News
16th September 2006
Andrew Pollard Scotsman Piece
THE mission of the EU, its leaders say, is to become the world's "most competitive and dynamic economic area". Its task is to encourage competitiveness, create business efficiency and liberate the market.
As we drown in a sea of regulation, the claim is one that the financial services industry needs to think about.
Technology has made many borders transparent and dynamism within markets has led to increased capital flow and reduced capital cost. Yet there are few EU financial-sector companies with more than a toe-hold outside their traditional geographies. Mortgages, loans and pensions are the preserve of local providers. What prevents world-class banks and insurers operating across Europe? That would surely bring down prices and increase choice for everyone.
Most problems lie in the vast array of different regulations.
Taxation of income from capital - one of the major factors governing investment decisions - is still far from a level playing field. Tax rates seriously alter the relative returns on financial assets and are at least as important in restraining investment as transaction and settlement costs. Capital tax rates across the EU still vary widely. The capital gains tax rate in Lithuania is 6.3 per cent: in Denmark, 43.8 per cent. The average is 25.8 per cent. Different classes of investment and individual capital allowances also vary.
Although differential taxes on residents and non-residents are slowly being swept aside, any decision to invest across borders is complicated by this uneven tax burden.
National capital markets are far from integrated. There are more than 30 exchanges and some 20 national clearing and settlement institutions. This sort of inefficiency may be costing up to 3.2 billion a year. The real cost in lost business is immeasurable.
If Europe really wants more investment, then its member states need to allow financial institutions to build systems that take compliance seriously but do not stand in the way of increased competition.
The minefield not only adds hugely to cost but is also unbalanced.
Independent financial advisers in the UK must complete at least five examinations and be approved by the FSA's vetting process. Spain has no such process and takes no steps to regulate. The fragmented legislation governing financial products means limited offshore bonds in Spain, no hedge funds in Belgium, no annuities in Poland and no non-status mortgages in France.
Alongside governments, the private sector must play its part in improving efficiency and competitiveness by consolidating its own infrastructure - for instance, by pruning trading platforms and payment, clearing and settlement systems. Governments should allow this process to take place unhindered. The days of building national champions have long gone.
The UK has got that message, as companies that were thought of as national success stories are now owned or headquartered abroad. A third of UK listed companies are not owned by UK investors.
These larger groups can compete better globally. In a free market, anyone can buy a stake in foreign companies providing they can live with the problems raised here.
Take the so-called UCITS (undertakings for collective investment in transferable securities). These have to comply with EU laws and hold the European passport.
UCITS funds make up 70 per cent of the 5 trillion worth of assets managed by the European fund industry. There are nearly 29,000 of them in the EU with more than 16 per cent sold on a cross-border basis. But the rules are interpreted differently by member states creating barriers to an efficient "passport" regime.
UCITS is a qualified success but it took a long time coming and is now obsolete. The first directive was issued in 1985 and national obstacles took until 2001 to demolish. That pace is just too slow for effective market reform.
UCITS doesn't meet the needs of today's investors. Financial markets need to continuously invent new products yet it restricts choice, increases compliance costs and has been used to protect domestic companies.
But let's look at the positives. Two other EU directives are designed to make cross-border trading easier. MiFID - the markets and financial instruments directive - should bring dramatic change to EU markets, harmonising much of the national legislation designed to protect the customer. But it is long-winded, vague and its outcomes still unclear, striking fear into IT and compliance departments. The other directive, IORP, seeks to provide a framework for institutions offering pre-funded occupational pensions. It harmonises rules in areas such as prudential supervision, capital adequacy, investment risk management and cross-border operations.
Will these directives work? It depends on how much individual states and regulators "gold plate" their implementation. Each national regulator feels compelled to tamper with directives. Every minor change obstructs free trade and undermines the whole exercise.
Should we care about yet more Brussels directives? Yes - a lot. MiFID has been fast-tracked to deliver reform rather more quickly than the 16 years it took UCITS. Success will do much to open up financial markets on cross-border competition, but will also demonstrate that directives can deliver benefits in a commercial timescale.
Andrew Pollard is a director of Stewart Asset Management Group, an IFA and independent fund manager with offices across Europe.