Earlier this week figures from the UK’s Office for National Statistics revealed that the country has crawled out of recession, the last major European economy to do so. The UK’s return to positive growth reinforces evidence that the EU has made it through the worst of the economic crisis.

Work on preventing a repeat of the financial market collapse that caused the crisis is, however, still in its early stages. It will fall to Michel Barnier, the next European commissioner for internal market and financial services, to drive through a comprehensive set of reforms to make markets and financial institutions more secure, more transparent and more responsible – reforms ambitious enough to convince investors that change really has come. Barnier has been clear in his public comments that he wants serious reform, telling MEPs: “We will not come out of the crisis as if nothing has happened. We must learn all its lessons.”

Delivering change will, however, not be easy. Some of Barnier’s agenda has been prepared in advance, at meetings of the G20, at the Basel Committee on Banking Supervision and inside the European Commission. But scope still exists for Barnier to put his personal stamp on it, and there are signs that he intends to be more ambitious than his predecessor, Charlie McCreevy.

Regulatory proposals

The Commission already plans a hectic programme of regulatory proposals over the next 18 months. The plans include regulation of the derivatives market, further strengthening of bank capital requirements, the setting up of a ‘crisis management’ system for banks that get into financial difficulty, new measures to counter insider dealing and market manipulation, a revision of the directive on markets in financial instruments, and implementation rules for reforms to the insurance sector.

Barnier gave hints during his hearing before MEPs of other areas where he might take action. He said he “would not be shocked if we [the Commission] have to go further” in clamping down on bank bonuses. He also said that he was “not afraid to tackle short selling” – the practice of selling stock to drive down the price, and then buying it back – which has been blamed by many analysts for deepening the financial crisis.

Parliamentary resistance

Barnier’s determination will have to overcome the resistance that has bogged down many earlier reform proposals in the European Parliament and Council of Ministers. The political climate has also changed since late 2008 and early 2009, when far-reaching reforms in areas such as credit rating agencies could be presented by the Commission and adopted by ministers and MEPs in a matter of months. The need for reform is just as great, but the sense of urgency has diminished.

A package of reforms to EU-level financial supervision was agreed unanimously by finance ministers in December, but only after the Commission’s original plans had been diluted. The discussions revealed splits between member states on how much supervisory power should be wielded at European level. McCreevy urged the Parliament in December to accept what ministers had agreed, saying that it would “be difficult to change the balance we have achieved in this compromise [between finance ministers] without jeopardising it”. Barnier, however, has been far more bullish, telling MEPs that the ministerial agreement “needs to be improved”. “Let’s try and move things back to the Commission’s original proposal,” he said.

Alternative investment funds

A Commission proposal in April 2009 to regulate alternative investment funds (such as hedge funds and private equity firms) has been criticised by MEPs and ministers as unworkable and poorly drafted, and agreeing changes is proving a struggle. Barnier has spoken of the need to “improve” the proposal, but his team are keen for this to be done through amendments by the Parliament and the Council of Ministers, rather than by the Commission producing a fresh text.

Fact File

Reforming capital requirements/The Basel Committee

The Basel Committee on Banking Supervision (which brings together central bank governors from 27 major economies, including eight EU member states) presented a package of reforms to bank capital requirements in December.

The reforms would overhaul the current Basel II framework (enshrined in EU law through the capital requirements directive). Its proposals include introducing a leverage ratio, and increasing capital requirements for counterparty credit risk exposures. It is also proposing that banks should build up capital buffers in good times, which can be drawn down in bad times. The committee is also proposing to refine the types of assets that can be counted as core (Tier 1) capital. The committee is going to present detailed texts by the end of the year.

The committee’s member countries gave broad approval to the proposed changes this month. Aspects of the committee’s proposals have, however, been strongly attacked by the banking industry.

Guido Ravoet, the secretary-general of the European Banking Federation, says that the proposed leverage ratio is a “problem for us” because it is “completely incoherent” with the existing Basel II framework. “It is there because the US pushed it; we are really unhappy about it,” he says.

Ravoet says that this does not mean that the EBF is anti-reform. “We accept the Basel framework had some gaps and that the work must be completed,” he says.

The Basel proposals, once finalised, will be converted into EU law through amendments to the capital requirements directive. The Basel countries agreed this month that they should aim for implementation of the reforms by the end of 2012.

Derivatives

The Commission in October 2009 published a policy plan for regulating the derivatives market.
The Commission says that by mid-2010 it will present proposals to regulate central counterparty clearers and trade repositories. By the end of 2010, it plans to amend the capital requirements directive so that higher capital charges are placed on firms which do not use central clearing.
Click Here: cheap Cowboys jerseyBarnier has been strong on the need to regulate the derivatives market comprehensively. The European Association of Corporate Treasurers, however, has criticised aspects of the Commission’s policy as unworkable.

Other Issues

Securities: the Commission is going to bring together a group of national experts to discuss possible reforms to securities regulation. The reforms would focus on protection of investors when a firm goes bankrupt.
Short selling: mentioned by Barnier during his hearing as a possible area for the action (see main article). If Barnier does decide to act, he is likely to do so as part of the review of the market abuse directive.
Bonuses: Barnier mentioned during his hearing that no one should be “shocked” if he decides to take further action against irresponsible pay in the banking sector. The Commission presented a recommendation on financial sector pay in April. It followed this up in July with a proposal to apply capital sanctions against banks with irresponsible remuneration policies. Ministers approved the legislation in November. It is still under discussion in the European Parliament.

The Reviews

Mandatory reviews of existing legislation will provide the Commission with opportunities to strengthen regulation.
Market abuse directive. The legislation, dating from 2003, harmonises member states’ approaches to tackling insider dealing and market manipulation. It is due to be reviewed during 2010. The Commission will propose strengthening the sanctions applied against those guilty of market abuse.
Markets in financial instruments directive (MiFID). The legislation, dating from 2004, regulates investment activities in the EU, and guarantees investment firms and stock exchanges the right to offer their services cross-border. A review of the directive is foreseen for this year. Barnier plans to use the review to tackle ‘dark pools’ of liquidity (ie, investment networks where neither the price nor the identity of the trading company is displayed).

The financial services sector, despite the battering that the crisis inflicted on its reputation, has reverted to resisting reforms that it sees as over-burdensome or unwarranted. The hedge funds industry vociferously attacked the Commission’s proposal on alternative investment funds, while banks are warning that the cumulative impact of planned regulation could stifle lending.

Guido Ravoet, the secretary-general of the European Banking Federation, says that “nobody has made an overall assessment of the impact” of reforms to capital requirements envisaged by the Basel committee. He says this is “worrying” for the sector.

International talks

Barnier also faces an evolving international agenda. An International Monetary Fund report, expected in April, will intensify discussions between governments on possible taxes and charges that could be imposed on the banking sector as the counterweight to the support it received during the crisis. Developments on the other side of the Atlantic may influence the EU’s plans too. US President Barack Obama’s announcement last week of measures to limit banks’ size and activities go beyond what has been agreed at the G20.

Barnier has promised to “make our financial services industry more competitive with the right rules that restore trust”. Whichever way he goes about it, the new commissioner has a mammoth task ahead of him.