Reducing barriers to the creation of a single European capital market through the so-called Lamfalussy process will fail. This will necessitate the creation of a European equivalent of the Securities and Exchange Commission (SEC), which will rely initially on “soft” enforcement powers and on attacking “soft” issues such as corporate disclosure. Or so say Grard Hertig, professor at the Swiss Institute of Technology, ETH Zurich, and Ruben Lee, managing director of the Oxford Finance Group and a member of the Advisory Panel of Financial Services Experts, which advises the Economics & Monetary Affairs Committee of the European Parliament.
In a paper launched today, Hertig and Lee discuss the future of securities markets legislation and regulation in the European Union. They argue that the Lamfalussy Process will not work; that there will be a European Securities and Exchange Commission (ESEC); that the ESEC will focus initially on corporate disclosure issues; and that the ESEC will obtain “soft” enforcement powers. The authors emphasise that these predictions do not reflect the authors’ views as to what should happen – only what they believe will happen.
Hertig and Lee say that the Lamfalussy approach of reducing barriers to the integration of European capital markets will not work because it fails to address two fundamental issues: national protectionism and bureaucratic inertia. “The resulting failure will make increased harmonization and some centralization of supervision inevitable,” they continue. “Notwithstanding current opposition to the establishment of a pan-European securities regulator, there will be a European Securities and Exchange Commission (ESEC). The ESEC will be set up, and develop, following the path of least political resistance. Initially at least, the ESEC will focus on corporate disclosure issues, the area where opposition to regulatory harmonization is weakest. It will not have powers to sanction infringements of its rules, as there would be too much resistance to this. The ESEC will, however, be allowed to investigate possible infringements and make its findings and recommendations public. This “soft enforcement” approach will provide incentives for Member States to undertake corrective action and also foster private litigation.”