The Regulation of Cross-Border Financial Services in the EU Internal Market

8 Colum. J. Eur. L. 221 (2002)

Andrea M. Corcoran and Terry L. Hart. Andrea M. Corcoran is Director of, and Terry L. Hart is a Senior Counsel in, the Office of International Affairs of the United States Commodity Futures Trading Commission.

Recent news from Europe, as reported in the world’s business dailies, might suggest that competitive forces are undermining European initiatives in the field of financial services and markets. Mergers or alliances between firms and markets announced with great fanfare are as often abandoned as completed. These developments might suggest that, in the area of financial services and markets, the European experiment is not succeeding. In fact, Europeans themselves often are critical of their progress and may focus public debate on areas in which their efforts have been slow to produce results or where further action may be needed. However, the recent growth in the supply of cross-border financial services and the recent creation of cross-border markets have been possible only because of the structural changes in the regulation of financial services and markets pursued by the European Union (EU) and its Member States over the past decade. While numerous articles and reports identify problems and obstacles that continue to impede the completion of a European internal market in financial services, this Article is intended to review the progress that has been made to date in a more positive light.

An appraisal of EU directives adopted in the field of financial services and markets exposes the progressive development of a highly coordinated legal and regulatory framework calculated to permit the creation of a pan-European securities market and to achieve a progressive liberalization of restrictions on the cross-border supply of services by financial intermediaries and markets within Europe. Through the implementation of this framework, the EU has acquired significant experience concerning cross-border services provided by financial intermediaries and markets and has developed unique methods to oversee those services. The succession of varyingly successful commercial initiatives in financial services recently announced in Europe reflects the competition among financial intermediaries, markets, and jurisdictions positioning themselves to exploit the new European regulatory framework.

The economic integration that is occurring within the EU also is occurring internationally and developments in technology are facilitating and accelerating this international economic integration. Therefore, it is becoming increasingly important that policy makers for the United States financial services industry and financial industry professionals acquire an understanding of (i) the general process of economic integration pursued in Europe; (ii) the policy objectives underlying that process; and (iii) the methods by which Europe regulates the cross-border supply of services by financial intermediaries and markets. Variations in regulatory requirements applicable in the U.S. and the EU may increasingly affect the allocation of capital between currencies, instruments, and markets and the locations from which and to which financial services are provided. Moreover, a comparison of the United States and European regulatory models and an assessment of the relative quality of those models are critical components of any assessment of the relative competitiveness of financial intermediaries and markets in the U.S. and Europe and the relative effectiveness of their regulation.

In addition to outlining the history of the development of the European regulatory framework for financial services and markets, this Article attempts to identify the components of the European system that are critical to integrating a market composed of different national jurisdictions. EU policy objectives compel development of a regulatory system that provides for equivalent conditions of competition across national jurisdictions and among different financial sectors, such as banking, securities, and insurance. These objectives favor a functional approach to regulation such that persons providing the same services or engaging in the same activities are regulated in the same way.

Because the European framework contemplates the free flow of financial services within Member States that historically had developed their own regulatory policies, the requirements to which individual Member States must conform are premised on the following: (a) harmonizing the laws that are essential to prudential supervision and conduct regulation that could affect competition or result in duplicative or inconsistent requirements if not harmonized; (b) designating the law of a Member State to apply to specified activities based on principles facilitating the free flow of services and pre-existing conflicts of laws principles common to the laws of the Member States; (c) allocating regulatory responsibility between Member States based on their level of regulatory interest and their practical capacity to apply the regulation; and (d) mandating cooperation among Members States, and among competent authorities within Member States, so as to permit one Member State to rely on the enforcement of European requirements by the others. In the course of the development of this functional framework, tensions have arisen within the EU regarding the level of government at which and the jurisdiction in which regulation of specific activities should occur. These tensions are part of the ongoing dialogue in Europe regarding both the relative benefits of a centralized or decentralized approach to regulation and the extent to which individual Member States should retain flexibility and national control over certain elements of the regulatory process and their local stakeholders.

In this regard, the Article discusses current work within the EU to accelerate the process of integration, to facilitate appropriate and necessary harmonization, and to improve the  timeliness of transposition and the enforcement of European requirements. This current work has identified not only areas where further harmonization is needed, but also has suggested mechanisms for making the process of articulating policies for an integrated market more transparent and efficient.

This Article provides: (i) a general overview of the basic policy objectives pursued by the EU in the field of financial services and markets; (ii) a general overview of the legal framework within which such policies are pursued; (iii) an analysis by topic of the methods that have been developed by the EU to regulate the cross-border supply of services by financial intermediaries and markets; (iv) a review of initiatives to reorganize the European financial infrastructure to facilitate the cross-border supply of financial services within Europe; and (v) a review of other current initiatives to enhance European regulations in the field of financial services and markets. Lastly, the implications of the European experience on current issues regarding the international integration of financial services and markets also are considered.