10 September 2004 / Date
European Commission
DG for the Internal Market
FSAP review
Unit F1 (Financial Services Policy)
Rue de la Loi 200
B-1049 Brussels, Belgium
Dear Sirs
Financial Services Action Plan – Review of the Expert Group Reports
The Commission is calling for reactions from all stakeholders and interested parties to the assessment and recommendations of four independent groups of experts on the state of financial integration in the banking, insurance, securities and asset management sectors.
Nordea welcomes the opportunity to provide its response to the consultation.
Nordea’s main concerns are the specific barriers to further industry integration, which we at Nordea now face having initiated a process of change towards a one-bank legal structure in the form of a European Company. The hampering effects of the current Deposit Guarantee directive is considered in section 8 and the VAT issue in section 7. There is every reason to expect that other European industry participants may sooner or later come up against these same barriers and both of them appear to be barriers where small, targeted adjustments to the current regulatory consensus could produce large and beneficial stimulus for further cross-border industry integration.
As a Nordic bank with a full range of cross-border products we appreciate a process where implementation of new directives are closely supervised by the Commission to ensure a coherent harmonisation. An integrated financial market within Europe is not possible to achieve only by adopting EU directives if the business activities in the local markets still are guided by too many fragmented rules and regulations for the same kind of products.
Nordea understands and agrees that its response may be published on Internet or made public in other means of communication. The numbering and questions below follows the Commission’s on-line questionnaire.
Background information
Nordea’s contact persons in this matter are Group CLO Lena Eriksson, tel. +46 8 614 84 33, fax +46 8 614 87 70, e-mail: and Senior Advisor Hannu Halttunen, tel. +358 9 165 53247, fax +358 9 163 53247, e-mail: .
Nordea was created between 1998 and 2000 from mergers of a major bank in each of the four Nordic countries: Finland, Sweden, Denmark and Norway. Nordea is the largest financial services group in the Nordic and Baltic Sea region with approximately EUR 260 billion in total assets and operates through three business areas: Retail Banking, Corporate and Institutional Banking and Asset Management & Life. The Nordea share is listed in Stockholm, Helsinki and Copenhagen.
Nordea has significant positions in Nordic banking markets: 40 % in Finland, 25 % in Denmark, 20 % in Sweden and 15 % in Norway and is a leading asset manager in the Nordic financial market with EUR 102 billion (including private banking) under management. The Bank has also significant positions in Nordic life insurance markets and an increasing presence in Poland and the Baltic Countries.
The bank has the largest customer base of any financial services group in the region, including 9.6 million personal customers, 900 000 corporate customers and 1 000 large corporate customers.
Nordea is a world-leading Internet banking and e-commerce operation with 3.7million customers. Customers are served also through 1 200 bank branch offices and telephone banking services in the region.
Nordea is the leading provider of custody services in the Nordic region. Bank’s custody services are aimed at foreign professional investors dealing with Nordic or Baltic securities. Bank’s services consist of safekeeping and clearing of securities, income collection and tax services, corporate action and proxy services, clearing services for remote brokers, securities lending, reporting and information services.
1 Comments on the general ambitions which the expert groups put forward as a vision for the further development of a single financial market
Banking Expert Group
At large Nordea agrees with the main conclusions in the Report of the Banking Expert Group. Nordea’s detailed remarks and comments to the Report will be found below.
Securities Expert Group Report
In general Nordea agrees with the main findings and conclusions presented in the Report of the Securities Expert Group. Nordea’s detailed remarks and comments to the Report will be found below.
Insurance Expert Group Report
Nordea agrees at large with the Report presented by the Insurance and Pensions Expert Group. However it should be pointed out that, the volume of cross-border activities, except for large risks and reinsurance business, is significantly small. Nordea’s detailed remarks and comments to the Report will be found below.
Asset Management Expert Group Report
Nordea supports the main conclusions presented in the report. Nordea’s detailed remarks and comments to the Report will be found below.
2 Comments on the assessment of the expert groups concerning the effectiveness of the current EU legislative framework and arrangements for supervisory cooperation in supporting the pan-European organisation of different business functions
Securities Expert Group Report
Effective implementation and enforcement is essential
Nordea fully supports the objectives of both the FSAP and the Lamfalussy process as a whole. The suggestion of the Expert Group to place more emphasis in the post FSAP period on effective implementation and enforcement of rules already adopted under the current FSAP is also supported by Nordea. Market participants, as well as regulators and supervisors need time to adapt to the new rules and make them work in practice.
The report addresses also the question of whether legal measures within the securities markets should be implemented as regulations or directives and the Expert Group concludes that this is a questions that has to be decided on a case-by-case basis, which Nordea also strongly supports.
Asset Management Expert Group Report
Nordea agrees with the Expert Group that the current level of fragmentation still hinder specially cross-boarder flows and does not make it possible to optimise business operations in the most effective and rationale way.
We also fully agree that regulatory arrangements should be flexible to allow innovation of new technical solutions and products as well as to allow optimisation of processes and business models to each marketplace.
Further Nordea welcomes idea of supervisory convergence and cooperation to deliver legal certainty and enforcement for effective market access.
We highly support introduction of high standards of investor protection. Nordea agrees with the view of the Expert Group that high levels of investor protection are vital for continuous success and development in the industry. We further agree with Groups considerations on transparency and disclosure, which are important for investors to make right decisions.
As mentioned in the Report the different national implementation of the existing regulatory framework causes uncertainty within the market participants. This effectively requires Asset Managers to await national implementation and interpretation before any implementation measures can be initiated. This delays and makes the implementation inefficient. Secondly the possibility for regulator arbitrage becomes apparent. An actual example is the national interpretation in the UCITS directive where Luxembourg has allowed outsourcing of certain operations – within the same group of companies whereas a much sharper definition as considered in Sweden – an interpretation that the Swedish market participants strongly have opposed. These issues lead to unnecessary uncertainty among all market participants and delay an effective implementation.
3 Comment on the proposals of the expert groups regarding general principles and methodology for identifying and prioritising further EU level legislative or other policy actions, and improving the EU financial rule-making process
Securities Expert Group Report
How to develop the legislative process
Nordea warmly supports the suggested principle of cost-benefit analyses and the need to introduce only evidence-based legislation. New legislation typically leads to additional cost burden for those involved in the business in question - including private investors, and therefore the costs should carefully be weighed against the need for new legislation in every stage of the rule-making procedure.
When prioritising focus should be on the specific problems, fact-finding and solving one problem at the time. This approach will most certainly lead to a more evidence based and even better legislation within EU.
One of the major challenges for the legislative process within EU is how to develop the transparency in the process. A fully transparent process is of the benefit for all parties, but has its price. A massive consultation at all stages of the process within a very limited time frame puts extreme pressure also on the market participants. Therefore Nordea strongly supports the suggestion in the report to introduce more realistic time schedules for the consultation process in the future. In the process of harmonising the European securities legislation, speed cannot be the dominating driver.
Nordea agrees with the Expert Group on the essentiality of increasing the use of Level 2 regulations. To Nordea’s comprehension this would speed up harmonisation.
One very obvious reflection on the legislative process within Europe is that all new legislation tends to be very detailed, which is burdensome for the markets. To achieve the right balance between the need to harmonize and the level, to which this harmonisation has to be taken, should be the greatest challenge for the legislators in the next FSAP period.
Sometimes very detailed legislation also results in unexpected impact on the market and/or its products, why Nordea strongly supports the suggestion by the Expert Group to introduce a “fast-track” solution to remedy bad legislation.
Asset Management Expert Group Report
Lack of cross-border fund mergers – lack of opportunities
Nordea agrees with the following priority issues and particularly points out experience in lack of opportunities for operational efficiencies due to lack of cross-border fund mergers.
- The Expert Group considered that a flexible, principle-based approach offers the best prospects for an appropriate EU-level framework for alternative investment vehicles including hedge funds.
- EU-pension fund Directive (2003/41/EC) opens new doors for the cross-border pension fund business.
- The industry should take the lead in developing high-level principles on governance and the prevention of conflicts of interest, and ensure that they are applied rigorously.
Nordea substantially supports the comments presented in paragraph 10 of the report regarding in-efficiency due to defects in possibilities for cross-boarder marketing. This is mainly due to lack of common regulatory framework for cross-border marketing.
4 Comments on the analysis of the expert groups regarding the emphasis placed on improvements at the level of supervisory convergence and enforcement, and on practical proposals in this regard
Banking Expert Group Report
Supervisory arrangement
Nordea supports the long-term goal of a lead supervisor principle as further integration and harmonisation has materialised.
5 Views on specific issues identified by the Expert Groups as priorities for further attention by EU policy-makers
Banking Expert Group Report
VAT treatment
Current value added tax (VAT) treatment on cross-border transactions is problematic and causes additional costs for the financial industry. Within the EU, the VAT exemption model currently applicable to financial services results in a reduced right to deduct input VAT. This makes it difficult to centralise intra-group internal functions that serve units of the group located in another member states and means substantial additional VAT costs. Also, the application of VAT to services, which are outsourced by a financial institution, such as IT services, is an impediment to the efficient operation of business and the need to reduce costs.
Nordea proposes that the 6th VAT-Directive would be elaborated in a way that guarantees the financial industry a possibility to organise their functions in the most effective way and to reduce costs. The response of European Banking Federation (FBE) with its annexes deals with the VAT problems in an exhaustive way. Nordea fully agrees with the problems and conclusions presented in FBE’s response. Nordea strongly supports the FBE proposals, which involve among other things cross-border VAT grouping, cost sharing arrangements and intra-company cross-border transactions.
Securities Expert Group Report
Peer-pressure group
Nordea agrees with the Expert Group on the need to involve market participants more heavily in the reviewing and improving of the implementation of new EU laws and rules but finds a Peer-pressure group unnecessary. Channels for market participants’ pressure do to Nordea’s understanding already exist since the infrastructure within EU includes very many Expert Groups and Market Participants groups already today.
No need for Ombudsman
When it comes to the suggested concept of a European Ombudsman, Nordea does not support this suggestion. We do not feel convinced that there yet is a need for such a structure and fear that this concept would be very bureaucratic and that it rather would add on confusion and complexity than solve any problems.
Insurance Expert Group Report
Important to complete Solvency II
Nordea feels it important to complete the so-called Solvency II to have an international standard in due time.
Asset Management Expert Group Report
Facilitation of cross-border fund mergers
Presently the market is over fragmented and the possibilities for any cross border offerings and operations are very limited and above all costly due to different national requirements and authorisation requirements. This may also cause unnecessary delays. Cross-border fund mergers would enable a consolidation in existing fund range.
Greater freedom of choice of depositaries
The need to include the so-called support functions (e.g. depositary and custody functions) into the framework and to allow cross border operation of funds is vital to further enhance the efficiency of the fund market.
Convergent principles of governance and management of conflicts of interests
Nordea works thoroughly with conflicts of interest situations and supports further work to be carried out to define the appropriate requirements to handle the multiple conflicts present in the asset management industry.
Effective single passport for management companies
We want to emphasize that creation of effective single passport system for management companies is one necessary step to help fund companies to organise their operations on cross-border basis. Currently different requirements and processes for applying a licence vary between different member states. This causes unnecessary work and also causes delays when entering to new markets. Single passport system would reduce bureaucracy between different national requirements and would make cross-border operations more flexible.
Regulatory framework to cover all types of market participants
The Expert Group proposes that when considering the need for regulation or other public intervention, public authorities should ideally seek to ensure that comparable business functions are subject to “broadly equivalent” regulation and professional standards. Nordea wants to point out that the regulatory framework should include all types of market participants and business models. The regulatory framework should cover all market participants and all participants with similar functions should also be subject to equal regulation and standards.
6 Aspects of the assessment where Nordea diverges from the expert group report, or concerns which may have been overlooked or not given sufficient prominence
Banking Expert Group
Cross-border consolidation and deposit guarantee schemes
On 8 October 2001 the European Company Statute was adopted by the EU’s Council of Ministers (Council Regulation (EC) No 2157/2001). For companies active across the Internal Market, the European Company offers the prospect of reduced administrative costs and a legal structure suited to the Internal Market as a whole, which we welcome.
However, when initiating a process of change aimed at establishing a one-bank European Company structure with one legal entity conducting business in all local markets by means of branches, Directive 94/19/EC on deposit guarantee schemes (“the Directive”) and its differing implementations in the EEA States give rise to certain negative effects, which hamper the creation of the European single market in the financial area.
Changing the legal structure of a group with separate national banking entities into a one-bank structure with branches will shift the deposit guarantee cover for all the group’s deposits to the deposit guarantee system of the legal domicile of the bank, although the operations of the group in the other countries concerned will otherwise be materially unchanged. The shift of responsibility can lead to different negative effects, depending on how the deposit guarantee schemes are financed in the countries involved.
- Banks and other credit institutions remaining in the former "home" countries can gain a competitive advantage, since the need for contributions to that country’s guarantee fund can be reduced or eliminated, without any of their respective deposits being decreased.
- The banks and other credit institutions in the new "home" country can face a competitive disadvantage, since the need for contributions to that guarantee fund can be increased, without any of their respective deposits being increased.
- In order to be able to provide the same consumer protection conditions as its local competitors, the transformed bank may have to contribute to the systems where the branches operate, (depending on the level of coverage) to top-up the deposit guarantee for its customers. However, it may be unable to use its former contributions to the guarantee funds concerned for this purpose.
The negative effects that follow of the lack of harmonisation of the national deposit guarantee schemes is a barrier to further integration of Europe’s financial services markets and especially to the creation of a European Company. The long-term solution is to revise the Directive in order to bring about greater harmonisation of the national deposit guarantee schemes.