European Community liberalizes financial services market to become more competitive

Business America, Feb 8, 1993 by Bob Straetz

* Response by U.S. Firms and the U.S. Government--U.S. investment services firms and brokerage houses have established offices and affiliates in the EC to take advantage of a growing market. During the last few years, the Investment Company Institute, a trade organization in Washington, D.C., has been working with the European mutual fund industry in an effort to establish a framework that could serve as the basis for allowing U.S. firms to sell their funds to EC consumers. A key obstacle preventing cross-border sales of United States and European investment companies is the different tax system for mutual funds in the EC and United States. United States tax laws may discourage foreign investors from investing in U.S. investment companies.

The Securities and Exchange Commission has signed bilateral understandings to cooperate with the United Kingdom, Italy, France, and the Netherlands calling for authorities of those countries to cooperate/assist with each other in enforcing the securities laws and regulations governing their respective markets.

Insurance and Pensions

The centerpiece reform of the EC insurance program is the single license enabling a firm, once authorized in an EC home country, to establish branches and provide services freely throughout the EC without having to meet separate member state controls. The home country will ensure that the insurance company meet financial rules set by the EC. Most people thought a single market program in insurance would prove to be too controversial for member states to adopt. However, the EC has adopted the "framework" directives on life insurance and non-life insurance and they are due to be implemented by mid-1994.

The reciprocity clause, which contains similar wording as the one found in the banking and investment services directive, appears in the motor vehicle liability insurance directive and applies to the entire insurance sector. U.S. firms are not expected to experience problems with the EC's reciprocity provision because the EC has indicated its companies receive similar opportunities and are held to similar legal requirements as U.S. firms in the American market. Some difficulty could arise, however, because the U.S. market in insurance is regulated by the states and is much more fragmented than the planned EC market. The U.S. government has had consultations with the EC about insurance and will continue to monitor EC application of the reciprocity clause in insurance.

* Pensions--The EC proposed a pension fund directive which would lift member state restrictions on pension fund investments and enable fund managers to invest anywhere in the EC. The directive would enable workers to make their pensions "portable," or permit them to take pension funds from one member state to another, therefore making labor mobility in the EC easier. The directive is seen as an important way of moving to individual financing of pensions as member states become financially pressed to finance pension funds in the future.