BUSINESSWEEK ONLINE : JANUARY 15, 2001 ISSUE
INTERNATIONAL -- FINANCE ONLINE EXTRA: "European Regulation Today Is Totally Outdated" Alexander Lamfalussy, an architect of the ECB, discusses reforming financial securities' rules Alexander Lamfalussy, 71, was one of the original architects of the European Central Bank. From 1994 to 1997, he served as the president of the bank's predecessor, the European Monetary Institute in Frankfurt. Now he is back home in Belgium, teaching European studies at the Catholic University of Louvain in Louvain-la-Neuve, and more important, serving as Chairman of the Committee of Wise Men set up by European Finance Ministers to propose reform of Europe's fragmented securities regulations. The committee's preliminary report appeared in November, and it plans to release its final report in mid-February. Professor Lamfalussy spoke with Business Week's William Echikson at his university office: Q: After the single currency, shouldn't there be a single securities law for Europe? A: The single currency has removed one of the major nontariff impediments to free trade in Europe. The other is the completion of the single market. Both are progressing nicely. But this is not true for financial services. Financial globalization and pace of technological innovation mean we must act. That's why our group was created. [Our] mandate is to assess how financial regulation [is working] and propose remedies [where] it [is not]. We are not supposed to do the regulation ourselves. Q: How did the committee come about? A: The finance ministers appointed us on July 17. They were concerned about the working of financial regulation. At the time, there was a distinct possibility that the exchanges would merge and that raised the practical question: Who is going to supervise them? Basically, financial regulation now is in the hands of national authorities. Q: What about setting up a single European securities and exchange committee modeled on the American SEC? A: We don't recommend it at this stage for two important reasons. First, for a single regulatory agency to function, you need a single body of regulatory rules and practices. That is not the case, and any organization would be hampered by different ways of dealing with problems. The other reason is that a new European SEC-type institution would require a new European treaty. And that would take several years of preparatory work. We don't have the time. We must deal with the identified shortcomings of the present regulatory practices and come up with practical proposals. I don't exclude a European SEC later on, but this is not the time to raise the question. Q: In your view, what are the major problems in Europe's regulatory environment? A: It's more than merely inadequate regulation. We have different laws dealing with financial regulations. Consider bankruptcy. The procedures and laws are different in each country, and you have to change the laws. Different taxation, different accounting -- these are all obstacles not dealt with under the umbrella of financial regulation. That said, the biggest problem is the inefficiency of Europe's regulatory procedure. The system is much too slow. Today, the European Commission has the responsibility to make legislative proposals for Europeanwide regulations. The Commission makes proposals. But then the decision to accept or not belongs jointly to the governments through the European Council and the European Parliament. This co-decision procedure is the heart of the problem. Once the Commission agrees on a set of principles, you get bogged down in specific discussions in both [the European Parliament and the European Council]. Each government feels it has national interests to protect. You want the rules in your own country to prevail elsewhere, not the reverse. Everyone considers his or her own rules best. And it all gets bogged down in an incredibly slow process of negotiating. To give just an example, the average time lag between a regulation being conceived and implemented is 3-1/2 years. The takeover legislation now being considered by the European parliament is 10 years in the making. By the time these regulations go into effect, they are historical monuments. The markets have changed five times. We must come up with a less rigid system adapted to market circumstances and financial innovation. Major financial firms tell us they come up with two to three new financial products. Take mutual funds. The European regulation today is totally outdated. It doesn't refer to modern mutual funds. It refers to mutual funds that existed 10 years ago. Q: What's the upshot? A: If you do not have consistent national applications, you don't have the basic rules necessary for cross-border transactions and a single financial market. People can't easily sell financial products outside their home countries. So for example, it's hard to issue equity and bonds throughout the Union at the same time. There's a different regulation for doing so in all different countries. What would be considered a private placement [in one country] becomes a public offer in another, and a public offer is more [highly] regulated. As a result, if you want to issue your shares in all local markets, you must hire hundreds of lawyers and negotiate in each country. Large companies can do this. They have the resources. But even for them, it is costly and cumbersome. And it is not possible for many startups. Q: So what are you going to propose to help resolve the situation? A: We want to devise a system that can be rapidly operational within present European treaties. We don't want to launch a new intra-country negotiation. Our first proposal is that the traditional legislative process only applies to core principles. In other words, the commission makes proposals about questions such as what a prospectus should contain and this should go through the regular legislative process. But it should only define principles. The technical definitions would be handed over to a Securities Committee of representatives from different national governments. They would get input from market participants. And then they would make decisions. Q: Would this really be faster? A: Yes, once the overall principles are accepted in European law and governments agree on the general principals, they cannot discuss it further. The Securities Committee would be responsible for implementing the details. Of course, their implementation has to be strictly supervised. But this would function faster. Q: What are the other proposals? A: We need more transparency. One of the main reasons the present process gets stuck is that no one knows exactly who put in changes. Did this or that member of parliament do something, because of domestic pressures? We should know. All participants must be exposed to public opinion. Minutes of meetings must be published. Fingers should be pointed. Second, we need to put deadlines. An open-ended decision-making process is a recipe for inaction. And third, we must appoint an ombudsman to represent public pressure. Q: Do you expect these goals to be achieved? A: We handed our preliminary report to the Council of Ministers and were told that the ministers agreed with our analysis. We now need to put some flesh on [the] proposals. Specifically, this means proposing who should be on the securities committee and so forth. Q: But hasn't there been a fair amount of criticism? A: Well, yes, some people were disappointed that we didn't propose a SEC at this stage. They said we should have been more courageous. I like courage. But if it takes four years to put that into action with a new treaty, I think it is too long. Our system could begin functioning at the end of next year. We could have half-year monitoring and then a full review about 2004. If we saw [then] that there had been little progress, perhaps we would propose a treaty change. Remember we are not excluding the creation of a single European Union regulatory authority. Our proposals are open-ended. Q: What do you think about the recent merger of stock exchanges in Europe? Would your proposals affect this consolidation? A: Consolidation is a good thing. But I don't think we will get around to a single European stock market. Look at the U.S. The New York Stock Exchange dominated 10 years ago, but it no longer does. A monopoly is not desirable or possible. But consolidation is essential. We don't need an incredible number of marketplaces. We need to get cost efficiency and liquidity in a few marketplaces. Q: How would your proposals prevent scandals like the recent one concerning Belgian speech-recognition company Lernout & Hauspie? A: I don't think this was thanks to the SEC. It was thanks to journalists. Even in the best regulatory environment, one cannot prevent this type of thing. You can only minimize the chances. You always will have abuses and fraud. Q: Yet isn't Europe lagging behind the U.S. in limiting the risks? A: Clearly we are lagging behind the United States. We need stricter rules on the type of information companies must release, about profit warnings etc. The American disclosure [rules are] not the absolute best, either. But it would help if we had an [agreed-on] approach among the countries so that companies cannot conduct regulatory arbitrage. We need to coordinate and not compete on who has the most lax regulations. Look at the Netherlands and the [failed IPO] of World Online. The Amsterdam Exchange relaxed its rules. Q: What about accounting standards and takeover regulations? A: These are crucial issues. You need them for well-functioning financial markets and for appropriate restructuring of European industry. It is wrong what the European Parliament is trying to do to allow management to take protective measures without shareholder approval. But our group cannot get into the content of regulation. We can only create a more transparent, competitive system that will force regulators to go in the right direction. Q: Despite the difficulties, do you see any progress? A: Yes. Things may not be moving fast enough for some. But you do see cross-border mergers and industrial restructuring. This would not be possible without progress in financial markets. Remember that we don't need laws that are exactly the same on everything. Take bankruptcy. In the U.S., this is dealt differently for Delaware corporations than others. You can have different tax laws. You don't necessarily need one regulator. Q: A little about yourself to conclude. Why did you end up taking this job instead of staying with the European Bank? A: Since I relinquished the president of the European Monetary Institute at the end of June, 1997, I have returned here, to my old university. I studied in Leuven from 1949 to 1953 and then went to Oxford. I always have liked teaching, and even when I was in Basel and Frankfurt would come back here on Saturday mornings to hold a seminar on financial innovation. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Global Bourses? Hold Your Horses (int'l edition) TABLE: Bourses Get the Urge to Merge A Common Market, but Not for Equities (int'l edition) ONLINE EXTRA: "European Regulation Today Is Totally Outdated" INTERACT E-Mail to Business Week Online

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