solution

Case study

Internationalizing financial services in the European Union

In 1985 the European Commission published a White Paper, ‘Completing the Internal Market’, which proposed a series of measures to create a single internal market among the countries of the then European Community. This was codified in the Single Europe Act of 1986, the first major amendment to the Treaty of Rome (which had initially established the European Union in 1957). This Act required that the measures outlined in the 1985 White Paper should be implemented by the end of 1992, and included provision for mutual recognition of national product standards and a range of other measures to eliminate barriers to trade within the Union. The Single European Market formally came into being in 1993, underpinned by the ‘four freedoms’ – free movement of goods, services, labour and capital.
In the case of financial services, the single European market aimed to eliminate restrictions on cross-border activity, thus encouraging greater competition, greater efficiency, lower prices and better service for customers. Given the high level of regulation in financial services and considerable differences in industry tradition, the single market relied on the principle of mutual recognition – if a financial services provider was licensed to operate in its home market, then it was effectively free to provide services to consumers throughout the European Union.
Although formal legal restrictions on cross-border activity in financial services have been largely removed as a consequence of the Single European Act, progress towards a genuine single market in retail financial services has been slow. Genuine cross-border trade in financial services failed to grow substantially, and most providers serving non-domestic markets did so by establishing a physical rather than an export presence, with that physical presence typically being via mergers and acquisition rather than greenfield developments. In principal, there is no reason why many retail financial services need to be provided locally; in practice, most are. Take the case of a mortgage; while it is technically possible for a resident of Germany to obtain a mortgage for a house in Germany from a Spanish bank, in practice many customers are nervous of non-domestic providers with no physical presence in the market. Equally, banks may be concerned about lending into a different legal environment where it may prove costly to recover the security (i.e. the house) in the event of default. Differences in tax treatment and consumer protection legislation between countries may also serve as a disincentive to the purchase of savings and investment products across borders. In business markets, progress has been rather faster and the degree of integration is much greater, although considerable effort has been required to address areas such as capital adequacy requirements and accounting standards.
Recognizing some of the particular difficulties with financial services, the European Commission developed a Financial Services Action Plan (FSAP) in 1998 which focused on eliminating barriers to cross-border trade. The Action Plan concentrated on developing a genuine single market for wholesale financial services, creating open and secure retail markets, ensuring the continued stability of EU financial markets and eliminating tax obstacles to financial market integration. Considerable progress was made in relation to the wholesale markets; progress with retail markets was slow and the scale of crossborder activity remained low.
Subsequently, in December 2005, the Commission published a White Paper, ‘Financial Services Policy 2005–2010’, to outline its policies for the rest of the decade. The White Paper focused its attention on ensuring that existing policy changes were implemented and consolidated, improving regulation, enhancing supervisory convergence, increasing competition between service providers and expanding the EU’s influence in global financial services.