A single market in finance and financial services would benefit the UK and other Member States "if the balance was right" according to a Lords report published today.

The Committee examined the EU Financial Services Action Plan (FSAP), which provides a major impetus towards creating an internal market, but raises many important issues.

The FSAP comprises 42 measures, not all of them legislative proposals, of which some 35 have been agreed to date.

The EU objective is to agree the outstanding Directives before the European Parliament dissolves in April 2004. The deadline for implementation is the end of 2005.

The Chairman of the Committee, Lord Woolmer said:

"Overall we conclude that a single market in financial services would benefit the EU and the UK provided the balance is right.

"A key part of this balance would be achieving good legislation rather than rushed legislation to meet the 2005 deadline. There are some disturbing signs that his balance is suffering as EU Ministers feel the pressure of that deadline. Bad decisions have been made by EU Ministers on the Investment Services Directive and the Takeover Directive. The European Parliament may yet reverse these bad decisions in the next few weeks although it is difficult to be optimistic a this stage.

"There has been a misunderstanding about the nature of the London financial markets. They are not an exclusive UK asset. London is a global market not a national one: it should be regarded as an EU asset. If over-regulation or poorly drafted legislation drives business away from London, it will not go to elsewhere in the EU, but to international markets where the regulatory touch is lighter. It is, therefore, essential that the global context informs all EU proposals in this field."

The most important outstanding directives to the UK when we concluded our Report were:

The Transparency Directive

Quarterly Reporting

Companies in London have raised concerns about the requirement for mandatory quarterly reports to the market. The UK is used to reporting price sensitive information speedily whereas continental Europe is not.

That obligation would have improved reporting in some countries but would simply add to costs in the UK without increasing transparency. We felt that the obvious solution is to allow Member States flexibility to choose quarterly reporting or UK-type practice. Lord Woolmer said: "I understand that an agreement was reached by EU Finance Ministers last week that appears to meet our concerns."


We heard evidence that, "as currently drafted, the Directive significantly extends the established limitation in English case law on the civil liability of directors and auditors arising from the publication of the company's annual accounts and audit report. It would mean that directors and auditors would not only be liable to shareholders (as is presently the case) for any errors in the published financial information, but they would also be liable to the general public throughout Europe".

We urge the Government to establish with the Commission the extent to which the civil liability of directors and auditors might be increased as a result of this directive.

The Takeover Directive

We believed that failure to agree the Directive would weaken movement towards the efficient and effective operation of a single market in capital in Europe. We took the view that key provisions in the Directive should not be diluted. The Council of Ministers is reported to have agreed a deal on the Directive last Thursday. Lord Woolmer said: " I do not like what I read of the deal. It appears to be a massive step backwards and is a victory for protectionism of industry in a number of EU Member States. It will significantly hamper industrial restructuring in parts of the EU. It is another example of poor legislation as a result of artificial time constraints."

Investment Services Directive

The decision to amend Article 25 (which would allow major investment banks to continue to do business direct without having to use local stock exchanges) was regrettably decided in ECOFIN in the face of opposition from important financial centres including the UK. This was another step backwards by EU Ministers. The potential loss to the UK through less competitive pricing for institutional clients might be as much as £300 million a year. Lord Woolmer said: "We urge the Government to make every effort to ensure an acceptable outcome is reached. Failure to reverse this decision will result in bad law, damage UK interests, be another victory for protectionism and hamper the operation of competitive and efficient financial markets."

Other issues:

International Accounting Standards

IAS or International Financial Reporting Standards (IFRS) will be introduced in 2005. Problems over IAS 32 and 39 need to be resolved quickly. It is important that there by mutual recognition of IAS and the US Generally Accepted Accounting Principles (GAAP).

Clearing and Settlement

This is not part of the FSAP but there is a need for an EU-wide, cross border, competitive, efficient and effective clearing and settlement system. This is essential to the working of a single financial market.

Volume of Legislation

The volume of legislation will impose substantial demands on businesses, regulators and the Commission if the 2005 full implementation dates is to be adhered to. This needs to be recognised. The 2005 target dates may need to be revisited and a clearer sense of priorities for action established. The desire to achieve uniformity and harmonisation across 25 member states must not result in sclerosis of the financial arteries of Europe.

Future Legislation

The Commission has still to bring forward a revision of existing Company Law legislation and proposals for Corporate Governance.

The Future

There is no case for FSAP II. The Commission's efforts should be concentrated on enforcing the FSAP. We found no support for the concept of a single EU financial regulator. The Committee share that consensus view.


The Members of the European Union Sub-Committee B who conducted this inquiry were:

Lord Cavendish of Furness

Lord Chadlington

Baroness Cohen of Pimlico

Lord Faulker of Worcester

Lord Fearn

Lord Howie of Troon

Lord Shutt of Greetland

Lord Skelmersdale

Lord Walpole

Lord Woolmer of Leeds (Chairman)

Mr Graham Bishop, an independent consultant and Mr Tom Troubridge, a partner at PricewaterhouseCoopers were specialist advisers to the Committee.

The report is published by the Stationery Office: Towards a Single Market for Finance: The Financial Services Action Plan, Lords Select Committee on the European Union, 45th Report, Session 2002-2003, HL Paper 192, ISBN 010 4003278, price £22.50. The full text of the report will be available on the internet via shortly after publication.

For embargoed copies of the report contact Jillian Bailey on 020 7219 8659.