13.3.2Regulation of the securities markets in the eu

A genuine single nancial market across the EU needed to apply much more broadly

than to banking. It was accepted that if competition were to be fair for all rms, free

access was required to all sources of capital. It was also accepted that if savings were

to be utilised as effectively as possible, investors should have free access to all invest-

ment products irrespective of their country of origin. With the rapid development

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Chapter 13 • The regulation of nancial markets

of nancial markets and the great increase in new nancial products from the early

1970s, the securities (or investment) industry (which covers securities trading, unit

trusts, broking and market-making, portfolio management, underwriting and invest-

ment advice as well as issues related to the access of companies to foreign stock

exchanges and the quotation of securities on foreign stock exchanges) was becoming

increasingly signicant. However, it was also an area in which markets developed

much more rapidly in some member states than others. This caused anxiety in some

countries that increased competition across the EU would damage, if not destroy,

their underdeveloped markets and institutions. Under these circumstances, progress

towards a single market was bound to be slow.

Nonetheless, strong efforts were made in some segments of the industry from the

late 1970s on, notably in regard to the harmonisation of the different regulations

of the member states on the admission of securities to stock exchange listing and

the information provided to investors. In 1979, the Directive Co-ordinating the

Conditions for the Admission of Securities to Ofcial Stock Exchange Listing set

out the minimum conditions to be met by issuers of securities, including minimum

issue price, a company’s period of existence, free negotiability, sufcient distribution,

and the provision of appropriate information to investors. Member states were

free to impose stricter requirements. This was the rst of four directives (the others

followed in 1980 and 1982) that were designed to make it easier for companies to

list their shares or raise capital on other EU stock exchanges. Directives concerned

with information to investors covered the disclosure of large shareholdings in com-

panies, the provision of information in prospectuses, and insider dealing.

The new principles of minimum harmonisation, mutual recognition, a single pass-

port, and home-country regulation were applied in two directives on the marketing

of unit trusts in 1985 and 1988. These allowed a unit trust that had been approved in

one member country to be sold anywhere in the EU without further authorisation,

provided it met investor protection requirements in force in the host country.

The Investment Services Directive (ISD), which came into force in June 1992, was

the rst major securities industry directive based on the SEA principles. It extended

the single passport principle to non-bank investment rms generally. This extension

was essential because the Second Banking Co-ordination Directive had given this

right to banks carrying out securities business, but did not grant it to non-banks

in this area. There was a particular problem because the banking industry in some

member states had traditionally been organised on universal banking principles,

whereas in other member states (notably the UK), the two forms of business had

been separated. Thus, if the ISD had not been agreed, banks engaged in securities

business would have been given a competitive advantage over non-bank rms. The

ISD thus provided for the removal of barriers to both the provision of cross-border

securities services and the establishment of branches throughout the EU for all rms.

It also liberalised the rules governing access to stock exchanges and nancial futures

and options exchanges.

The difference in the organisation of banking and securities industries among

member countries led to problems in relation to capital adequacy. If capital adequacy

rules had not been extended to cover non-bank securities rms, they, in their turn,

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