Transparent and efficient

30 May 2008

The Single Euro Payments Area (SEPA) is expected to save consumers and businesses €50-100 billion a year, but some countries have been slow in implementing the initiative. While barriers towards SEPA still remain, Charles McCreevy, EU Commissioner for internal market and services, says that the benefits of SEPA are already apparent and that the creation of a level playing field in the eurozone is on track. Jon Eldridge interviews Charlie McCreevy. JE: As a market-driven initiative, is SEPA developing as intended? CM: I think we have got off to a very good start. The European Payments Council (EPC) has developed the basic rule books for credit transfers and direct debits. More than 4,000 European banks have now adhered to the EPC credit transfer scheme and SEPA credit transfers were successfully launched on 28 January. As can be expected the actual number of SEPA credit transfers is relatively small, but this will increase over the next three years. Even so, the actual volume of transfers is significant and already exceeds 100,000 on a daily basis. For full direct debit migration we will need to wait till the deadline for the implementation of the Payments Services Directive (PSD), 1 November, 2009. However, it is encouraging that some countries may already use the SEPA Direct Debit for national direct debits before that date. The position for cards is perhaps more nuanced, but I am aware of at least three potential new entrants to the pan-European debit card market. So that is very positive. However, we still have a long way to go, and I will be closely following market developments to see, for example, how the improved EPC governance arrangements work out in practice. The aim of SEPA is to create a level playing field in the eurozone. What would be a realistic target date for achieving such a goal given the existing big differences in fees and interchange fees between southern Europe and northern Europe? In reality will SEPA be only created after 2015? Yes, it is true that we have different business models for payments in Europe. SEPA will place these models in competition and customers should benefit from the increased competition. However, I think once the market becomes more familiar with SEPA, with banks actively marketing the new SEPA products, and customers, particularly corporates, making the investments to seize the opportunities of SEPA, then migration could occur a lot faster than many people think. Clearly, direct debit migration will take longer than credit transfers but 2015 seems unduly pessimistic. To realise the SEPA vision, strong commitment from all the stakeholders is required. What is the European Commission doing to encourage national governments and public authorities to move towards SEPA? SEPA is a market-led initiative. Therefore, in the first place banks should develop attractive products and market them actively so that there is a natural momentum for customers to migrate to SEPA. These efforts need to be tailored to the national situation. However, I recognise that SEPA can bring very significant benefits to the wider economy and that public authorities can play a strong role in kick-starting migration and achieving critical mass. Therefore, I have sought to raise the political profile and awareness of SEPA at the European level. I think we have been successful, as can be seen from the Ecofin conclusions adopted last January. We intend to closely monitor SEPA migration by public authorities and to coordinate our communication efforts with the EPC and the European Central Bank. For example on 28 January, we successfully hosted a SEPA launch event, "SEPA Goes Live", and last year I hosted a major conference for public authorities. The conference showed that while public authorities strongly support SEPA, concern about the pricing and performance of SEPA products may, sadly, create a negative climate for early migration.  But SEPA is a market-driven process, and in a market driven process, suppliers should persuade customers of the merits of new products so that migration occurs naturally. Banks should espouse the non-deterioration principle, namely that the new SEPA products should have price/performance characteristics at least as good, and preferably better, than existing products. Ecofin has already highlighted its importance in its conclusions last year and the Commission will continue to monitor this issue and, at the same time, will strive to promote the role of public administrations in the timely and successful implementation of SEPA. Finally, we can, of course, encourage by example, by being early adopters of SEPA products ourselves. Are you concerned about national debit cards? Within SEPA, functionality will undoubtedly be expanded so that a card can in principle be used at any terminal in the eurozone. Unlike the comprehensive rule books for credit transfers and direct debits, the SEPA Cards Framework does not develop any detailed rules and standards, but rather describes three options for attaining SEPA compliance. There is a justifiable concern that under current market developments, this increased functionality could come at the cost of increased market concentration and the risk of a more expensive payment card for the merchant and consumer. At the heart of this issue is our concern that national card schemes should not be replaced by more expensive payment card schemes, using SEPA as some sort of pretext for increasing prices. More competition in the EU payment cards landscape should mitigate against such tendencies. In a more cross-border integrated banking landscape, is the current primarily domestically oriented banking supervision the right model? Do you foresee changes in this model in the next five to ten years? We are engaged in discussions on this issue with finance ministers in the Ecofin Council. A single supervisor is not on the horizon, but I am in favour of deeper and quicker supervisory convergence. Is there sufficient transparency of the real costs of payments services for consumers? For example, Dutch consumers and traders fear a level playing field since a balance would imply a considerable rise in banking fees. As a result, banks have informed their clients that payments are cheap because of efficient processing and technologies? Transparency of real costs is a general problem in payments markets. There are hidden costs and cross-subsidies. For example, banks can use float income to offset direct payment costs. Consumers often do not recognise these costs. On the other hand, some consumers may unreasonably expect payments to be free. Clearly, banks have to cover their costs somewhere. However, I agree that the Dutch market is probably one of the most efficient. Markets with more expensive payment products have greater potential to gain. But SEPA is about increasing competition to arrive at a "best-of-breed" level, not about regression to some average EU level. Payment costs for end users are still not very transparent. Can you foresee governments or the EU putting pressure banks to open up further and increase the efficiency of the European payment sector? One of the main objectives of the PSD is to increase transparency and the quality of information provided to customers. SEPA will intensify competition and further improve efficiency through increased economies of scale. These effects are already visible in the payments processing market. I think the merger of Dutch Interpay and the German Transaktionsinstitut in 2006 to create Equens is a very good illustration. Clearly, I prefer market-led solutions, but the Commission has always reserved the right to propose further legislation to attain the full potential of SEPA, if necessary. Increasingly, banks are working towards – or have begun – cross-border consolidation. Do you expect a further acceleration driven by the EU agenda for a fully harmonised financial services market? At the start of this mandate, in December 2005, we published our strategy for the financial services 2005-2010. The strategy explores the best ways to effectively deliver further benefits of financial integration to industry and consumers alike. These remain our priorities. The top priority is to dynamically consolidate progress and ensure sound implementation and enforcement of existing rules. Our second priority is to drive through the better regulation principles into all policymaking. Third, we are working to enhance supervisory convergence. Fourth, we are aiming to create more competition between service providers, especially those active in retail markets. Finally, we are seeking to expand EU's external influence in globalising capital markets. To what extend will competition authorities monitor SEPA? This question is best answered by my colleague, Nellie Kroes [EU commissioner for competition], with whom I enjoy close cooperation on SEPA issues. From our contacts, I know competition authorities at both the European and the national level are closely monitoring SEPA, as am I. What happened to cause PSD to be delayed, and how does that relate to direct debit for example? I am pleased that we are able to find a successful compromise on the PSD between member states, which preferred a more traditional approach and those that favoured a more innovative approach to payments. The PSD provides the legal foundation for SEPA. This is absolutely crucial for direct debits where we need to harmonise the authorisation, revocation and refund rules at European level to make a SEPA direct debit possible. Consequently, full direct debit migration requires the implementation of PSD. We appreciate the importance of consistent, correct and timely implementation of the PSD to provide a common legal framework for the launch of the SEPA Direct Debit scheme. We are working closely with member states and business through transposition meetings and our interactive website on PSD implementation to achieve this result. What other barriers do you see on the path towards a level European market playing field? The Commission is actively committed to identifying and proposing the removal of significant barriers to the completion of the internal market in financial services. The most important remaining barriers are in the retail area where cross-border transactions are less developed. Taxation and especially VAT was one of them, and the Commission proposed in November, 2007, to modernise the existing provisions of the VAT Directive concerning financial services to have a consistent regime across the EU. The Commission also identified others barriers in the mortgage market in a white paper published in December, 2007, and in customers' mobility related to bank accounts.  How do you see the EU market growing over the next few years in relation to those countries that just joined the EU and those that are eager to join? Between 2001 and 2006, the EU financial service industry has been growing more rapidly than the global EU GDP. Although this growth was fuelled by many factors, such as increased demand for more sophisticated products, financial innovation and strong real estate markets, the EU financial integration has played a decisive role. Therefore, the Commission expects the financial service industry to continue to grow significantly, especially in the new member countries and the neighbouring countries as financial services were generally less developed in these countries.   Apart from SEPA, what do you think will influence the internal economic market most in coming years? Concerning the financial services internal market, the Commission expected the integration of retail markets to progress further both with an increase in cross-border trade of financial services and the consolidation among the financial service companies. In the context of the current financial turmoil, the Commission is also pressing for deeper and quicker convergence and integration of supervisory practices across the EU. If adopted by the Council and the European Parliament, the new risk-based prudential regime, Solvency II, should foster a more competitive EU insurance industry for the benefits of all its customers. The Solvency II Directive is expected to transform insurance and reinsurance regulation in Europe. How will this directive be adopted? Our key priority for this year is ensuring that the Solvency II Proposal is adopted without the substance of the proposal being compromised. 2007 was a key year with the Commission adopting the proposal in July. The Portuguese Presidency did an excellent job in negotiating it. The Commission's Proposal is innovative and responds to a real need to improve the regulatory framework in the EU. The negotiations in the Council are now continuing under the Slovenian Presidency. Two Council meetings have already taken place and the Presidency has scheduled several other meetings. I am confident that good progress will be made. It is also our key political priority that the Solvency II Project proceeds according to the timetable. Otherwise the directive will not enter into force in 2012 as expected. This would be detrimental to both EU industry and policyholders. We therefore need to meet all the deadlines. Key milestones will be the votes in the Council and the European Parliament. In February this year the Peter Skinner, the Parliament rapporteur, will present his report to the Committee on Economic and Monetary Affairs. A vote in ECON is expected in the summer of 2008 and a vote in the Plenary in the autumn of 2008. The Council and the European Parliament are expected to adopt the directive by the end of this year. The adoption of the Level 1 Framework Directive is not the end of the Solvency II Project. As you are aware, Solvency II is adopted under the Lamfalussy procedure. It is very important for the Commission that the Level 2 implementing measures, which give further detail to the directive, are also developed and adopted according to the timetable. We expect that the implementation measures will be adopted by the European Parliament in 2010. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has already started working on the areas where it is likely that implementing measures are needed. We have asked CEIOPS to deliver advice on these measures by October 2009. How has industry received the proposals? Getting buy-in from all stakeholders is one of our key priorities. There is little point in introducing a new innovative regulatory framework for insurance if only the Commission believes in its benefits. We therefore want to operate in a very transparent way and consult our stakeholders as much as possible. It is also important that national supervisory authorities embrace the fundamental changes brought about by Solvency II. We do not only want buy-in from industry and consumers but also from insurance supervisors. They will be at the forefront of the new regulatory framework. They need to demonstrate that the supervision of insurers has changed. I am encouraged by the widespread support for Solvency II. Indeed, there is significant interest also from countries outside the EU. Our regulatory framework will be, I hope, world leading, but Solvency II does give the Commission the option to recognise a third country regulatory regime as equivalent. The third country would then be able to benefit from the group supervision provisions in Solvency II. What is next on your agenda? What challenges do you see for all financial markets (including pensions and insurance) over the next two years? The greatest challenge for insurers and reinsurers across the EU over the next few years will be to introduce a modern solvency regime. As you may know, the European Commission has adopted the Solvency II Directive proposal last summer and it is expected that the European Parliament and the Council will have adopted this new supervisory framework by the end of this year. In parallel, work on implementing measures has already started, and we hope that European insurers and reinsurers will be able to benefit from a new solvency regime by 2012. Occupational pension funds are part of the pension system decided by the member states and they have a key role to play in helping economies to meet the challenges of demographic ageing. Occupational pension funds in the EU are subject to the Institutions for Occupational Retirement Provision (IORP) Directive. Given that this directive has been implemented by member states only recently, time is still needed for its full effects to unfold. At the same time, prudential regulation of these funds is linked to the prevailing life insurance directive. As a result, there is a need to decide which rules should apply to them once Solvency II is in force. Looking ahead, it will be important to ensure that pension fund regulation incorporates state-of-the-art financial supervision principles so as to achieve a high degree of pension security at a reasonable cost for employers. The issues involved are, however, highly complex and views differ markedly. In moving forward we will need to tread carefully. It is for this reason that I have asked Commission services to launch a broad consultation in order to get a good understanding of all the issues involved from the perspectives of the different stakeholders. Pension funds differ in countries across Europe. Is harmonisation of solvency rules in this area a possibility? I know that there is a great deal of interest in the UK on whether Solvency II will be extended to pension funds. The IORP Directive has now been implemented by all member states. In order not to slow down the finalisation of the Solvency II Proposal, it was agreed with member states in 2006 to come back to the issue of possible extension of the new solvency regime to pension funds in 2008 in the context of a review of the directive. In order to prepare the discussion, CEIOPS is presently examining the existing solvency rules for pension funds. It is only after this first fact-finding exercise has been finalised that we will be able to better understand which solvency rules apply to the area of pension funds. I believe that further work is needed here before we can commit ourselves to any specific regime. Stakeholders will have an opportunity to provide us with their views. But a very strong business case would be required before we start shifting Solvency II rules to pension funds, and frankly, I would be surprised if there is such a case. I have no intention of sponsoring proposals that would risk closing down defined benefit pension schemes. A version of this article originally appeared in FSI Magazine.

 

< Prev		Next >