Financial markets: how to ensure level playing

On Monday, ACCA launched its European manifesto – Accounting for Europe’s
Development – to highlight the need for consistent financial regulation.

Two themes are central to our manifesto – the need for full-scale
liberalisation of the European Union’s sometimes protectionist financial
markets, so the EU no longer has to manage a 21st century economy with an
outmoded 19th century financial sector, and regulatory consistency.

The need for liberalisation comes at a time when Europe faces increasing
global competition – most notably from China and other emerging economies, but
also from established players such as the US. Only with thorough reform will
Europe be able to stand up to these global threats.

Regulatory consistency and fairness is also vital. A level playing field will
enable businesses to flourish and financial services providers to exploit the
market for the benefit of their business and the customer.

Differing degrees of regulation pose a real risk for Europe as it expands.
Europe plc could end up with too much regulation in one country, and not enough
in another, resulting in regulatory sink-holes where some businesses will fear
to tread.

We believe that prompt agreement on a new seven-year EU budget is essential
to Europe’s economic and financial reform. Without consensus, the EU seriously
risks being left without the necessary investment in innovation, research and
education. And in the face of the aforementioned global competition, this
consensus is an imperative.

The EU’s financial markets need a sanity check. Recent moves to liberalise
and deregulate the financial markets – at both wholesale and retail level – have
resulted in an over-ambitious programme of 42 financial services action plan
(FSAP) directives, initiatives and rules, many presented in impenetrable detail.

The national financial markets across the EU still do not operate as an
authentic unified market, allowing for the raising of capital across borders and
lower costs of capital. These 42 directives represent the Gordian knot of red
tape, from which Europe must untie itself to operate in the 21st century.

The EU’s financial services and markets need a single set of principles-based
regulations, monitored by the national financial regulators on the basis of home
country-approval, which in the UK is the Financial Services Authority. This will
remove the current administrative burden for companies to have to create
separate entities in each country to sell their financial products.

With the FSAP’s main focus being on wholesale markets, the time has now come
for equal emphasis to be given to consumers, who still remain unable to seize
opportunities for cheaper pensions, insurance and mortgages across the EU.
Amazingly, over 95% of transactions in EU consumer markets are confined to
national boundaries.

Tax is another key area. The commission’s home state taxation proposals
should be actively considered – these would enable small businesses to take much
greater advantage of the European single market.

Small firms’ access to finance should also be improved, whether through the
introduction of an incentive through the tax system for all small businesses to
reinvest in their business (and thereby increase the amount of equity available
to support sustainable growth), or by working with banks and stakeholders to
ensure that any finance gaps are plugged.

Small businesses in Europe have a high failure rate – 40% fold in the first
five years and only 5% of EU SMEs grow into larger businesses, compared with 20%
in the USA. The challenge for the EU is to improve success rates and to create
an entrepreneurial culture. A simple first step is to include entrepreneurship
and business studies in all curriculae, but more will be required.

Our manifesto also calls for more use of the regulatory impact assessment
(RIA) mechanism, which assesses the impact of new policy initiatives on
businesses and includes cost benefit analysis. Duplication, redundant or overly
complex legislation should be reviewed and removed where appropriate.

Independent audits are a valuable tool, generating business confidence and an
excellent way of combating fraud. But the current audit exemption threshold for
companies is set too high. It needs to be lowered so that more companies can be
put through the audit process.

This will benefit stakeholders and potential investors across the EU who are
currently deprived of valuable, independent and verifiable information about the
financial health of organisations.

The level playing field we’ve been calling for also applies to corporate
governance. We believe that financial disclosure and corporate governance in the
EU needs to be consistent not only amongst the 25 member states, but with the US

Listed corporations, financial service companies and public interest entities
should be encouraged to adopt a ‘comply or explain’ approach to corporate
governance, to avoid an over-prescriptive, rules-based culture.

Europe’s financial regulation has come a long way, but wholesale reforms are
still needed. Without these reforms, EU’s businesses, its financial systems and
its citizens will be left behind by unrelenting global competition. Regulation
must protect the public interest but also enable the EU’s businesses to compete
and grow.

Allen Blewitt is chief executive of ACCA

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