

20. (SBU) Deutsche Bank's research staff has praised the
Lamfalussy procedures but considers them an intermediate
step to a single regulatory and supervisory authority.
Lamfalussy would probably agree. Reportedly he once quipped
that not following his recommendations would lead to the
creation of a EU supervisory authority and following them
would lead to the same result.

21. (SBU) The European Economic Advisory Group (EEAG)
composed of European academics working through Munich's Ifo
Institute arrived at a similar conclusion, but with a view
to promote market integration and financial stability. With
respect to integration, EEAF reasons that an EFSA might
better resist local pressure to assist particular
institutions. On financial stability, EEAG argues that
cross-border financial activities within the EU has made
"mere coordination" of financial supervision as likely to be
insufficient. Thus, the need for a more centralized
supervision mechanism.

22. (SBU) EEAG believes that the ECB could assume
responsibility for more centralized banking supervision and
a European Securities and Exchange Commission could
supervise securities markets. However, they note that a
strong case for an EFSA that covers banking, securities and
insurance is based on the trend toward integration of
intermediaries and market operations as well as avoiding any
potential conflict between conduct of monetary policy and
supervision of the financial system.

23. (SBU) EEAG states that supervision need not be
completely centralized but rely on national authorities.
Deutsche Bank has argued for a similar approach, modeled on
the ECB structure, with the central authority (like the
ECB's Governing Council and Executive Board) developing
principles and guidelines and coordinating their
implementation, but relying on national authorities (like
the national central banks in the euro system) to perform
the actual supervision and enforcement. To put an EFSA into
place would require a change in the treaty. Deutsche Bank
and others have called for the Inter Governmental Conference
to insert an enabling clause into the Constitutional Treaty
for Europe, for use if and when appropriate.

24. (SBU) In October the Initiative for Finanzstandort
Deutschland, a group of German banks promoting Germany as a
financial center, endorsed the idea of a European Financial
Supervisory Authority. A Bundesbank Board member
immediately criticized the initiative as "illusionary,"
claiming that such an EFSA would need to have a European
political union before it could work. That's the same thing
critics said about European Monetary Union and the ECB.

Comment: Against the Wind

25. (SBU) Creation of EU committees is hardly news. The
Lamfalussy procedures themselves are a form of the EU
"comitology," well established in some other areas. What is
new is that the securities committees are now an integral
part of implementing, enforcing and amending EU directives
and implementing measures. Spreading this to banking and
insurance would give these groups more influence than their
predecessors. The other side of the coin is that all of
these groups will have more significant responsibilities
under the directives and regulations being adopted under the

26. (SBU) Working through the new procedures is cumbersome.
Although it would be ironic to concede that the once closed
EU rule making process in financial services now offers too
much consultation, some market participants admit to
"consultation fatigue." Consultations with the Commission
when it is working on a proposal, with the Parliament and
Council when they are considering the proposal, with CESR
Expert Groups in developing advice to the Commission, and
again with the Commission and possibly the ESC, when
considering adopting implementing measures based on CESR's
advice does seem excessive. Collapsing these procedures
into a EFSA could help eliminate a step or two, but, would
still involve more consultations than has been the case to
date for EU level legislation on financial services.

27. (SBU) Added to such practical advantages are those
pointed out by EEAG - a potentially easier path to
integration and better coordination for implementation and
enforcement. Taken together, the arguments for a single
entity become stronger. The senior Bundesbank official that
has downplayed the probability of an EFSA was the same one
who had fought for the Bundesbank and the ECB to have a
greater role in banking supervision. He lost that debate.
Once more, he may be leaning against the wind.

28. (U) This cable coordinated with Embassy Berlin.

29. (U) POC: James G. Wallar, U.S. Treasury Representative
for European Affairs, e-mail; tel. 49-
(69)-7535-2459, fax 49-(69)-7535-2238.


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