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May 1, 2008updated 13 Apr 2017 8:59am

Crisis sparks regulatory overhaul

Spurred into action by the credit crunch, the European Parliament is demanding of the European Commission that by the end of November it produces recommendations that will bring about a sweeping change of the European Unions financial regulatory legislation In the shadow of the global financial crisis, the European Parliament (EP) has plunged for a wholesale overhaul of the European Unions (EU) legislation to supervise its financial services

By Jeremy Woolfe

Spurred into action by the credit crunch, the European Parliament is demanding of the European Commission that by the end of November it produces recommendations that will bring about a sweeping change of the European Union’s financial regulatory legislation. Jeremy Woolfe reports from Brussels.

In the shadow of the global financial crisis, the European Parliament (EP) has plunged for a wholesale overhaul of the European Union’s (EU) legislation to supervise its financial services. In the firing line is all manner of financial malpractice. Insurers, banks, rating agencies and many other financial services players the targets.

This radical support for wide-ranging reform of financial market supervision cleared through the EP plenary session in Brussels with a spectacular 565 votes in support. There were only 74 votes against.

This vote is certainly for a massive drive forwards. The EP is demanding the European Commission (EC) come back with its legislative proposal by 30 November. And it backed its stipulation by copying its text to the European Council (the body which brings together ministers from European national governments), national governments and to national parliaments.

The resolution, under the arcane title Report with recommendations to the Commission on Lamfalussy follow-up: future structure of supervision hardly does justice to its explosive contents. The report was co-authored by Dutch European Parliamentary rapporteur Ieke van den Burg and EP member Daniel Daianu.

On the crucial supervisory aspect of financial services, the European lawmakers are seeking wording for a regulation as soon as the end of 2008. A regulation, as opposed to a directive, does not have to go through the lengthy process of being transposed into the EU’s 27 different national legislations.

Specifically, the EP wishes to stiffen the structure for the three committees of financial regulators. These are: the Committee of Euro-pean Insurance and Occupational Pensions Supervisors; the Committee of the European Securities Regulators and the Committee of European Banking Supervisors.

The recommendation for this present “light co-ordination structure of national supervisors” is to place over it a “supervisory architecture” that would give “better… cross border-integration.” Legal power to solve conflicts between national and sectoral supervisors is also recommended.

Such teeth for EU legislation would be going in the direction of setting up a European version of the US’ Securities and Exchange Commission (SEC). In the US, the SEC has federal powers “to protect investors and promote financial efficiency”. Van den Burg told LII that the EU needs equivalent powers.

With the first drafts of the EU Parliamentary Report dating back to mid-June this year, when the true ferocity of the current storm was still only rumbling, it glances on one touchy subject after another. The wording from van den Burg and Daianu launches in with the legislator’s argot of “having regard” and “whereas ..” paragraphs pointing up a range of fields of interest. Specific mention is made of insurance.

Also on the menu, if not on the plate, are inadequate risk management, irresponsible lending, excessive leverage, and weak due diligence. The report touches on compensation schemes that, it says, should not reward excessive risk-taking. Credit-rating agencies are included for “misconceptions of the meaning of rating”. More generally, the European Central Bank and the European system of Central Banks are asked to set up systems to give “early-warning” of upcoming risks to financial stability.

Parliamentary finger pointing

Unrelenting hand wringing was voiced during the debate leading up to the vote. Unsurprisingly, members came up with several “I told you so” expressions over the crisis. There were naked airings of distress and frustration. Members of the EP heaped blame on perceived culprits, such as the European Council, for being supine during the development period of the crisis.

Particularly, the parliamentarians pointed the finger at Charlie McCreevy, internal market commissioner. EC president José Manuel Barroso also came under attack.

Firebrand EP member Pervenche Berès, head of the EP’s Economic & Monetary Affairs Committee, lead this particular fray.

She demanded from the president: “Mr Barroso! Where have you hidden the internal market commissioner?” She added: “Where was he [McCreevy] in July 2007 when his services were warning us of the forthcoming disasters in European banks?”

If this put McCreevy on the ropes, he quickly took another body blow. EP member Werner Langen described McCreevy as “playing dead man walking for the last four years – Dublin and London are remotely controlling this commissioner.” Langen urged Barroso to pass McCreevy’s portfolio to Joaquin Almunia, currently commissioner for economic and monetary affairs.

The MEP’s decision call for the EC to come up with draft legislation is unusual. Normally the EC proposes legislation. But the law makers do have this opportunity, if they achieve an absolute majority in their vote.

Whether or not McCreevy’s portfolio has been formally passed to Almunia is not known, but a preliminary “communication” from the EC in response to the call from the EP is said (by a Commission insider) to be largely the work of Almunia’s department.

The communication, From financial crisis to recovery: A European framework for action promises a more detailed EU recovery framework by 26 November. Dated 29 October, it sets out in general terms an overall economic plan for the EU. It brings up one issue after another, some of which have been dragging on for years.

For instance, the communication touches on “flexicurity,” referring to Europe having suffered “from a failure to apply active labour market measures to help people to retain for the future, to find and to create new jobs. Research and development also comes into the spotlight. Research and development also came into the spotlight.

While insurance itself gets no specific mention, another EC insider notes that reform is being encouraged by the financial crisis. Hence, he said at the time of going to press, Solvency II looking likely to clear through the Economic and Financial Affairs Council meeting of finance ministers on 2 December. This would be a major development.

Commenting on the possible silver lining, Charles Cronin, of the Chartered Financial Analyst Institute, says that the crisis is at least creating an opportunity to bring in global legislative solutions, including to insurance.

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