[A-List] EU & the imperialist chain: financial markets

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Europe's financial system goes in search of the Holy Grail: New
stockbroking rules are moving Brussels a step closer toa single market
for securities by 2003, says Francesco Guerrera
Financial Times; Apr 22, 2002
By FRANCESCO GUERRERA

It is the Holy Grail of European financial regulation: a single market
stretching from the north of Scandinavia to the south of Greece where
investors can buy and sell securities with the same rules and the same
safeguards.

At present, investors who want to trade in shares in more than one
European Union country have to contend with such a baffling array of
regulations, red tape and languages that few bother trying.

A recent study by the European Financial Services Round Table, a forum
of banks and insurers, said there was no such thing as a Europe-wide
market for financial products and that creating one would save consumers
and investors up to Euros 15bn (Dollars 13bn, Pounds 9bn) a year through
increased competition and wider choice.

New rules on retail stockbroking, reported last week by the FT, are an
attempt to plug this costly gap at the heart of Europe's financial
system and move a step closer to the European Commission's ambitious
goal of creating a single market for securities by 2003.

Drawn up by the Committee of European Securities Regulators (CESR) after
months of discussions among representatives from the 15 EU
member-states, the rules are the first attempt to bring order in the
regulatory cacophony currently facing small investors.

It might be argued that the most important aspect of the new regulation
is that it is mandatory: national authorities will have to implement the
whole code over the next few months, without derogations or transition
periods.

When retail stock brokers across Europe get down to reading the CESR's
work, they are likely to be surprised by how thorough it is. The 129
general standards and 140 detailed rules cover most of the activities of
a retail financial house from marketing and cold-calling to complex
derivatives and portfolio management.

The code is based on two main principles: improving the quality and
impartiality of information given by brokers to customers and forcing
brokers to know more about their customers.

On the first point, the CESR lays down detailed principles on how
stockbrokers should be organised. It calls for "Chinese walls" between
departments to avoid conflict of interests and requires firms to set up
an independent compliance department that must report to the regulator
at least once a year.

On dealings with customers, stockbrokers will be required to keep
records of transactions for up to five years, with tapes of
conversations between traders and investors to be stored for a year -
longer than in many countries.

The rules forbid firms from cold-calling customers on a Sunday or in the
evening, a widespread practice in many EU countries.

Before providing any service, stockbrokers will also be forced to
disclose to customers their policies on commissions, to ensure traders
do not have an undue incentive to recommend a particular investment.

The CESR also requires brokers to obtain information from their clients
"to determine whether the investment services envisaged are appropriate"
- the so-called "know-your-customer-rule". In particular, brokers will
have to find out how much an investor knows about a particular type of
investment as well as their financial circumstances before processing an
order.

According to some brokers, such an all-encompassing requirement could
increase costs and slow down trading. As one UK stockbroker said last
week: "How can we find out in a five minutes' phone call if the guy at
the other end of the line has the right qualifications to invest?"

In Spain, brokers have warned that the new rules could reduce margins,
especially for the smaller firms that are not part of a larger financial
group.

Others argue that, although some of the rules are already present in
national regulation, the CESR's pan-European code could trigger a
stricter enforcement. As an Italian industry executive said last week:
"The problem for Italy isn't regulatory. Our problem is enforcement."
Additional reporting by Joshua Levitt in Madrid, Fred Kapner in Milan,
Bettina Wassener in Frankfurt and Raphael Minder in Paris