The creation of a pan-European financial services market has long been a central plank of EU policy. The Financial Services Action Plan (FSAP), endorsed by the heads of government of each member state at the Lisbon European Council in March 2000, emphasized its importance.
The primary markets are seen as fundamental to the creation of the single market in financial services, and the ability to provide issuers with a passport to unlock the untapped pan-European investor base would represent a significant step forward.
But progress in the securities markets has been limited. Though the adoption of some EU legislation has served to open up national markets, little headway has been made in providing issuers with access to the alluring prospect of investors across the whole of Europe.
Earlier legislative efforts (specifically the Listing Particulars Directive and the Public Offers of Securities Directive) created, in theory, the right conditions for issuers to gain access to a European-wide capital market. In practice, however, they have failed.
As part of the initiative to put the FASP in place the European Commission created a committee of seven wise men chaired by ex-head of the European Monetary Institute – the precursor to the European Central Bank – Alexandre Lamfalussy.
It was established by the European Commission on July 17 2000 to investigate and discuss the barriers that have, so far, prevented the creation of a genuinely pan-European capital market, and to examine the steps that may be taken to expedite progress towards this commonly held goal.
The Lamfalussy Report, published in preliminary form in November 2000, sets out the principal aims and range of the discussions that took place between the seven members of the committee. The paper examines the perceived benefits of European financial integration and examines these against market developments in Europe and the shortcomings of the present regulatory system.
Section three of the report examines the specific regulatory barriers to the creation of the single market for offerings of securities: “The EU passport for issuers is still not a reality,” says the report. “Firms wishing to raise capital in other jurisdictions are obliged to comply with different or additional requirements in order to gain the approval of local regulatory authorities.”
It adds that there is not even an agreed definition of a public offer of securities, with the result that the same operation is analysed as a private placement in some member states and not in others. “The current system discourages firms from raising capital on a European basis and therefore from real access to a large, liquid and integrated financial market.”
So, enter the new Prospectuses Directive: the first of several regulatory initiatives likely to emerge following the Lamfalussy Report. John Russell, a partner with Sidley Austin Brown&Wood, says: “At the moment it is possible, in theory, to do a pan-European offering. but in practice this is a mirage. The [new] directive contains provisions which could help it become a reality.” So far, then, so good. But progress may slow down again.
The announcement of the new directive at the end of May took many by surprise. At a meeting of the International Bar Association in Helsinki held in May, the deputy head of Italian regulator Consob, and Federation of European Securities Commissions (Fesco) committee member, said that he anticipated a new directive would be published in mid to late summer.
Most of those attending the meeting were fully aware of the usual pace of European committees and therefore assumed that their summer holidays were unlikely to be interrupted by having to ponder the intricacies of any new initiatives.
So when the new directive was published in draft form at the end of May, somewhat ahead of the widely anticipated schedule, many felt that things had moved too quickly, with insufficient consultation and, as a result, this summer looks set to see considerable lobbying and discussion about the effects the directive is likely to have. And for many markets these are expected to be wide-ranging.
The International Primary Markets Association (Ipma) has already issued a severe warning about the likely effects on the Eurobond market. Sidley Austin Brown&Wood’s Russell, who attended a recent meeting of Ipma, says: “There are serious flaws in the proposed directive. The Eurobond market would no longer be able to function as it does now.”
Central to these concerns are two issues: the provisions for private placement in the directive, and the role of the “home country” regulator in approving a prospectus.
Russell says: “There is no concession given to, for example, the creditworthiness of the company making the offering, or how sophisticated the investor may be if he is not a securities professional.”
The lack of concessions to the different environments for different securities means that, as it stands, the directive would require any offer of securities to provide a prospectus that had the same level of detail as if it were, say, an equity offering to retail investors.
It’s a flaw that Russell believes needs urgent attention. “In the proposed directive there is no exemption – all prospectuses are required to carry the same level of detail. There is no halfway house for professionals-only issues.”
The second point in the directive that is seen as a grave threat to the Eurobond market is the home country approval procedure. This clause means that an issue of securities must be approved by the regulator in the issuer’s home country in order to be passported into other jurisdictions. For the Eurobond market, the insistence on the home regulator giving approval would deal a fatal blow to London and Luxembourg and would put an end to the market as it stands.
But the political ramifications of changing the directive to allow any EU member-state regulator to approve an issue are considerable. Gilles Thieffry is a partner with Andersen Legal who has specialized in the Eurobond market for 16 years.
He argues: “All the regulatory authorities were created with the intention of protecting investors and, in particular, local investors. If you were to allow, say, a Spanish issuer to go to London, get its listing approved there and be passported back into its home jurisdiction, then the home regulator is deprived of the role for which it was created.
“There is no way that people are going to accept a genuine single-passport concept if that means that there will be a transfer of the regulatory and investor protection role to, say, London or Luxembourg. Regulators in other member states are unlikely to acquiesce to a proposal that will see them lose regulatory authority and their investor protection role over what is an essential part of any 21st-century economy: the capital markets “
The technical details of the Directive are likely to be debated and argued over for some time to come and it is also likely that the finalized directive (due at the end of this year) will accommodate some of the points that will be raised in the course of these discussions.
But the political barriers to implementing the envisaged pan-European securities market will remain. And these will be the most difficult of all to overcome.
Thieffry says that the transfer of regulatory responsibility that would result from the home authority being overruled is very unlikely to gain the consent of the other regulators.
“It is as politically palatable as saying that the Bundesbank should have been running the euro from the start. I hope that in this directive there will be some kind of exemption made for the Eurobond market, but I think, with this exception, they will stick to the home country rule.” he says. “And then I think that this directive will follow the fate of its predecessors.”
