Implementation of key directives remains patchy

Date: 21/12/1995

By Tim Jones

THE EU's financial institutions are about to begin a new regulatory year with only a handful of countries having implemented two key laws.

The Investment Services Directive (ISD), which allows investment firms to open branches and offer cross-border services throughout the EU on the basis of a single licence in their home state, has still only been implemented in seven out of 15 member states.

As for the Capital Adequacy Directive (CAD), which is meant to protect the financial system against risk, only French and UK banks have come close to being ready to carry out its stringent controls.

Nevertheless, even without formal implementation, the effects of the ISD should be felt because supervisory authorities are expected to behave as if it had been enacted. The directive will allow an investment firm to provide services in another EU state, either by opening a branch there, or by providing the service from its home base.

Investment firms authorised by their home state to provide broking, dealing or market-making services will be entitled to membership of its exchange.

Under the current system, brokers must either set up branches in EU countries where they wish to trade or pay local brokers to trade on their behalf.

London is expected to be the biggest beneficiary since firms are keenest to concentrate resources where the most business is to be found. While personal investors will stick to their local stockbroker, the competition for the business of the international investor will hot up.

Stockbrokers in small capitals that have relied on international investors for business could be hit the hardest. Market analysts expect the number of European stock markets to shrink from the current 32 closer to the eight operating in the US, but the stock exchanges disagree.

“You cannot compare the eight stock exchanges of the US with the 32 in Europe because of the differences in languages, currencies and so on,” says Jean-Pierre Paelinck, secretary-general of the Federation of European Stock Exchanges.

“We expect competition on the basis of efficiency, transparency and liquidity. Each country's stock market is best placed to take care of trading in their own shares.”

However, the structure of the markets will certainly change. The London market is likely to continue its efforts to attract listings from companies in other member states, while screen-based trading systems will try to win over national floor business.

“Because of the ISD and intensified cross-border business, we expect stock exchanges and supervisory authorities to find it a bit more difficult to control their own markets,” says Paelinck.

The CAD remains behind schedule on implementation. This directive, which establishes a framework for monitoring the market risk of investment firms, requires complex reporting by banks to their supervisory authorities and heavy investment in software.

In a survey published in November, accountancy firm Touche Ross found that almost a third of banks would be unable to comply with the directive due to underestimated project staffing requirements and costs.

In follow-up work since publication, Touche Ross have found no reason to change their views that the CAD will not be implemented in the EU from January.

“There has been no huge change,” says Andrew Mann, a senior manager in Touche Ross' financial sector practice. “There are quite a number of banks that are taking a very laissez-faire attitude to the whole thing.”

They are holding back from major investments while they await new proposals on market risk from the Basle committee on banking supervision, which are due to take force in 1997.