The document discusses the different approaches and challenges to achieving a single European financial market, as originally envisioned in the Treaty of Rome. It summarizes the current Lamfalussy process of minimum harmonization and mutual recognition, as well as arguments that it may fail and lead to increased centralization under a European Securities and Exchange Commission. However, creating a single regulator faces political and practical challenges given differences in member states' laws and reluctance to give up national control. Overall, there are many potential paths to integration but no clear consensus due to the complex interplay of economic, political, legal and cultural factors across Europe.

1. Oliver Damian, UTS Student No 02110423
International Banking and Finance Law, Spring 2005
The Meandering Roads to a Single European Financial Market
Roads leading to Rome
All the changes and reform in the regulation of financial markets happening in Europe at the
moment can be seen as roads leading to what was originally envisioned at the Treaty of Rome-
free movement of persons, services, and capital1
. Clearly there are economic benefits to a single
and integrated European financial market. Furthermore, the creation of the Economic Monetary
Union (EMU) and the Euro as the single currency has created the impetus for an integrated
financial market2
.
However, at present there is no consensus as to what form this single market would take and
which road will lead there. The debate on the topic is important not only for Europe but for the rest
of the world. As the world capital markets get more interconnected, and international, there is the
need for a model of regulation to enable issuers and investors to meet at the global level without
going through the labyrinth of disparate national regimes. Further, with all the corporate scandals
rocking the U.S. Capital markets and the corresponding Sarbanes Oxley reaction,3
the position of
the U.S. Securities and Exchange Commission (SEC) as setting the global de facto model of
choice in capital market regulation is being put into question.
Will the current European experiment in minimum harmonization and mutual recognition work or is
it doomed to fail?
The Road the Wise Men set to follow
The current situation of minimum harmonisation and mutual recognition is borne of the efforts of
the Committee of Wise men outlined in the well known Lamfalussy Report in 20014
. It identified
that the then system of directives and national implementation was too slow and rigid to adapt to
rapid development in the capital markets. The principles and the measures to implement these
were mixed in the too much detailed directives. There was a low risk for a member state to be sued
for failure to implement a directive. Furthermore, a system with 40 different national regulators was
too unwieldy to be effective. To address these issues, the Lamfalussy Report advocated a 4 level
process for the creation of securities legislation and the creation of the European Securities
1 Title III. ‘Free Movement of Persons, Services and Capital’, Treaty Establishing the European Community
as Amended by Subsequent Treaties ROME (1957) < http://www.hri.org/docs/Rome57/ > at 26 October
2005.
2 Gikas A. Hardouvelis, Dimitrios Malliaropulos, and Richard Priestley, ‘EMU and European Stock Market
Integration’<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=280775 > at 26 October 2005.
3 Robert C. Pozen ‘Can European Companies Escape U.S. Listings?’ < http://ssrn.com/abstract=511942>
at 26 October 2005.
4 Founding texts CESR <http://www.cesr-eu.org/ > at 26 October 2005.

2. Committee (ESC) and the Committee of European Securities Regulators (CESR). ESC is
composed of economic and finance ministers as EU member state nominees, chaired by a
representative of the European Commission (EC). CESR is composed of senior representatives of
national regulatory agencies.
Level 1 involves the setting of principles as framework legislation – directives and regulation
through the co-decision process by the Council of Ministers and European Parliament on advice of
the ESC. Level 2 involves the setting of measures as technical implementation of the Level 1
framework. These measures are envisioned to be used frequently to keep up with developments in
the capital markets. Level 2 involves a streamlined rule making process of ‘comitology’ with CESR
acting as an independent, transparent body drafting the technical measures put to a vote by ESC.
Level 3 involves the EC ensuring common and uniform implementation of Level 2 measures with a
lot of help from CESR and EC through interpretative guidelines and standards amongst the
regulators. Level 4 deals with EC enforcing the legislation.
Now, this Lamfalussy process was adopted in the context of something needed to be done
urgently, and within the existing arrangements of the EU Treaty. The report did hint at the
possibility of a European SEC in the future. But arguably, the setting up of this body would require
a change in the treaty, in the same manner as the creation of the European Central Bank (ECB).
Is the system working?
When the Lamfalussy process was adopted by the EC there was a sunset review provision
scheduled in 2004. It did pass that review and judging from the activities, reports, and timetables
published in the CESR website, the process seems to be moving on full steam ahead. However, it
may be too early to know if the process is working or not. This is because most of the projects are
still at Levels 2 and 3. The real test would be at level 4 – if, when and how strictly would the
legislation be enforced amongst the members. The real test does not really lie in the harmonisation
itself but the in the actual implementation.
Any new system when first implemented is sure to experience a period of uncertainty and
adjustment, the recent implementation of the Prospectus Directive (PD) dubbed as the ‘biggest
change in Europe’s capital markets for decades’5
is no certainly no exception to this. Of the 16 EU
members, only 6 countries have fully implemented the directive and met the 1 July 2005
implementation deadline. Even then there were still some legal ambiguities in the implementation.
The remaining 10 countries had partial implementation or missed the deadline altogether. This has
created an uncertainty in the market. In theory, PD should make it easier and less expensive to do
a Europe-wide capital-raising. PD creates a passport for a prospectus or offering circular which
allows an issuer to obtain approval in one home member state, after which it can be used to sell to
5
Michael Evans, ‘Many EU states miss Prospectus Directive deadline’ (2005) International Financial Law
Review < http://www.iflr.com/default.asp?page=10&PUBID=33&ISS=17457&SID=522855> at 26 October
2005.

3. other member states without further approval or documentation apart from a summary in the local
language for some member states. However, as stated earlier the actual implementation has
created uncertainty which is not good for any market. It remains to be seen if this uncertainty is just
a temporary adjustment period that will pass or if it would linger and become a prevalent problem
for all future directive implementation.
Failure as Key to Success – a transition period to centralised regulation?
There are those who predict that the current system will fail and will lead to increased
harmonization and centralised supervision creating a European Securities and Exchange
Commission (ESEC) which would initially focus on corporate disclosure issues and would
implement a ‘soft enforcement’ approach. This is because the current Lamfalussy process
addresses the symptoms and not the cause – the cause being national protectionism and
bureaucratic inertia leading to weak enforcement. Also, the further enlargement of the EU creates
a practical necessity of aiming for maximum harmonisation and centralisation.6
Another issue raised, at least in relation to the Markets in Financial Instruments Directive (MiFID)7
,
is that the Lamfalussy process has produced debate and implementation that are too detailed and
technical which results in further re-regulation and regulations that are rigid and abstract. Further,
the political compromise along the way has watered down the regulations to inefficacy.
It is also quite useful to remember that one of the main points of market integration is to harness
the economies of scale and scope. It is doubtful if this could be achieved in the EU other than by
centralised regulation. Furthermore, there are strong arguments for the effectiveness of a strong
central regulator to coordinate efforts in maintaining market stability is times of crisis, given the
greater interconnected of markets of today and the inherent contagion effect this carries8
. For
example, would the present EU system without a strong central regulator been able to implement
the U.S. Fed rescue of the Long Term Capital Management (LTCM)?
There is also an argument that Europe is not in want of a single regulator because it is effectively
regulated by the US SEC through its huge influence in the European market, the prevalence of the
take-up of US style international offerings. Still, Europe needs a counterweight to the SEC in
setting International standards and this can only be done through a single regulator who will forge
the markets together.9
Finally, home bias in terms of the trade off in scale and accountability in the enforcement of rules is
6
Hertig, Gerard and Lee, Ruben ‘Four Predictions About the Future of EU Securities Regulation’ (2003).
<http://ssrn.com/abstract=376720> at 26 October 2005.
7
Guido Ferrarini ‘Contract Standards and the Markets in Financial Instruments Directive (MiFID): An
Assessment of the Lamfalussy Regulatory Architecture’ (2005) < http://www.extenza-
eps.com/WDG/doi/abs/10.1515/ercl.2005.1.1.19> at 26 October 2005.
8
Kern Alexander ‘Working Paper No 7 Establishing A European Securities Regulator: Overcoming The
Institutional and Legal Obstacles’ < http://www.cerf.cam.ac.uk/publications/files/Alexander%2007.pdf> at
26 October 2005.
9
Eric J Pan, ‘Harmonization of U.S.-EU securities regulation: The case for a single European securities
regulator’(Winter 2003) 34 (2) Law and Policy in International Business 499

4. an issue to be considered. Some see this happening even within the US SEC itself which is seen
not reluctant to pursue extra-territorial enforcement. This makes the case for a European SEC
stronger and more over there is even a call for a worldwide securities regulator.
However, no matter how strong the calls are for a maximum harmonisation and an ESEC are, the
reluctance of each nation member to give up its power and hand it over to a supra national entity
remains strong and it is highly unlikely that each nation member would allow unfettered
enforcement by this ESEC in its home turf.
Regulatory competition ?10
There are other models put forth other than harmonisation and mutual recognition under various
degrees of regulatory competition.
There is the Romano model11
which fixes the disclosure rules at the county of incorporation. It
postulates that investors will factor in the discount for less disclosure when making investment
decisions. And that regulatory competition will lead to a race to the top rather than a race to the
bottom. There is a recent development in the EC corporate law which may enable this model.
Companies can now have a choice of jurisdiction at establishment. However, discrepancies exist in
capital, requirements, taxation and even possibly traditional system of law that could hamper the
expected mobility in cross-border incorporations. Add to this the existing difficulties in
reincorporation, it is perceived as unlikely that a US Delaware monopoly type of incorporation
harmonisation will take place in Europe.12
Furthermore as discussed by Scott, the proposition that
investors can properly discount prices due to disclosure is highly questionable and a minimum
disclosure regime must still be in place for the discounting to make sense.
There is the Choi and Guzman portable reciprocity model13
which advocates freedom of choice in
the issuer in adopting the rules to follow. The major drawback which may make this model
untenable and impractical is that it makes the responsibility of enforcement unclear and could lead
to an enforcement black hole the way it happened with BCCI case.
Why is it so hard? the big picture
The foregoing discussion highlights the fact that the issue is a complex one. There may or would
be several models working at the same time in order to tame the financial services beast. The
definition of financial services is in itself rapidly evolving and consolidating. Hence, the advantage
of having one regulator within a jurisdiction to oversee the products and services like securities,
10
As discussed in Hal S Scott ‘Internationalization Primary Public Securities Markets’ (2000) <
http://www.law.harvard.edu/programs/pifs/pdfs/Scott_21.pdf> at 26 October 2005.
11
Roberta Romano ‘Empowering Investors: A Market Approach to Securities Regulation’ (1998) 107 Yale
Law Journal 2359.
12
Tobias H. Troger, ‘Choice of Jurisdiction in European Corporate Law – Perspectives ̈ of
European Corporate Governance’ (2005) 6 European Business Organization Law Review: 3-64
13
Stephen Choi & Andrew Guzman ‘Portable Reciprocity: Rethinking the International Reach of Securities
Regulation’ (1998) 71 South California Law Review 903.

5. insurance, and derivatives under the financial services banner, such as UK FSA. Most of the EU
member states don’t have this unified structure, making the job of enforcement more complicated.
More importantly, the regulation of capital markets can not really be divorced from the issues of
corporate governance. As it stands, there is movement towards harmonisation in the field of capital
markets regulation while the opposite occurs in corporate governance. This may have to do with
dichotomy of capital markets belonging to the public sphere of law whilst corporate governance to
the private. Furthermore, it doesn’t help that there are 4 main families of legal tradition co-existing
in the EC namely the UK common law, and the three strands of Continental Civil Law – French,
German, and Scandinavian14
. As long as there is not a corresponding move towards harmonisation
in corporate governance, there will always be this challenging situation because enforcement
usually falls within the realm of corporation governance.
There are also developments in technology that affects financial services like the internet enabling
broker screens to be located outside the country where the exchange is located. The definition of
the exchange itself is evolving as they have moved away from their previous public character to a
more private and enabler role. Add to this the competition, mergers and acquisitions happening
amongst and within the exchanges themselves and other financial institutions. Examples include
the Euronext15
, EASDAQ16
and the proposed take over of London Stock Exchange (LSE) by
Macquarie Bank17
. Furthermore there is the growth of off-exchange Alternative Trading Systems
(ATS), and cross-border exchanges like Virt-x18
which indirectly achieves a form of market
integration within the present system of regulations.19
Quixotic Quest and off-road transactions
The quest for one road or one best model of financial market regulation may be a quixotic one. In
reality and practically, issuers, investors, and financial institutions together with their lawyers
achieve a form of financial market integration away from the stricter rules of public capital market
regulation largely by means of private placements. The idea of achieving market integration mainly
by means of overarching regulation is also becoming questionable as self regulation among
institutions that are not politically elected or confined to the nation state is becoming more viable -
in the line of delegated regulation. Finally, in the context of economic efficiency even the idea of
extensive investor or consumer protection which is primarily the reason why the capital market
14
Amir N. Licht, ‘International Diversity in Securities Regulation: Some Roadblocks on the
Way to Convergence’ (1998) Interdisciplinary Center Herzliyah - Radzyner School of Law -
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=86628 >at 26 October 2005.
15
<http://www.euronext.com/home/0,3766,1732,00.html> at 17 November 2005.
16
< http://www.easdaq.be/> at 17 November 2005.
17
<http://news.google.co.uk/news?q=bid+for+lse&hl=en&lr=&cr=countryUK%7CcountryGB&sa=N&tab=nn&oi
=newsr> at 17 November 2005.
18
< http://www.virt-x.com/index.html> at 17 November 2005.
19
Guido Alessandro Ferrarini ‘Pan-European Securities Markets: Policy Issues and Regulatory Responses’
Università degli Studi di Genova - Law School; European Corporate Governance Institute (ECGI)
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=314576 > at 26 October 2005.

6. legislation has become convoluted can be questioned.20
A recent example of the foregoing discussion can be seen with the growth and increasing
popularity of the LSE’s Alternative Investment Market (AIM)21
dubbed as the ‘most successful
growth market in the world’. This is primarily due to less strict regulations than the LSE Main
Market and because of the indirect implementation of the regulations by the UK FSA by means of
Nominated Advisers (Nomads) who are from the capital market industry. There is an increasing
number of companies from outside the UK that are listing in AIM such as Canada, Israel, Australia
and Russia22
AIM has even become attractive for US companies.23
Conclusion
There is not one road leading to the vision of the Treaty of Rome. There are many, and the roads
are not straight, they meander. This is because whilst the basis of financial market integration is
economic, in fact the benefits of regulation and market integration could even be quantified24
, the
roads to get there are political. As such social forces25
, culture, and history come into play. And
politics has always been a series of compromise, and negotiated settlements, rarely consensus.
Rather than seeing the current difficulties of the Lamfalussy process and the whole European
experiment as a failure, it is more of a step in the evolution towards the coveted goal.
20
Jonas Niemeyer, ‘An Economic Analysis of Securities Market Regulation and Supervision: Where to Go
after the Lamfalussy Report?’< http://ideas.repec.org/p/hhs/hastef/0482.html> at 26 October 2005.
21
< http://www.londonstockexchange.com/en-gb/products/companyservices/ourmarkets/aim/ > at 17
November 2005.
22
<http://www.londonstockexchange.com/engb/pricesnews/statistics/othermarketstats/newissuessummary.ht
m > at 17 November 2005.
23
Kenneth R Lamb et al ‘Why US companies should consider AIM’ (2005) International Financial Law
Review < http://www.iflr.com/default.asp?page=10&PUBID=33&ISS=20856&SID=594942 > at 17
November 2005.
24
Luzi Hail & Christian Leuz ‘International Differences in the Cost of Equity Capital: Do Legal Institutions and
Securities Regulation Matter?’ (2004) <http://www.afajof.org/pdfs/ 2005program/
UPDF/P1026_Corporate_Governance.pdf.> at 26 October 2005.
25
Hans-Jürgen Bieling ‘Social Forces in the Making of the new European Economy: the case of Financial
Market Integration’-<http://scholar.google.com/scholar?hl=en&lr=&cluster=5185601784159840533 > at
26 October 2005.