EU – Baltic States, Financial Services, The Baltic Course No. 27

The “forth freedom”: problems from within

Undoubtedly the “common market” is the main achievement in the European integration based on four basic freedoms: free movement of goods, workers, services and capital. The last one, free movement of capital and payments, has been so far the most controversial and complicated for liberalization and harmonization. It is generally accepted that free movement of capital is an essential condition for the proper functioning of the EU’s single market as a whole. The capital instruments that regulate “movements” on the EU financial crossroads have become overly important as unified “instruments” for a wide range of businessmen and entrepreneurs.

Single market for capital as the EU’s fourth freedom, is a complex and varied issue composed of at least six components and development directions:

• Banking sector,

• Investment and securities (it is, generally, in this sector the new directive takes effect);

• Various forms and services in insurance (directive’s domain, as well),

• Retail financial services for citizens and SMEs,

• Supervision of financial conglomerates and financial malpractice, and

• Various occupational pensions and payment services.

Among these financial services’ sectors for which similar European policies apply are, at least, three major areas: banking, insurance, and investment and securities. For more details, see: http://www.ec.europa.eu/internal_market/top_layer/index.

Until recently, Europeans were in principle obliged to manage and invest money predominantly in their home country. Now, with the increased liberalization of capital movements and payments which has assisted the consolidation of the common market, the EU citizens can conduct most operations abroad, e.g. opening bank accounts, buying shares in non-domestic companies, or purchasing real estate, etc. However, the rules concerning some of these rights within the “forth freedom”, as the EU Internal Market website informs, “remain governed by national provisions which vary from one Member States to another”.

In 2005 the Commission completed the previous Financial Services Action plan (FSAP) of 1999-2005 which was aimed at developing a unified market in financial services; the Commission presently is developing and implementing a new strategy to deepen financial integration (up to 2010) for the benefits to industry and consumers.

One of the action plan’s ingredients in regulating investments flow into Europe and involved securities has been the new MiFID. The directive’s text can be seen in the Commission’s legal website: http://eur-lex.europa.eu. 

Finances and economy: “united in diversity”

Whatever happened in the “financial economy” during several summer months it might have affected the real economy and financial assets markets. Several thousand billion dollars (!) have been knocked off the value of financial assets during the crisis highest point this August. The losses are probably at the level of about 5 per cent of world GDP (Financial Times, 7 August 2007, p.24). No doubt unregulated “financial instruments” played vital role in the turmoil, as well as a new financial assets’ role in economics. So-called financial economy with all its assets’ stocks and funding has outstripped for long the “real economy” in its material volumes. Thus, David Roche from London-based Independent Strategy puts it at about 10 years’ of global GDP.

Traditionally economists regarded “financial component” (such as liquidity) as something akin to broad money supply in form of notes and coins in national circulation, as well as banks’ deposits and reserves in central banks. Often liquidity doesn’t include other different investment instruments in financial assets. Therefore modern definition of liquidity includes securitized debt and derivatives.

MiFID history: a short overview

Investment operations have become the aim of the first EU regulatory efforts already in the EU Council Directive 93/22/EEC of 10 May 1993. About 14 years ago this directive on investment services in the securities field has sought to establish the conditions under which authorized investment firms and banks could provide specified services or establish branches in other member states on the basis of home country authorization and supervision. At the same time, the directive aimed to harmonise the initial authorization and operating requirements for investment firms including the conduct of business rules.

Further activity in investments in respect of transactions in shares admitted to trading on a regulated market ended up in the multilateral trading facilities, MTFs, generally outside the trading venues. This forced some changes into the 1993 directive, hence already at the end of 2000 the Commission adopted Communication COM (2000) 729 “Upgrading the Investment Services Directive” aimed at closer market integration and improving investor protection. These two aspects have been under scrutiny in the member states during last sever years leading to a set of directives and regulations.

From the directive to a regulation

Due to specific measures of any directive, the member states are obliged to transpose directive’s requirements into their legal system within a certain period of time. The European Commission decided that it would be quite inappropriate to rely solely on the member states’ efforts. With this in mind, the Commission in mid-2006 adopted a Commission Regulation/EC, No 1287/2006 of August 2006 aimed at universal and practical measures for the MiFID’s requirements.

It has to be mentioned that it’s a rear situation in the EU practice that an “implementing” regulation follow the directive. But in the case of financial instruments’ complexity it was regarded feasible and appropriate. It was in that regulation, in particular, that a final date for MiFID entering into force from the 1st of November was established, except a couple of directive’s articles that were enforced already in June 2007. For example in the regulation’s art. 11 it was said that the relevant competent authorities in the member states should ensure that there were established and maintained updated lists of financial instruments. Besides, the Committee of European Securities Regulators shall, on the basis of data supplied to it by or on behalf of competent authorities, publish on its website consolidated and regularly updated lists of, e.g. shares admitted to trading on a regulated market, the average daily turnover and daily number of transactions for those shares, etc. (art.34, p.5). However, the detailed account of the MiFID and the implementing regulation will be published in the next BC’s issue.

The Baltic Course 27, Autumn 2007