European Community liberalizes financial services market to become more competitive

Business America, Feb 8, 1993 by Bob Straetz

Since the second banking directive allows banks to sell stocks and bonds, banks and investment services firms will be competing with each other. The investment services directive, like the second banking directive, features the "passport license" allowing provision of services and freedom of establishment throughout the EC. To provide an equal playing field for banks and investment services firms, the EC wanted the second banking directive and investment services directive to take effect at the same time. However, the investment services program has been delayed due to intra-EC controversies. The investment services and its companion directive, the capital adequacy directive, should be adopted early in 1993 and implemented at the beginning of 1996.

Eventually the EC plans to link its stock exchanges with the EC's major companies cross-listed on all major stock exchanges. A group of about 150 stocks representing the EC's largest companies is listed or displayed on most EC stock exchanges. Under terms of the investment services directive, an investment firm in one country can buy stocks listed on another country's exchange. Investment firms authorized in one EC country will be able to gain membership automatically to stock exchanges in other EC countries. This liberalization would allow, for example, a broker in Britain to buy shares for a customer on the Italian or Spanish stock exchanges.

Following is a description of the key directives in the EC's securities program:

* Investment Services and Capital Adequacy Directives--The investment services directive will allow an investment firm, once authorized in a European Community member state, to set up branches throughout the EC without having to meet separate member state legal requirements and to sell its products and services anywhere in the Community. The country granting authorization for the single license is responsible for prudential supervision of the firm.

The services covered by the investment services directive include brokerage (acceptance or sale of investors' orders); dealing as principal (the purchase and sale of financial instruments such as equities, bonds, futures and options, money market instruments, or exchange rate and interest rate instruments on one's own behalf); portfolio management; arranging and offering underwriting services; professional investment advice; safekeeping and administration; and market making (the maintenance of a market in financial instruments referred to earlier by dealing in such instruments on the basis of a commitment to make two-way prices).

The investment services directive contains a reciprocity clause stating that a firm from a non-EC country can gain a single license so long as that firm's home country gives EC firms "national treatment and effective market access." The EC wants its firms to receive opportunities in that foreign country comparable to those offered to that non-EC country's domestic financial institutions. U.S. firms should not be affected by the EC reciprocity clause because EC investment firms established in the United States receive national treatment. The Securities and Exchange Commission staff reports that European Community firms do not face barriers to establishment in this country.