1992: The Case of Financial Services
Northwestern Journal of International Law & Business
ase of Financial Ser vices
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1992: The Case of Financial Services
By the end of 1992 the European Community (EC) intends to create
a single internal market in goods, services, labor and capital.1 Of all the
internal markets to be created by the end of 1992, the single internal
market in financial services2 may be the most interesting.
* M.A.; (Cantab), LL.M., Lecturer in Law with special reference to the Law of International
Transactions, London School of Economics and Political Science.
1 The creation of such a market was envisaged in 1957 by the Treaty of Rome, 1973 Gr. Brit.
T.S. No.1 (Cmd 5179-I) (official English translation), 298 U.N.T.S. 11 (1958) (unofficial English
translation). For contemporary comment see Efron & Nanes, The Common Market and Euratom
Treatier Supranationalityand the Integration of Europe, 6 INT'L & COMP. L. Q. 670 (1957).
Progress towards the aim of the single internal market was slow until, in 1985, the Commission of the
European Communities (the Commission), the EC institution which is responsible for making
proposals for legislation and for monitoring compliance with EC rules, produced the White Paper,
Completing the InternalMarket (Document COM(
) 310 final, June 1985), which led to the Single
European Act of 1986, 30 O.J. EUR. Comm. (No. 169) 1 (1987), reprintedin 25 I.L.M. 506 (1986),
and the 1992 deadline for the achievement of the internal market.
For the events leading up to the Single European Act see e.g. Lodge, The Single EuropeanAct:
Towards a New Euro-Dynamism?,24 J. COMM. MARKET STUDIES 203 (1986). On the Single
European Act see Glaesner, The Single EuropeanAct Attempt at an Appraisal, 10 FORHANM , r'L L.J.
2 When Price Waterhouse was commissioned to produce its report on the gains to be made
from European integration it agreed with the Commission to define financial services as including
the provision of a financial service, or the sale of a financial product, or both. The activities covered
would be: international, commercial and private banking; corporate financial services; offshore
This paper considers three aspects of the single market in financial
services: regulatory harmonization as a solution to the problems caused
by the development of international financial markets; the rules which
the EC has adopted and proposed to create the single market in financial
services; and the extent to which the single market will encourage
competition between regulators.
The single internal market was designed to ensure the proper
fumctioning of European financial markets in matching the supply of and
demand for capital which is essential for the health of the European
economy.3 Nevertheless, in pursuing the single market goal, the EC has
created a new method of dealing with the problems which worry all
regulators of financial services activities. Unfortunately, the EC has not
made the most of its opportunity. The rules are sometimes unclear, and
it is not inevitable that they will achieve equivalent regulation
throughout the EC. In addition, although each Member State has an interest in
the achievement of the single market in financial services, each Member
State also has a national interest in ensuring that it benefits from financial
activity within the Community, even at the expense of its neighbors.
The achievement of the single market in financial services promises
to promote the efficient allocation of capital in Europe and to produce
significant immediate gains. The Community's total gain from
completion of the internal market will probably exceed 200 billion ECU,4 which
represents between 4.3% and 6.4% of the Community's gross domestic
product in 1988.1 The creation of a single market in financial services
may account for as much as one sixth of this total. As part of its vast
ing and money market activities; brokering; funds management; assurance, insurance and
reinsurance; consumer credit; building societies; and stock exchange services. See 9 Commission of the
European Communities, Research on the 'Cost of Non-Europe', Basic Findings, The Cost
ofNonEurope in FinancialServices 3 (1988) [hereinafter Price Waterhose Report]. This is part of the
research which provided the foundation for the Cecchini report, see P. CECCHINI, THE EUROPEAN
CHALLENGE: 1992 THE BENEFrs OF A SINGLE MARKET (1988).
3 For recognition of this, see, e.g., the Commission Recommendation concerning a European
code of conduct relating to transactions in transferable securities, 20 O.J. EUR. COMM. (No. 212) 37
(1977), Explanatory Memorandum at point 1; see also Emerson, Aujean, Catinat, Goybet &
Jacquemin, The Economicsof 1992. The EC Commission'sAssessmentof the Economic Effects of
Completing the InternalMarket 98 (1988): "The integration of financial markets across Community
borders is uniquely important, however, in the sense that it will not only have important effects on
the efficiency of the sector itself but also on the efficiency of resource allocation of sectors using
4 One ECU was worth USS1.22 on April 27, 1990.
The ECU is a currency made up from a basket containing specific amounts of ten European
currencies. See Works, The European Currency Unit: The IncreasingSignificance of the European
Monetary System's Currency Cocktail, 41 Bus. L. 483 (1986); Usher, The Legal Regulation of the
European Currency Unit, 37 Ir'L & CoMp.L. Q. 249 (1988).
5 P. CECCHINI, supra note 2, at 83.
project on the economic benefits of European integration, the
Commission engaged Price Waterhouse to write a report on the 'Cost of
NonEurope in Financial Services'. 6 In this report, Price-Waterhouse
estimated that integration of European capital markets would produce a
gain of 11-33 billion ECU.7 Integration should also produce other
macroeconomic welfare gains because it will allow the pooling of risks
and the equalization of interest rates.'
Currently, national regulation creates non-tariff barriers to trade
and investment in the EC.9 The Price Waterhouse report lists a number
of these, but it emphasizes that there may be barriers which are not yet
apparent because they are hidden in the fine detail of the rules, and that
the impact of national regulations tends to depend on how they are
applied.' 0 The attainment of the single market in financial services involves
the removal of existing barriers between Member States and the
harmonization of new and existing rules. European integration should mean
that national rules throughout the EC will tend to converge and prevent
new barriers from arising. This process, however, involves costs: some
financial firms exposed to new competition will fail."
The internationalization of financial markets is the most important
issue facing financial services regulators and irms today.
Internationalization links the three aspects of the single market in financial services
covered by this paper: (i) the need for harmonization of financial
regulation, (ii) the EC's rules as an example of regulatory harmonization, and
(iii) the possibility that regulatory authorities in different Member States
will compete to develop the most popular regulatory system for financial
services in the EC.
First, the removal of barriers between Member States, and the
har6 Price Waterhouse Report, supra note 2.
7 Id. at 166, 179. The report is explicit about the need for caution in interpreting quantification
of the potential gains because the results are speculative, see Section 6.2, Potential Future Price
Changes, id at 144; in particular the figures 'represent a snap shot of the position before and after
integration' and 'also assume a competitive market structure after integration', id. at 166. For the
methodology adopted for the survey see Section 6 of the report, particularly Section 6.1,
Introduction and Review of Methodology, id. at 139.
8 Id at 25-27, 171-79.
9 Id. at 6. For a list of the barriers to integration, see id. at 62.
10 Id. at 63.
11 See id. at 179. "The gains from integration will result from the dynamic effect of economic
integration and not simply as a result of removing the costs of meeting some of the existing
regulations. In all countries consumers will benefit from European integration but some producers will
come under pressure to survive in the single market.... In view of the potential benefits of European
integration offinancial and capital markets it is essential that steps are taken to rapidly complete the
internal market in financial services." IdoOn the risks firms will incur as a result of market
integration see J.PELKMANS, MARKET INTEGRATION IN THE EUROPEAN COMMUNITY 56-57 (1984).
monization of regulation of financial services within the Community,
involve the EC in dealing with the problems of international financial
markets in a completely new way. The measures which the EC is
adopting to achieve the single internal market in financial services, although
designed primarily to achieve economic goals, may be far more effective
than other, more traditional, attempts to deal with these problems by
way of extraterritorial legislation or memoranda of understanding.
Second, it is interesting to consider the rules which the EC has
adopted to eliminate the barriers between national financial services
markets and to coordinate regulation throughout the Community. These
rules are new, significant, and interesting in tliemselves, both in the
context of international financial markets and as'a focus for some questions
about financial regulation which are significant beyond the EC's
boundaries. For example, commentators in the United Kingdom have begun to
debate whether functional regulation12 is better suited to modern
financial markets than institutional regulation,' 3 which is the type of
regulation envisaged by a central element of the legislative program designed to
achieve the single market in financial services, the Second Banking
Directive.1 " Other commentators have been considering what type of
regulation is appropriate to particular types of financial activity.15 The EC's
financial services rules are not yet well-known in the United States, but
will affect United States financial services firms which wish to carry on
12 Functional regulation gears regulation to particular activities, regardless of the type of entity
involved in the activities. The UK Financial Services Act, 1986, ch. 60, is an example of a functional
scheme of regulation, and sets up a scheme for regulation of'investment business'. However, the UK
system does also involve institutional regulation: banks, building societies and insurance companies
are all subject to regulation under separate statutory schemes. See generally, D. LOMAX, LONDON
MARKETS AFTER THE FINANCIAL SERVICES ACT (1987).
13 Institutional regulation gears regulation to the type of entity carrying on an activity, whatever
the activity. Under such a system, a bank involved in dealing in shares would be regulated by a
banking regulator. See Dale, FinancialRegulation after the Crash, 158 THE ROYAL BANK OF
SCOTLAND REVIEW 3, 17 (1988) (". . .the fragmentation of regulatory responsibilities both geographically
between national authorities and functionally between bank; securities market and futures exchange
regulators is becoming outdated in a global financial marketplace in which securities and banking
markets are becoming increasingly integrated.")
14 Second Council Directive on the co-ordination of laws, regulations and administrative
provisions relating to the taking up and pursuit of the business of credit institutions and amending
Directive 77/780/EEC, 32 O.J. EUR. COMM. (No. L 386) 1 (1989) [hereinafter Second Banking
Directive]. The Council is the EEC's legislative body.
15 See, eg., J.FRANKS & C. MAYER, RISK, REGULATION AND INVESTOR PROTECTION: THE
CASE OF INVESTMENT MANAGEMENT (1989). Note that the EC's proposal for a Directive on capital
adequacy of investment firms and credit institutions, COM (
) 141 final, O.J.EUR. COMM. (No. C
152) 6 (1990), will require the imposition of capital requirements on investment management firms.
Franks and Mayer argue that a requirement of separation of client funds from the funds of the
investment manager would be more appropriate.
business in Europe.16
Third, harmonization of the regulation of financial services in the
EC is being achieved through the imposition of minimum rules which
must apply throughout the Community. 'In promoting their own
national interests, Member States may set off a race to the bottom with
the consequence that only the minimum rules apply throughout the
Community. Alternatively, one or more Member States may decide that
they can attract financial services businesses to their territory by
imposing more onerous rules. The situation may be compared to that of
corporate law in the United States where there is a considerable body of
literature dealing with the race between the States to the bottom, or top.
Whether financial services regulation in the single market will involve a
competition in laxity, or a competition to promulgate and enforce tough
and effective rules, is not yet clear.
Although the EC rules on financial services are described as rules to
create a single market, in reality they continue to divide the EC
according to territorial boundaries. The EC allows these regulatory
divisions despite the increasing internationalization of the markets
themselves. As the markets become more global it becomes more important
to question whether financial regulation should continue to be applied by
reference to territorial limits. If there is to be a truly European market,
the EC should go some way towards recognition of the
internationalization of the markets by introducing regulation which operates at the EC
level, rather than at the national level.
OF FINANCIAL MARKETS
Dramatic changes have occurred in world financial markets in
recent years. 7 Increasingly, institutions dominate the markets. They hold
a growing percentage of equities, and can therefore have an increasingly
profound effect on the markets. 8 Throughout the world, governments
have deregulated financial markets, removing exchange and interest rate
controls. Regulatory authorities have removed controls on
commissions.1 9 Meanwhile, the financial markets have become more integrated:
events in derivative markets, such as futures markets, now have such a
significant impact on the underlying markets that the Securities
Exchange Commission (SEC) has concluded that pricing in derivative
markets leads price trends in the underlying equity markets." As domestic
markets have become more integrated, so have international markets.
Events in one domestic market may affect another domestic market on
the other side of the world. 21
Firms involved in the investment business are constantly developing
new markets and new products: recent examples are new financial
futures markets, 22 swap transactions, securitization and options.23
Financial conglomerates are now involved in activities which range from fund
management to corporate finance, and from insurance to commercial
banking. New technology has played an important role in these
developments through encouraging the integration of markets and the
development of new products and new markets.24
19 On the removal of controls on commissions, see J. LORIE, P. DODD & M. KIMPTON, THE
STOCK MARKET: THEORIES AND EVIDENCE (2d ed. 1985); Jarrell, Change at the Exchange: The
Causes and Effects ofDeregulation,27 LL. & ECON. 273 (1984); Miller, Regulating
FinancialServices in the United Kingdom-An American Perspective,44 Bus. LAW. 323 (1989); Gower, Big Bang
and City Regulation, 51 MOD. L. REV. 1 (1988); Terry, The 'BigBang' at the Stock Exchange, 156
LLOYDS BANK REVIEw 16 (April 1985). But see Santos, On Modes ofProductionofLaw and Social
Power, 13 INT'L J. Soc. L. 299, 324 (1985) ("Deregulations are reregulations.").
20 SEC Staff Report, supra note 18, at ch. 3, pp 3-6. See Schick, A Review and Analysis of the
ChangingFinancialEnvironmentand the Needfor Regulatory Realignment,44 Bus. LAW. 43
(198889), for a suggestion that the stock market and the market for derivative instruments are no longer
separate markets, but together form a single equity market and should therefore be regulated by a
single regulatory agency.
21 See Report of the Presidential Task Force on Market Mechanisms, Comm. Fut. L. Rep.
(CCH), No. 319, (Dec. 12, 1988)(Study I The Global Bull Market at I-1): "The birth of 24-hour
markets made all markets functionally and psychologically interlocked."; SEC Staff Report, supra
note 18, at ch. 2, ch. 11.
These effects were particularly noticeable during the world-wide market crash in October 1987.
See id.at ch. 2, Para. 2-2. ("The October Market Break also highlighted the interconnections among
securities markets internationally. Ripple effects of the market volatility were seen in strong,
wellcapitalized international markets such as London and Tokyo, as well as in fast growing, more
speculative markets such as the Hong Kong Exchange, which closed for the week of October 19.").
22 See, e.g., Hey, Establishingthe GermanFinancialFuturesExchange, 1989 INT'L FIN. L. REV.
22; J. WALMSLEY, THE NEW FINANCIAL INSTRUMENTS: AN INVESTOR'S GUIDE (1988); A.
HERBST, COMMODITY FUTURES. MARKETS, METHODS OF ANALYSIS AND MANAGEMENT OF RISK
23 See, e.g., R. BRYANT, supra note 17, at 51-57; M. WATSON, et al, supra note 17, at ch. III,
App. II.; Falconer, Securitisation in the United Kingdom, BUTrERWORTHS J. INT'L BANKING &
FIN. L. 105 (March 1989); 258 (June 1989).
24 GOURGUES & LAUTERBACH, REVOLUTION IN FINANCIAL SERVICES 6 (1987).
Each of these changes involves new challenges for regulation. The
development of large financial conglomerates raises issues relating to
conflicts of interest, competition and concentration, and supervision of
multi-function firms by single-function regulators. 25 The development of
new products and new markets means that effective regulation needs to
be flexible. 26 The integration of markets means that it is increasingly
difficult to apply regulation according to national boundaries. The
combination of all of these changes makes the regulator's job particularly
difficult: financial conglomerates operate throughout the world, as
institutions with significant potential to affect the markets, investing in and
developing new products.
The internationalization of the markets may be seen as the unifying
thread in all these developments. For example, participants in the
markets are not merely conglomerates, they are international conglomerates,
formed of entities subject to different jurisdictions and subject to different
legal regimes.27 Of course, the internationalization of the markets has
advantages, such as allowing investors to diversify across national
boundaries more easily. In addition, issuers have access to new sources of
capital, and markets become more liquid, and more efficient.2 8 Although the
markets have become more integrated, they are not yet completely
integrated: differences between different markets remain.29 In addition, the
internationalization of the markets creates new problems for regulators:
legislation tends to be restricted by reference to territory,30 but regulators
have to deal with problems which do not fall neatly within territorial
limits.3 1 For example, is a person who produces a tip-sheet in the United
Kingdom which is distributed only in France carrying on investment
business in the United Kingdom? If the tip-sheet producer knowingly
publishes false information about shares in a company listed on the
Luxembourg Stock Exchange and encourages its subscribers to invest in
those shares, is an offense of market manipulation committed in France,
in Luxembourg, or in both countries? What law governs whether the
investors have a civil remedy against the tip-sheet producer?
Solutions to Problems Caused by the Internationalization
of the Markets
Although international cooperation in financial regulation involves
collective action problems, States have adopted different solutions to
these problems and have tended to act in their own national interests,
ignoring the collective good.32 So far, most attempts to solve the
problems of international financial markets have focused on the effective
enforcement of national laws. For example, States have entered into
general multilateral treaties such as the Hague Convention on the Taking of
Evidence Abroad in Civil or Commercial Matters, which may be used to
obtain information in other jurisdictions.33
Courts have adopted another strategy, interpreting municipal
legislation to apply to acts abroad which have effects within the courts'
jurisdiction. 34 This approach has the disadvantage that it is likely that other
31 See SEC Staff Report, Internationalization of the Securities Market, (July 25, 1987); BAT
Industriesplc, Panel on Takeovers and Mergers, Reasons for the decision of the Appeal Committee
(Sept. 29, 1989); Grass, Internationalizationof the Securities TradingMarkets, 9 Hous. J. INT'L L.
17 (1986). For an example of a court facing problems in international financial markets see, e.g.,
Libyan Arab Foreign Bank v Bankers' Trust,  QB 728.
32 See, R. BRYANT, supra note 17, at ch. 8, suggesting the need to evolve international political
institutions; and, on collective action generally, see F. HIRSCH, SOCIAL LIMrrs TO GROWTH (1976);
M. OLSON, THE LOGIC OF COLLECTIVE ACTION (1971).
33 Opened for signature, 23 U.S.T. 2555 (Mar. 18, 1970). For an example of an application under
this Treaty in England to obtain information on a revenue matter see Re State of Norway's
Applications (Nos 1 and 2),  1 All E.R. 746. Also see the Santa Fe case for successful use of this
convention in a securities matter: SEC v. Certain Unknown Purchasers of Common Stock, Civ. No.
81-6553 (S.D.N.Y. 1986), aff'd., 817 F. 2d 1018 (2d Cir. 1987), cerL denied,56 U.S.L.W. 3568 (U.S.
Feb. 23, 1988). See also Casenote, US Obligationsunder theHague Evidence Convention.More than
Mere Good Will?, 22 INT'L LAW 511 (1988).
34 See, ag., Leasco Data Processing v. Maxwell, 468 F.2d 1326 (2d Cir. 1972), where US law
was applied to a non-resident alien who was held to have engaged in significant conduct in the US in
breach of the United States securities laws in relation to transactions overseas.
See Goelzer, Mills, Gresham & Sullivan, The Role of the US Securitiesand Exchange
Commission in TransnationalAcquisitions, 22 INT'L LAW. 615, 619-20 (1988); Macintosh, The Impact of
Extraterritorialityon World Banking, in THE INsTrrUTE OF BANKERS, COMPETITION AND
CO-OPERATION IN WORLD BANKING (1985); Grossfeld & Rogers, A Shared Values Approach to
countries affected by what they see as the extraterritorial operation of the
legislation will be offended and refuse to assist or even block the activities
of the regulators in question.35 National rules providing for secrecy in
certain circumstances, such as in relation to banking activities, may also
impede the effectiveness of extraterritorial legislation.3 6
Bilateral agreements to cooperate in the enforcement of regulation,
such as those which the United States and Japan,37 and the United States
and the UK have concluded, 38 are a more satisfactory solution to the
problem of enforcing national rules in the context of international
markets, and are an important development. At present, however, the
bilateral agreements which exist are not sufficiently comprehensive to be
really effective. These agreements are designed to help regulators to
obtain information from their counterparts in other jurisdictions, but they
are not helpful if the foreign regulators are inefficient, or if the foreign
law does not regulate the activities in question.
A completely new solution to the problems caused by international
markets would be the creation, through multi-lateral agreements between
many states, of a transnational regulatory body, or several such bodies,
and the acceptance of common principles for regulation.3 9 The program
which the EC is adopting to achieve the single internal market in
finantional Conflicts in InternationalEconomic Law, 32 INT'L & COMP. L.Q. 931 (1983); Maier,
ExtraterritoriaJlurisdictionata Crossroads.An Intersectionbetween PublicandPrivateInternational
Law, 76 AM. J. INT'L L. 280 (1982)
35 See, eg., the Protection ofTrading Interests Act 1980, ch. 11, which was introduced to
combat the extraterritorial effects of United States anti-trust rules, but which may be used against any
country, and in a wide range of circumstances.
36 See, eg., Szat, InternationalCo-operationin InsiderTrading Cases, 40 WASH. & LEE L. REV.
The International Securities Enforcement Cooperation Act of 1990 is designed to improve
international co-operation in the enforcement of securities laws and to allow the SEC to restrict the
activities in the US securities markets of those who have been engaged in misconduct in other
countries. See International Securities Enforcement Cooperation Act of 1990, Securities Reforms of
1990, Fed. Sec. L. Rep. (CCII) No. 1424, Part II at 106 (Jun. 12, 1990). Cf Part III of the UK
Companies Act, 1989, ch. 40, dealing with powers to assist overseas regulatory authorities; see also,
THE SECURITIES AND INVESTMENTS BOARD, THE FINANCIAL REGULATION OF OVERSEAS
INSTITUTIONS WITH UK BRANCHES. A CONSULTATIVE DOCUMENT (March 1988).
39 Cf. the activities of the Cooke Committee in promoting cooperation between banking
supervisory authorities, and those of IOSCO in promoting cooperation between securities regulators. See,
eg., R. BRYANT, supra note 17, at 144-49.
cial services is a solution of this type, although the EC has not yet created
a single Euro-regulator for financial services activity, but instead relies on
regulation by national authorities. The EC scheme should enhance the
effectiveness of national rules where extranational elements are present,
and should also result in a common core of principles and rules applied
in a territorial area occupied by many separate states.40 The attempt to
achieve this solution is ambitious and may in the end not be wholly
successful, but it is a new departure.
The new departure has not, however, changed incentives. Each
Member State retains its national interest in ensuring that it benefits from
financial activity within the Community. National governments say that
they regulate financial services to protect investors so as to ensure that
funds are available for national industry.4 1 When a state's financial
markets are dominated by national savers and borrowers, the government of
that state must act to protect those savers and borrowers in order to stay
in power. However, when savers and borrowers in a nation's markets are
largely foreign, and national savers and borrowers are involved in foreign
markets, the connection between investor protection and votes is
weakened. In these circumstances the state's and government's real interest in
its financial markets is not in the encouragement of investment by
protecting investors, but in the capture of employment and revenue
produced by those markets, even if this capture is at the expense of other
In practical terms, internationalization results in national
authorities losing a significant degree of control over the national economy4 2 and
the protection of national savers and borrowers. Internationalization
also means that regulatory priorities may change: regulation is likely to
be designed to attract business, rather than to provide the highest
possible degree of protection for small investors. The probable result is a
40 See Note, Toward the Unificationof EuropeanCapitalMarkets: The EECsProposedDirective
on InsiderTrading, 11 FORDHAM INT'L L. J. 432 (1988), describing EC harmonization as a step to
global cooperation. On the coordination, approximation, or harmonization process see: Vogelaar,
The Approximation of the laws of Member States under the Treaty of Rome, 12 COMMON MKT. L.
REV. 211, 213 (1975) (arguing that harmonization "has a law-making function quite independent of
compromises as between national provisions"). See also Roth, The EuropeanEconomic Community's
Law on Services" Harmonization, 25 COMMON MKT. L. REv. 35 (1988).
41 See, eg., FinancialServices in the United Kingdom. A New Frameworkfor InvestorProtection,
CMND 9432 at ch. 1 (1985); Note, Stock-Exchange Regulation in Germany, 1908 J. POL. ECON. 369.
42 See R. BRYANT, supra note 17, at 91-94. "The undermining of the autonomy of
macroeconomic policies and the controllability of nations' economies that results from increasing
economic interdependence are among the most important manifestations of the growing salience of
collective-action problems with international dimensions". Id. at 94.
competition between different national regulators to develop regulation
which is attractive to financial services firms.
EXISTING AND PROPOSED EC LEGISLATION - ACHIEVEMENT
OF THE GAINS FROM INTEGRATION AND SOLUTION OF THE
PROBLEMS OF INTERNATIONALIZATION
In order to consider whether the EC's approach to achieving the
single market in financial services may be useful as a blueprint for wider
regulatory harmonization, it is necessary to examine the key elements of
this approach. The EC's approach to the single market has two basic
aims: the elimination of barriers between national markets within the
EC, and the coordination of regulation of those national markets across
the EC. In 1977, the Commission described its aim as being to
encourage the interpenetration of the financial markets of the Member
States by reducing the disparities between the different markets and by
improving the safeguards available to savers.4 3 EC legislation has started
to achieve this aim, and the Commission has put forward proposals for
further legislation designed to allow financial services firms to carry on
business throughout the Community, while protecting investors and
Much of this existing and proposed legislation requires all Member
States to enact legislation providing for a specified minimum level of
protection for depositors and investors. The Commission has chosen the
Directive as the appropriate Community legislative instrument for this
purpose. Directives require Member States to enact legislation which
will achieve a particular result." Member States, however, may choose
43 Although the existing differences between the various financial markets in the nine Member
States have not so far constituted an insuperable barrier to a number of international
transactions, the lack of full information on the securities themselves and ignorance or
misunderstanding of the rules governing the various markets have certainly helped to confine the investments
of the great majority of savers to the markets of the countries in which they live or to a few
wellknown major international securities.
A reduction in these disparities would therefore tend to encourage the interpenetration of
the member countries' markets, particularly if this is accompanied by improving the safeguards
available to savers.
Commission recommendation concerning a European code of conduct relating to transactions in
transferable securities, 20 O.J. EUR. COMM. (No. L 212) 37, Explanatory Memorandum, point 2
44 Treaty of Rome, supra note 1, at Art. 189. Directives may be contrasted with Regulations
which do not need to be implemented by national legislation in order to be binding, but are directly
applicable by virtue of their nature. See id.
However, the doctrine of direct effect, see Van Duyn v. Home Office, Case 41/74,  ECR
1337, may apply to Directives. Directives may create individual rights which municipal cou.ts must
recognize after the time limit for their implementation has passed, see Ratti, Case 148/78, 
In order to produce direct effects, a measure must be legally valid from the point of view of
the form and method of implementation.4" The Community has favored
the use of Directives to achieve coordination of the laws of the Member
States because Directives are flexible and Member States may implement
them in a manner appropriate to local conditions.
Much of the substantive law of the EC already affects financial
services firms, and will continue to do so after the single market in financial
services has been achieved. Of the existing legislation affecting the single
market in financial services, the EC's well-developed competition
(antitrust) rules will be particularly important. Removing the barriers
between Member States will encourage competition, but it will also
encourage the development of large financial institutions operating
throughout the EC which could ultimately reduce competition in
national courts, and the terms of the provision must be appropriate to confer rights on individuals.
The provision must be clear and unambiguous, and unconditional, and its operation must not be
dependent on further action being taken by Community or national authorities. See T. HARTLEY,
THE FOUNDATIONS OF EUROPEAN COMMUNITY LAW 188 (2d ed. 1988); H. SCHERMERS & D.
WAELBROECK, JUDICIAL PROTECTION IN THE EUROPEAN COMMUNITIES 124-37 (4th Ed.1987).
See also Winter, DirectApplicabilityand DirectEffect-Two Distinctand Different Concepts in
Community Law, 9 COMMON MKT. L. REV. 425 (1972); Timmermans, Directives:TheirEffect within the
National Legal Systems, 16 COMMON MKT. L. REv. 533 (1979).
45 In some circumstances the Member States' discretion about how to implement a Directive can
be limited, depending on the objective to be achieved; for example, in Enka, Case 38/77,  ECR
2203, the European Court held that the relevant provision should be introduced in the same way in
each Member State but cf Commission v. Italy, Case 363/85,  ECR 1733. In Commission v.
Italy, Case 300/81,  ECR 449, the Court held that it was not appropriate to implement a
Directive by means of administrative procedures, and that implementation must be clear and certain,
and not subject to the risk of being changed at the whim of the authorities. In Commission v.
Belgium, Case 301/81,  ECR 467, the Court held that a Member State could not plead
internal problems to excuse a failure to implement a Directive.
46 See Price-Waterhouse Report, supra note 2, at App. 5 ("There can be no certainty that an
unified European financial market will not be a concentrated one, unless a pro-competitive
regulatory regime is enforced"). See also the Council Regulation on the Control of Concentrations
Between Undertakings, 32 O.J. Eur. Comm. (No. L 395) 1 (1989).
On the competition law of the EC, see generally, D. WYATr & A. DASHWOOD, THE
SUBSTANTIVE LAW OF THE EEC, 341-474 (2d ed. 1987); B. BARACK, THE APPLICATION OF THE
COMPETITION RULES (ANTITRUST LAW) OF THE EUROPEAN ECONOMIC COMMUNITY (1981); Joliet,
NationalAnti-Competitive Legislation and Community Law, 12 FORDHAM INT'L L.J. 163 (1989);
Mancini, Access to Justice Individual Undertakingsand EEC Antitrust Law- Problemsand Pitfalls,
12 FORDHAM INT'L L.J. 189 (1989); Pescatore, Public and PrivateAspects ofEuropean Community
Competition Law, 10 FORDHAM INT'L L.J. 373 (1987); Marenco, Competition Between National
Economies and Competition Between Businesses--A Response to Judge Pescatore, 10 FORDHAM
INT'L L.J. 420 (1987); European Community CompetitionLaw-A Rejoinder by Judge Pescatore,10
FORDHAM INT'L L.J. 444 (1987); Canellos & Silber, Concentrationin the Common Market (pts. I &
2), 7 COMMON MKT. L. REV. 5, 138 (1970); Dassesse, EEC Competition Law Affecting Banking:
Recent Developments and FutureProspects, 3 J. INT'L BANKING L. 105 (1988); Hornsby,
Competition Policy in the 80.s More Policy Less Competition, 12 EUR. L. REV. 79 (1987); Frazer, Competition
Policy after 1992: The Next Step, 53 MOD. L. REv. 609 (1990).
Existing and proposed EC legislation divides financial services
activities into three categories: banking and credit services; insurance services;
and brokerage and securities services.4 7 This functional categorization,
however, may not reflect the reality of the marketplace as, for example,
firms which offer banking services to the public may also offer securities
services. The Second Banking Directive adopts an institutional4 8
approach, envisaging that banks will be regulated under one scheme which
will apply to a wide range of activities, including dealing in transferable
securities, but excluding activities in relation to insurance policies. This
approach may be contrasted with the one adopted in UK legislation
affecting financial services activity, which contains significant elements of a
Participants in the financial markets no longer observe rigid
distinctions between banking business and investment business, but may be
involved in a wide range of financial services. For this reason, this paper
will discuss the EC's rules and proposed rules on financial services as
separate categories of rules regulating markets, investment products, and
market participants. The topic of financial services regulation is too
large to be covered as a whole, so some subdivision is necessary. Any
categorization involves some problems, and there is some overlap
between the categories used in this paper. For example, a rule prohibiting
market manipulation may be seen as a rule about markets. If the
manipulation consisted of false statements by a market participant about an
investment product it would also be a rule constraining the techniques
used by market participants to sell investments. This approach may be
somewhat misleading, but the author considers it to be preferable to any
Measures designed to achieve the single market in financial services
and those designed to achieve the liberalization of capital movement are
closely linked.5 0 Restrictions on the movement of capital within the EC
constitute a real barrier to the development of an internal market in
financial services, and the elimination of these restrictions is a central aim
of the 1992 project.
Another essential element of the single market in financial services is
the development of an EC-wide securities market. More than ten years
ago, the EC began to harmonize procedures for listing securities on stock
exchanges in the EC, and to require a minimum level of disclosure about
listed securities throughout the Community. The Admissions Directive
established minimum conditions to be satisfied before regulators in
Member States could permit securities to be listed on their exchanges.51
Similarly, the Listing Particulars Directive was designed to achieve "an
adequate degree of equivalence in the safeguards required in each
Member State" without making the safeguards completely uniform.5" These
Directives laid the foundations for an EC securities market, and the
Commission has built upon these foundations with its measures to ensure
mutual recognition of listing particulars, and of prospectuses for
nonlisted securities, so that a company whose securities are listed on one
exchange in the EC, or marketed by means of a regulated prospectus in
one Member State will be able to use one set of listing particulars, or one
prospectus, to market those securities throughout the Community.53
Louis, A Monetary Union for Tomorrow?, 26 COMMON Micr. L. REv. 301 (1989); Thygesen, The
Delors Report and European Economic and Monetary Union, 65 INT'L AFFAIRS 637 (1989).
51 See the Council Directive coordinating the conditions for the admission of securities to official
stock exchange listing, 22 O.J. EUR. COMM. (No. L 66) 21 (1979) [hereinafter Admissions
Directive]; the Council Directive coordinating the requirements for the drawing up, scrutiny and
distribution of the listing particulars to be published for the admission of securities to official stock exchange
listing, 23 O.J. EuR. COMM. (No. L 100) 1 (1980) amendedat 30 OJ EUR. COMM. (No. L 185) 81
(1987) [hereinafter Listing Particulars Directive]; and the Council Directive on information to be
published on a regular basis by companies the shares of which have been admitted to official stock
exchange listing, 25 O.J. EUR. COMM. (No. L 48) 26 (1982).
In Re Stock Exchange Listing Directives, Case 390/85,  1 COMMON MKT. L.R. 146, the
European Court held that Belgium's problems in implementing the listing directives did not excuse
their non-implementation. Belgium had argued that its difficulties derived from the large number of
points the legislation covered, the lack of precision of the Directives, which meant that the Member
States had to develop precise rules, and the complexity of the national procedures involved.
52 Listing Particulars Directive, supranote 51, at Recital number 4; see also Admissions
Directive, supra note 51, at Art. 5.
53 See Council Directive amending Directive 80/390/EEC coordinating the requirements for the
drawing-up, scrutiny and distribution of the listing particulars to be published for the admission of
securities to official stock exchange listing, 30 O.J. EUR. COMM. (No. L 185) 81 (1987); Council
Directive amending Directive 80/390/EEC in respect of the mutual recognition of public-offer
prospectuses as stock-exchange listing particulars, 33 O.J. EUR. COMM. (No. L 112) 24 (1990); Council
Directive coordinating the requirements for the drawing up, scrutiny and distribution of the
prospectus to be published when transferable securities are offered to the public, 32 O.J. EUR. COMM. (No. L
124) 8 (1989); Dept. of Trade and Industry, ListingParticularsand Public
OfferProspectusetImplementation ofPart V of the FinancialServicesAct 1986 and RelatedEC Directives
ConsultativeDocument (July 1990).
These Directives emphasize the importance of information in securities
markets to protect investors, and to increase confidence in and ensure the
proper functioning of the securities markets.5 4 The introduction of
mutual recognition of listing particulars and prospectuses is an important
development which will make it easier and cheaper for companies to
raise capital in more than one Member State. However, until accounting
standards are harmonized throughout Europe, investors will need expert
advice about the contents of listing particulars and prospectuses
produced in other Member States. 55
Similarly, the proposed Investment Services Directive will affect the
way in which national stock exchanges operate in future. The proposal
contains provisions designed to allow firms authorized to provide
brokering, dealing or market-making services in their home Member State to
join stock exchanges and financial futures and options exchanges in other
Member States. 5 6
The protection of investors and maintenance of investor confidence
is a constant theme in the EC regulation of the securities markets.57 In
addition to provisions regulating disclosure to investors, the EC has also
produced legislation to prohibit insider dealing,58 and to require
disclosure of dealings in the shares of listed companies. 9 In addition, the EC
is attempting to prevent money laundering.'
CAPrAL MARKET EFFECrS OF INTERNATIONAL ACCOUNTING DIvERsrrY (1990).
56 See Explanatory Memorandum to the Proposal for a Council Directive on investment services
in the securities field, COM(
) 778-SYN 176, 32 O.J.EUR. COMM. (No. C 43) 7, § I [hereinafter
Explanatory Memorandum]. See also Amended proposal for a Council Directive on investment
services in the securities field O.J. EUR. COMM. (No. C 42) 7 at Art. 13 (1990) [hereinafter Proposed
Investment Services Directive]; Dept. of Trade and Industry, EC Investment Services Directive.A
Consultative Document 23-4 (July 1990).
57 See, eg., Admissions Directive, supra note 51, at Recital number 1; Listing Particulars
Directive, supra note 51, at Recitals numbers 2 and 3.
58 Council Directive coordinating regulations on insider trading, O.J. EuR. COMM. (No. L 334)
30 (1989); See also Dept. of Trade and Industry, The Law on InsiderDealing.A
ConsultativeDocument (undated); Hannigan, Regulating Insider Dealing - The EEC Dimension,  1 J.INT'L
BANKING L. 11.
59 Council Directive on information to be published when major holdings in the capital of a
listed company are acquired or disposed of, 31 O.J. EUR. COMM. (No. L 348) 62 (1988); see also
Dept. of Trade and Industry, Disclosureof Interests in Shares: The EC
MajorShareholdingsDirective. A ConsultativeDocument (Feb. 1991).
60 See Proposal for a Council Directive on prevention of use of the financial system for the
Eventually there should be a single securities market in Europe,
supervised by a single regulatory authority. The EC's market orientated
legislation is a first step towards such a market, and in September 1989,
the Stock Exchanges in the EC Member States agreed to pursue a goal of
creating a single stock market for Europe's largest companies. 6 1 This
will take time; in addition to the practical problems of developing
satisfactory clearing and settlement systems for such a market it will be
necessary for progress to be made on the harmonization of accounting
standards throughout Europe.
Rules Regulating Investment Products
Some of the EC's rules are designed to harmonize the rules
governing securities markets in the Community directly, others are designed
to harmonize the rules governing the securities traded on those markets.
In particular, the harmonization of company law means that the
incidents of share ownership in one Member State are more like those of
share ownership in the other Member States than ever before. Article
54(3)(g) of the Treaty of Rome provides for the coordination of
provisions of national company law to protect investors and creditors. The
first of the company law Directives began to harmonize disclosure
requirements, and introduced provisions to protect third parties dealing
with a company against the risk that acts of the company and its organs
might be invalid.6 2 Other Directives harmonize rules dealing with the
raising and maintenance of capital,6 3 mergers," the contents of annual
purpose of money laundering, 33 OJ EUR. COMM. (No. C 106) 6 (1990), amended by 33 O.J. EUR.
COMM. (No. C 319) 9 (1990).
61 See Waters, EC Nations in Accord on SingleStock Exchange Fin. Times, Sept. 16, 1989, at 4,
62 First Council Directive on coordination of safeguards which, for the protection of the interests
of members and others, are required by Member States of companies within the meaning of the
second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent
throughout the Community, 11 O.J. EUR. COMM. (No. L 65) 8 (1968). On disclosure requirements,
see also the Eleventh Council Directive concerning disclosure requirements in respect of branches
opened in a Member State by certain types of company governed by the law of another State, 32 O.J.
EUR. COMM. (No. L 395) 36 (1989).
63 Second Council Directive on coordination of safeguards which, for the protection of the
interests of members and others, are required by Member States of companies within the meaning of the
second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability
companies and the maintenance and alteration of their capital, with a view to making such
safeguards equivalent, 28 O.J. EUR COMM. (No. L 26) 1 (1977); see also Proposal for a Council Directive
amending Directive 77/91/EEC on the formation of public limited liability companies and the
maintenance and alteration of their capital, 34 O.J. EUR. COMM. (No. C 8) 5 (1991).
64 Third Council Directive based on Article 54(3)(g) of the Treaty concerning mergers of public
limited liability companies, 21 O.. EUR. COMM. (No. L 295) 36 (1978).
There are many draft company law Directives, including the draft
Fifth Directive6" which is designed to regulate the relationships between
the various organs of the company. The first draft of the proposal was
produced in 1972. Progress since then has been impeded by the
unwillingness of the United Kingdom to accept German-style provisions on
worker participation.69 Other proposals for legislation contain provisions
about groups of companies, 70 cross border mergers,7 1 single member
private companies, 72 take-overs, 73 and the European Company.74
65 Fourth Council Directive based on Article 54(3)(g) of the Treaty on the annual accounts of
certain types of companies, 21 OJ. EUR. COMM. (No. L 222) 11 (1978); Seventh Council Directive
based on Article 54(3)(g) ofthe Treaty on consolidated accounts, 26 O.J. EUR. COMM. (No. L 193) 1
66 Sixth Council Directive based on Article 54(3)(g) of the Treaty, concerning the division of
public limited liability companies, 25 03. EUR. COMM. (No. L 378) 47 (1982). This directive
provides for demergers of public companies.
67 Eighth Council Directive based on Article 54(3)(g) of the Treaty on the approval of persons
responsible for carrying out the statutory audits ofaccounting documents, 27 O.J. EUR. COMM. (No.
L 126) 20 (1984).
68 See, Dept. of Trade and Industry, Amended Proposalfor a Fifth Directiveon the
Harmonization of Company Law in the European Community. A Consultative Document (Jan. 1990); Welch,
The Fifth Draft Directive-A False Dawn?, 8 EUR. L. REv. 83 (1983); Hamilton, The Duties of
CorporateDirectorsand the DraftFifth Directive:Lessonsfrom the United States, 4 J. INT'L
BANKING L. 152 (1988); Dine, The Draft Fifth EEC Directiveon Company Law, 10 COMPANY LAW. 10
69 See Opinion of the Economic and Social Committee on the Memorandum from the
Commission entitled Internal Market and Industrial Cooperation- Statute for the European
Company-Internal Market White Paper, point 137, 32 O.. EUR. COMM. (No. C 23) 36 at para. 2.3 (1989).
70 Draft proposal for a ninth Directive on conduct of groups of companies, not yet formally
adopted by the Commission.
71 Proposed 10th Directive on cross border mergers ofpublic limited liability companies, 28 O.J.
EuR. COMM. (No. C 23) 11 (1985).
72 The proposed 12th Directive on single member private companies, amended, COM(
final-SYN 135, 32 O.. EUR. COMM. (No. C 152) 10 (1989).
73 The proposed 13th Directive on Company Law concerning takeover and other general bids
) 823 final-SYN 186, 32 O.J. EUR. COMM. (No. C 64) 8 (1989). See also Dept. of Trade and
Industry, EC Proposalfor a Thirteenth Company Law Directive Concerning Takeovers. A
Consultative Document. (Aug. 1989).
74 Proposal for a Council Regulation on the Statute for a European Company, COM(
final-SYN 218, 32 O.J EUR. COMM. (No. C 263) 41 (1989). See Dept. of Trade and Industry,
Proposalfor a European Company Statute.A Consultative Document. (Dec. 1989); Opinion of the
Economic and Social Committee on the Memorandum from the Commission entitled Internal Market
and Industrial Cooperation-Statute for the European Company-Internal Market White Paper,
point 137, 32 OJ. EUR. COMM. (No. C 23) 36 (1989).
On the harmonization of Company Law see generally, Dine, The Community Company Law
HarmonizationProgramme, 14 EUR. L. REv. 322 (1989); Schmitthoff, The Success of the
Harmonization of European Company Law, 1 EUR. L. REv. 100 (1976); THE HARMONIZATION OF
EUROPEAN COMPANY LAW (C. Schmitthoff ed. 1973).
In addition to the provisions relating to company law, the EC has
promulgated legislation relating to Undertakings for Collective
Investment in Transferable Securities (UCITS), which are comparable to
interests in mutual funds." This EC legislation is designed to establish
common basic rules for the authorization, supervision, structure and
activities of UCITS, and for the information they must publish. The aim is
to achieve free circulation of units in UCITS within the EC, and establish
effective and more uniform investor protection as part of the project to
create a European capital market.7 6
Rules Regulating Market Participants
Although the harmonization of rules governing financial markets
and investments is important, much of the existing and proposed
legislation designed to achieve the single market in financial services involves
an elaboration of the general rules contained in the Treaty of Rome
relating to freedom to carry on business in other Member States by setting up
subsidiaries or providing services. These rules are known as the rules on
freedom of establishment and freedom to provide services.77
A major element of the program to achieve freedom of
establishment and freedom to provide services in the financial services context is
the Second Banking Directive.78 This Directive illustrates the 'new
approach' which the Commission has adopted to speed up the process of
coordination of national laws since the 1985 White Paper. The old
approach involved the adoption of detailed harmonization measures. In
contrast, the new approach concentrates on harmonization of essential
standards for prudential supervision, so that the Member States can
recognize each other's supervisory systems and accept each other's
authori75 The rules relating to UCITS are coordinated by the Council Directive on the coordination of
laws, regulations and administrative provisions relating to undertakings for collective investment in
transferable securities (UCITS), 28 O.J. EUR. COMM. (No. L 375) 3 (1985), as amended at 31 O.J.
EUR. COMM. (No. L 100 ) 31 (1988) [hereinafter UCITS Directive]. See Wooldridge, The EEC
Directive on Collective Investment Undertakings,  J. Bus. L. 329.
76 See the UCITS Directive, supra note 75, at Recitals 2-4.
77 See generally, D. WYATT & A. DASHwooD, supra note 46, at 161-223; F. BURROWS, FREE
MOVEMENT IN EUROPEAN COMMUNITY LAW at Chs. 5, 6 (1987); Maestripieri, Freedomof
Establishment and Freedomto Supply Services, 10 COMMON Mr. L. REV. 150 (1973); Steindorff,
Freedom of Services in the EEC, 11 FORDHAM INT'L L.J. 347 (1988).
78 See supra note 14. The Second Banking Directive amends the First Council Directive on the
co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit
of the business of credit institutions, 20 O.J. EUR. COMM. (No. L 322) 30 (1977) [hereinafter First
Banking Directive]. For the background to the Second Banking Directive see Zavvos, The
Integration of Banking Markets in the EEC: The Second Banking Directive, 2 J. OF INT'L BANKING L. 53
(1988). See also Zavvos, Towards a EuropeanBanking Act 25 COMMON MKT. L. REV. 263 (1988)
[hereinafter Zavvos, Banking Act].
zations to carry on banking business. A bank authorized to carry on
banking business in one Member State should be able to carry on
banking business throughout.the Community. Because of this, authorization
to carry on banking business in the EC is known as the single banking
license.7 9 The most important aspects of the approach adopted by the
Second Banking Directive and related legislation ° are rules for a "single
banking license" valid throughout the Community, comparable to the
rules for mutual recognition of listing particulars and prospectuses,
coordination of prudential rules, reciprocity and home country control. The
State in which a bank or credit institution has its head office and is
authorized is described as its "home" State, a State where it establishes a
branch, or where it provides services to customers is described as the
"host" State."1 Similar approaches are being adopted in relation to
insurance82 and investment services. 83 Significantly, many of the provisions of
79 See Second Banking Directive, supra note 14, at recital 4. See also the Commission's
background report on Financial Services, Common Mkt. Rep. (CCH) 1195,064. For comments on the
"new approach" see Making the Common Market Work, 25 J. COMM. MARKET STUD. No. 3 (1987)
(special issue edited by Robson & Pelkmans).
80 See for example the proposals and legislation on prudential matters: (1) Council Directive on
the own funds of credit institutions, 32 OJ. Erni. COMM. (No. L 124) 16 (1989) (Directive defining
what may constitute a credit institution's capital); (2) Council Directive on a solvency ratio for
credit institutions, 32 O.J. EUR. COMM. (No. L 386) 14 (1989) (Directive providing that Member
States are to ensure that ratios are to be established for credit institutions expressing their own funds
as a proportion of their total risk-adjusted assets and off-balance sheet items. Provisionally, credit
institutions are not to allow the ratios to fall below 8%, although the competent authorities
ofMember States may establish higher ratios as they consider appropriate). See also Spencer &
MurrayJones, CapitalAdequacy: Towards a Level PlayingField, 1988 Ir'rLFiN. L. REv. 19, 20-21; Note,
The ProposedRisk-Based CapitalFramework A Model of InternationalBanking Co-operation?,11
FORDHAM INT'L L.J. 777, 794-800 (1988); (3) The Commission Recommendation on monitoring
and controlling large exposures of credit institutions, 30 OJ. EUR. COMM. (No. L 33) 10 (1987);
(4) Commission Recommendation concerning the introduction of deposit guarantee schemes, 30
OJ. EUR. COMM. (No. L 33) 16 (1987).
These measures form an integral part ofthe scheme proposed under the Second Banking
Directive. See also Proposal for a Council Directive on the co-ordination of laws, regulations and
administrative provisions relating to the reorganization and winding up of credit institutions, COM(
778 final, O.J. Eur. Comm. (No. C 365) 55 (1985), amendedby COM(
)4, OJ. Eur. Comm. (No. C
36) 1 (1988).
81 See Second Banking Directive, supra note 14, at Art. I, para. 7 & 8.
82 See eg. Amended proposal for a second Council Directive on the co-ordination of laws,
regulations and administrative provisions relating to direct life assurance, laying down provisions to
facilitate the effective exercise of freedom to provide services and amending Directive, 33 OJ. EUR.
COMM. (No. C 72) 5 (1990); Proposal for a third Council Directive on the coordination of laws,
regulations and administrative provisions relating to direct insurance other than life assurance and
amending Directives 73/239/EEC and 88/357/EEC, 33 O.J. EUR. COMM. (No. C 244) 28 (1990);
Dept. of Trade and Industry, EC Third Non-Life Insurance (Framework)Directive. A Consultative
Document. (Feb. 1991).
In all of the Member States in the Community the insurance sector is regulated to protect
consumers, to protect national capital markets, and to raise tax revenues. See J. PELKMANS, supra
note 11, at 179; Pool, Moves Towards a Common Market in Insurance,21 COMM. MARKET L. REV.
these Directives establish minimum standards for Member States to
apply to firms authorized by their competent authorities. The Second
Banking Directive establishes minimum requirements for: initial
capital,4 investigation of the suitability of those who have qualifying
holdings, 5 the approval and supervision after authorization has been
obtained of those who have qualifying holdings, 6 control of the
ownership of qualifying holdings by banks, 7 and for professional secrecy
obligations imposed on those involved with the competent authorities."8 The
imposition of such minimum requirements was necessary to persuade
Member States to agree that a banking license granted by one Member
State should be effective throughout the Community.
The Single Authorization Valid Throughout the EC
The EC's rules about securities markets benefit companies raising
capital in more than one Member State. These rules, along with the rules
on investment products, benefit investors who wish to diversify their
holdings across territorial boundaries. In contrast, the single banking
license benefits both banks and their clients, encouraging competition
between banks in the Community.
The idea of the single banking license was introduced in the First
Banking Directive.8 9 In that Directive, the Council expressed its aim to
achieve a situation where banks authorized in one Member State should
be free to set up branches in other Member States, 9° and where domestic
banks and those from another Member State should be able to compete
on equal terms. 91 The Council promised that legislation designed to
achieve these aims would provide for depositor protection together with
the maintenance of competition.92 However, the First Banking Directive
did not achieve this aim: in 1977 the differences between the laws of the
Member States relating to banking were thought to be so extensive that
coordination would have to proceed in stages. 93 The First Banking
Directive was the first stage in this process. 94
The Second Banking Directive continues the process started by the
First Banking Directive. The Directive permits banks authorized in one
Member State to carry on business throughout the EC without the need
to obtain authorization in the host state before commencing business. 9 5
The Directive contains minimum standards for the authorization of
banks; for example, the general rule is that a competent authority must
not grant authorization where the bank's initial capital is less than 5
million ECU.96 In addition, competent authorities must appraise the
suitability of shareholders or members who have "qualifying holdings" in
banks when deciding whether or not to grant an authorization. 97
Regulation of the suitability of those involved in managing a bank is not
referred to in the Directive, and may be a matter within the competence of
the host state.98
The provisions of the proposed Investment Services Directive reflect
the provisions of the Second Banking Directive. The proposed
Investment Services Directive provides for mutual recognition of authorization,
and sets out conditions for the grant of authorization. In order to
become authorized, an investment firm must have sufficient financial
resources, and the reputation and experience of the persons who effectively
direct the business of the firm must be satisfactory. In addition, those
who have qualifying holdings in the firm must be suitable.9 9
Authorization to carry on insurance business in the EC is affected by provisions
similar to those which affect banking and investment services." °0
Harmonization of the requirements for authorization throughout the EC is
an essential element of the mutual recognition of authorization.
Mutual recognition of authorization to carry on banking,
investment and insurance business is only part of the story. Another important
issue is who is to be responsible for supervising firms carrying on business
in more than one Member State. The EC has decided that continuing
supervision, as well as authorization, should be a matter for the home
Member State, but there are important exceptions to this rule.
The Second Banking Directive provides that banks will be
supervised by the competent authorities of the home Member State, and
contains provisions designed to help these authorities carry out their
functions in other Member States. 10 1 Supervision of prudential rules
applicable to investment firms is also generally within the exclusive
competence of the competent authorities of the home Member State. The home
Member State's prudential rules must require sound administrative and
accounting procedures and internal control mechanisms, the separation
of clients' and firm's money and securities, membership of compensation
schemes to protect investors, the provision of information to the
competent authorities, the keeping of adequate records, and the organization of
firms to avoid prejudicing clients' interests, through conflicts of interest
between the firm and its clients or between one of its clients and
99 The proposed Investment Services Directive, supra note 57, Art. 3, 4. "Qualifying holding"
has the same meaning as in the "Second Banking Directive,', supra at note 14; see Art. 1, par. 7 of
the proposed Investment Services Directive. Banks which are authorized according to the provisions
of the Second Banking Directive will not require a second authorisation for activities within the
scope of the proposed Investment Services Directive.
100 See, eg., the Second Council Directive on the coordination of laws, regulations and
administrative provisions relating to direct insurance other than life insurance and laying down provisions to
facilitate the effective exercise of freedom to provide services and amending Directive 73/239,
Directive 88/357, 31, O.J. EUR. COMM. (No. L 172) (1988). The Directive facilitates the provision of
services by an insurance firm in a Member State where it is not established, and clarifies the powers
of the supervisory authorities. The Directive covers measures to ensure the firm's activities continue
to conform to the applicable law, and contains provisions which determine the law applicable to
101 See Second Banking Directive, supra note 14, at Art. 13, 15.
102 The proposed Investment Services Directive, supra note 56, at Art. 11(1).
The host Member State retains a significant degree of control over
financial services firms which carry on business in its territory. For
example, until Community measures are introduced to harmonize
regulation of liquidity, host Member States are to supervise the liquidity of
banks in co-operation with the competent authorities of the home
Member State.103 Regulation of market risk is a matter for the State which is
home to the financial market on which the relevant transactions take
place, in collaboration with the home State's competent authorities."°
Host Member States also remain responsible for measures implementing
monetary policy, although such measures may not discriminate against
banks authorized in another Member State. 10 5 Host country rules
regulating compensation schemes will apply to branches of investment
businesses authorized in other Member States pending further
Compliance with these provisions is to be enforced in the first
instance through the home Member State's competent authorities,
although the host Member State may take certain measures to prevent
further irregularities, including preventing further transactions by that
institution in its territory. The host Member State may take action if the
home Member State does not act.' 0 7 In emergencies, the host Member
State may take any precautionary measures necessary to protect the
interests of depositors, investors and others to whom services are
provided.' 0 8 A similar provision applies in relation to investment
services." °9 The Commission has the power to monitor Member State
actions and has the power to decide whether the Member State shall
amend or abolish any precautionary measures.
Legal ProvisionsJustified on the Grounds of the Public Good
The major limitation of the principle of home country control is that
103 Second Banking Directive, supra note 14, at Art. 14.2.
104 Id. at Art. 15(3). As to market risk associated with the activities of banks, see Macey &
Miller, BankFailures,Risk Monitoringand the Marketfor Bank Control,88 COLUM. L. R.v. 1153,
105 Second Banking Directive, supranote 14, at Art. 14.2. The right of the host Member State to
implement its own monetary policy is limited by EC legislation relating to the European Monetary
106 Proposed Investment Services Directive, supra note 56, at Art. 11(1).
107 Second Banking Directive, supra note 14, at Art. 21.3, 21.4.
108 See id. supra note 14, at Art. 21.7. If such measures are taken, the Commission and other
Member States must be informed as soon as possible, and the Commission may require the Member
State in question to amend or abolish the measures.
109 Proposed Investment Services Directive, supra note 56, at Art. 16(7).
the host Member State may require a bank or investment firm authorized
in another Member State to comply with "legal rules... adopted in the
interest of the general good".1 10 The ability of the host State to act both
in areas where coordination has not yet been achieved and in relation to
legal rules to protect the general good means that the principle of home
country control may be subject to significant limitations. The meaning of
the phrase "legal rules... adopted in the interest of the general good" will
be tested by litigation before the European Court.
The Second Banking Directive contains three references to legal
provisions for the public good. First, the Preamble suggests that a host
Member State may regulate the activities of firms established in another
Member State, which are not authorized as banks in that State, and may
regulate activities not covered by the proposed Directive.'1 ' However,
the host Member State's rules must comply with EC law, must seek to
protect the public good, and must not apply where the home Member
State has imposed equivalent rules.
110 Second Banking Directive, supra note 14, at Art. 21.5; see also id. at Recitals 15, 16. Contrast
this with the formulation in the original proposal for this Directive: "legal provisions in force...
which are justified on the grounds of the public good". Proposal for the Second Banking Directive,
) 715 final, 88/C 84/01, 31 OJ. EUR. COMM. (No. C 84) 1 at Art. 19.3 (1988). See also the
proposed Investment Services Directive, supra note 56, at Art. 16(
111 Second Banking Directive, supra note 14, at Recital 15 ("the host Member State may, in
connection with the exercise of the right of establishment and the freedom to provide services,
require compliance with specific provisions of its own national laws or regulations on the part of
institutions not authorized as credit institutions in their home Member States and with regard to
activities not listed in the Annex, provided that, on the one hand, such provisions are compatible
with Community law and are intended to protect the public good and that,on the other hand, such
institutions or such activities are not subject to equivalent rules under the legislation or regulations
of their home Member States.")
The Directive covers a range of activities from traditional banking functions such as lending
money to dealing in securities. The activities covered by the Second Banking Directive are:
1. deposit-taking and other forms of borrowing;
3. financial leasing;
4. money transmission services;
5. issuing and administering means of payment (credit cards, travellers' checks and bankers'
6. guarantees and commitments;
7. trading for own account or for account of the customers in: a) money market instruments,
b) foreign exchange, c) financial futures and options, d) exchange and interest rate
Second, the preamble also states that Member States must allow
activities covered by the Directive to be carried on as they would be in the
home Member State, as long as this does not conflict with the host State's
legal rules to protect the general good.1 12
Host country rules for the public good may apply to business being
carried on in a manner accepted in the home Member State but not in the
host Member State. This suggests that the host state may prohibit
activities which it would, for example, regard as market manipulation.11 3
Other activities which could be covered by the term could include the use
by particular types of firms of derivative products, portfolio insurance,
and program trading. Host country rules may also apply to banks which
are not covered by the Directive.' 14
Third, Article 21.5 of the Directive provides that host Member
States may take action to enforce the legal rules they have adopted in the
interest of the general good.115 Under this provision a Member State
may apply its own rules, adopted in the interest of the general good, even
if, in doing so, it prevents a bank authorized in another Member State
from acting in a way that would be allowed in its home country. A host
Member State may therefore apply its own conduct of business rules 116 to
112 Id. at Recital 16 ("the Member States must ensure that there are no obstacles to carrying on
activities receiving mutual recognition in the same manner as in the home Member State, as long as
the latter do not conflict with legal provisions protecting the general good in the host Member
State.") Recital number 18 ofthe original proposal for this Directive, see note 110 above, referred to
activities "being undertaken using the financial techniques of the home Member State", and "legal
provisions governing the public good".
113 United Kingdom Financial Services Act, supra note 30, at § 47, ch.60, provides for a criminal
offence of market manipulation. This provision is currently being interpreted to cover a wide range
of activities. On section 47, see Au, Stock Market ManipulationAfter theFinancialServicesAct 1986,
2 J. INT'L BANKING L. 53 (1989).
114 In such a case the general rules on freedom of establishment and freedom to provide services
would apply. See supra note 77.
115 Art. 21(
) of the Second Banking Directive, supranote 14, provides that host Member States
"the power .. .to take appropriate measures to prevent or to punish irregularities committed
within their territories which are contrary to the legal rules they have adopted in the interest of
the general good. This shall include the possibility of preventing offending institutions from
initiating any further transactions within their territories."
This provision gives more freedom to host States than did the corresponding provision ofthe
proposal for this Directive. Art. 19.3 of the proposal, supra note 110, provided:
"If the competent authority of the host Member State ascertains that an institution having a
branch or providing services in its territory is not complying with the legal provisions in force in
that Member State which are justified on the grounds of the public good... that authority shall
request the institution concerned to put an end to the irregular situation."
116 Conduct of business rules govern the way in which a firm may carry on business, and cover
matters such as conflicts between the interests of the firm and its clients. Conduct of business rules
may, for example, require disclosure of commissions, and separation of the firm's funds from those
of its clients.
banks authorized in other Member States. Thus, Member State A, which
applies stringent conduct of business rules to banks which enter into
transactions in its territory, may deprive banks authorized in State B, a
state with relatively relaxed rules, of the competitive advantage they
would otherwise have over banks authorized in State A.
The ability of host States to apply their own conduct of business
rules to banks authorized in other Member States limits the opportunity
for a competition between different regulatory regimes within the
Community. 17 It may, therefore, require future harmonization to clear the
way for competition between regulatory regimes. Indeed, the
Commission has already expressed its intention to achieve the harmonization of
conduct of business rules.118
Until harmonization of conduct of business rules is achieved, the
European Court will have to decide whether a particular Member State's
rules have been adopted in the interest of the general good. The
European Court's approach is to try to find an interpretation which fits in
with the general scheme of an instrument; when legislation is considered,
preparatory documents, such as explanatory memoranda prepared by the
Commission, are available but rarely used. The Court adopts a
teleological method of interpretation, also described as decision-making on the
basis of judicial policy.' 19
The European Court's recent decisions concerning restrictions on
the freedom to provide services in the context of insurance may
foreshadow the way in which the Court will deal with rules restricting
banking or investment business. The Court held that the freedom to provide
services could only be restricted where the general good was not
protected by the rules of the Member State in which the provider of the
service was established. In such circumstances, the Member State into
which the service was supplied could apply its own provisions if these
were objectively "justified by the general good" and applied to all entities
117 Note that Member States may not find it easy to apply conduct of business rules to institutions
authorized in other jurisdictions, as such rules are often applied through the authorization process.
In the UK, people become authorized to carry on investment business under the Financial Services
Act 1986, ch. 60, by being authorized by the Securities and Investments Board (SIB) directly, or by
joining a self-regulating organization (SRO). The authorized person must then comply with the
conduct of business rules of the SIB or SRO.
118 See Explanatory Memorandum, supra note 56, at I.
119 See T. HARTLEY, supra note 44, at 76-77. See also H. SCHERMERS & D. WAELBROECK, supra
note 44, at 11-17 (referring to three categories of interpretative technique applied by the European
Court: literal interpretation; systematic interpretation, or interpretation by analogy; and teleological
interpretation); Usher, The Influence of National Concepts on Decisions of the European Court,
1 EUR. L. Rnv. 359 (1976).
operating in that State.12 °
The Court stated that restrictions on the freedom to provide services
may be justified in order to protect consumers, because the present state
of Community Law does not ensure that such protection is necessarily
guaranteed by the home State's rules. Requiring separate authorization
in the host state could be justified, subject to certain conditions, but
requiring insurance firms to be established in the host state was excessive
because it would eliminate the firm's freedom to provide services.12 1 A
Member State could require firms to seek authorization to carry on
insurance business and could apply its own legislation on technical reserves
and conditions of insurance, provided that these requirements did not
exceed what was necessary for the protection of policy holders and
insured persons.122 The Insurance cases have been described, on the one
hand, as an important step to the unification of the internal market, 123
and, on the other hand, as not opening up the market fully, and creating
problems of interpretation.1 24 In addition, the Court has been criticized
for encouraging the idea that Member States could adopt intricate and
incompatible systems of local control without interfering with
competition in the EC. 125
The Second Banking Directive and the proposed Investment
Services Directive appear to allow even more freedom to Member States to
interfere with competition in the EC, because they do not require the
relevant rules to be "justified by the general good", but merely to have
been "adopted in the interest of the general good". The Directives adopt
the rhetoric of home state control, but the reality will be a substantial
level of host state control.
PrudentialRules and Rules for the Conduct of Business
In addition to the provisions harmonizing authorization
requirements, the Second Banking Directive also contains provisions to
harmonize the continuing supervision of banks. National measures
implementing the Directive must require that banks maintain their
capi120 Re Insurance Services (Commission v. Germany), Case 205/84,  ECR 3755,  2
Common Mkt. L.R 69, 101, point 27.
121 Commission v. France, Case 220/83,  ECR 3663; Commission v. Denmark, Case
252/83,  ECR 3713; Commission v. Ireland, Case 206/84,  ECR 3817.
122 Commission v. Germany, supra note 120.
123 Note, Commission v Germany, 22 INT'L L. 543, 554 (1988).
124 Note, InsuranceCases, 24 COMM. MARKET L. REv. 273 (1987).
125 Edward, Establishmentand Services: An Analysis of the InsuranceCases, 12 EUR. L. REv.
231, 253 (1987).
tal at or above the level required at the time of authorization,' 26 and
require sound administrative and accounting procedures as well as
adequate internal control mechanisms. 2 7 The Directive also requires
national implementing measures for the continuing appraisal of the
suitability of those who hold qualifying holdings in banks, 2 8 and for the
national competent authorities to act where influence of those with
qualifying holdings "is likely to operate to the detriment of prudent and sound
management of the institution".'2 9
The proposed Investment Services Directive contains similar
provisions relating to the continuing supervision of investment firms covering:
the suitability of those with qualifying holdings, 130 continuing
compliance with the conditions for authorization,' 3' and prudential rules. 132
The original proposal for an Investment Services Directive stated, in
Article 9(2): "If the rules... are not appropriate to the nature of the
investment service in question, Member States may adapt them or provide that
they shall not apply."' 133 The current version of the proposal would
allow Member States to provide that the rules relating to separation of
clients' and firm's funds and securities, and to compensation schemes, do
not apply where the service is provided to business or professional
investors, or where the firm handles no money or securities on behalf of
clients. The current version of the proposal therefore allows Member States
much less flexibility in deciding when a particular type of rule is
appropriate than did the original proposal.
The proposed Investment Services Directive does not attempt to
coordinate the conduct of business rules regulating the relationship
between investment firms and their clients, because "there are considerable
126 Second Banking Directive, supra note 14, at Art. 10.1.
127 Idr at Art. 13.2.
128 Id at Art. 11.
129 Second Banking Directive, supra note 14, at Art. 11.5. Under the Directive Member States
must also provide that banks may not have a qualifying holding representing more than 15% of its
own funds in an undertaking other than a credit institution, financial institution, or an undertaking
pursuing activities which are a direct extension of banking, or concern services ancillary to banking
such as leasing, factoring, the management of unit trusts, the management of data processing
services or any other similar activity. Total holdings in such non-banking undertakings must not exceed
60% of a credit institution's own funds. See id. at Art. 12. The restrictions are not absolute: for
example, certain temporary holdings are excluded by Article 12.4, and it is possible to exceed the
restrictions in exceptional circumstances under Article 12.5. The restrictions are designed to limit
risk, and mirror many restrictions which may be found in the laws of the Member States.
130 Proposed Investment Services Directive, supra note 56, at Art. 10. Cf Second Banking
Directive, supra note 14, at Art. 11.
131 Proposed Investment Services Directive, supra note 56, at Art. 9.
132 Id. at Art. 11, see supra text at note 102.
133 For an argument that different rules are appropriate to different types of investment business,
see J. FRANKs & C. MAYER, supra note 15.
divergences between Member States in the content of such rules and in
the way in which they are applied."' 13 4 The Commission intends that
coordination of conduct of business rules will take place in the future.
Until that happens the conduct of business rules which currently apply in
the host Member State as a matter of national law or industry practice
will apply, and investment firms which carry on business in more than
one Member State will probably need to comply with a different set of
rules in each State. Such firms will, therefore, need to invest resources in
different compliance systems. This is one area where significant savings
could be made.
The reciprocity provisions of the Second Banking Directive and the
proposed Investment Services Directive mean that undertakings from
countries outside the EC which restrict the access of foreigners to their
financial markets may be excluded from the EC's market.
The original proposal for the Second Banking Directive provided
that applications for authorization by non-EC firms' subsidiaries should
be notified to the Commission. The Commission could then investigate
whether EC firms would be subject to restrictions on carrying on
business in a foreign country; this review would ensure reciprocal
treatment.'35 These provisions have since been relaxed; the preamble to the
Directive states that the EC intends to keep its financial markets open to
the rest of the world, and that it wishes to improve the liberalization of
the global financial markets outside the EC.'3 6
Member States are obliged to inform the Commission when they
authorize a direct or indirect subsidiary of a company governed by the
laws of a non-EC country to carry on business as a credit institution.
Member States must also inform the Commission when an undertaking
governed by the laws of a third country acquires a holding in a
Community bank which would make the bank its subsidiary.137 The Directive
also provides that Member States must notify the Commission of
difficulties which their banks encounter in establishing themselves or in carrying
134 Explanatory Memorandum, supra note 56, at § I.
135 See Proposal for the Second Banking Directive, supra note 110, at Art. 7. Similar reciprocity
provisions apply to applications for authorization under the proposed Investment Services Directive.
The Proposed Investment Services Directive, supra note 57, at Art. 7. In addition, the proposed
Directive contains grandfathering provisions comparable to those of the Second Banking Directive;
see id. at Art. 24.
136 See Second Banking Directive, supra note 14, at Recital 20. See generally Hankey, Pride,
Prejudiceand Reciprocity in the Single Market, 4 J. INT'L BANKING L. 161 (1989).
137 Second Banking Directive, supra note 14, at Art. 8.
on banking business in a non-EC country.'3 8 The Commission is to draw
up periodic reports on the treatment of EC banks in non-EC countries.
If a non-EC country appears to have failed to grant to EC banks
"effective market access comparable to that granted by the Community" to
banks from that non-EC country, the Commission may submit proposals
for a mandate for negotiations to obtain comparable competitive
opportunities for EC banks to the Council. 3 9 The Commission may itself
initiate negotiations with a view to remedying the situation where it appears
that EC banks in a non-EC country "do not receive national treatment
offering the same competitive opportunities as are available to domestic
banks and the conditions of effective market access are not fulfilled."' 140
Where such negotiations take place, the Commission may decide
that Member States should retaliate against undertakings governed by
the law of the non-EC country in question by limiting or suspending
decisions on their applications for authorization and permission to acquire
holdings in EC banks. States may not, however, apply these limitations
or suspensions to banks which are already authorized in the EC.
Article 23 of the Directive protects rights acquired by non-EC banks
which are not established in a Member State but supply services into a
Member State. In addition, the Directive protects rights acquired by
branches of foreign firms which commenced their activities according to
the host Member State's rules before implementation of the Directive.
Thus, a bank established in a non-EC country may avoid the reciprocity
provisions of the Directive by establishing a subsidiary in an EC Member
State and applying for authorization as a bank, or by acquiring a bank
authorized in a Member State of the EC (subject to domestic rules
restricting such acquisitions) before the entry into force of provisions
implementing the Directive in the Member State in question.' 4 '
The Second Banking Directive provides a regime which is much
more favorable to banks authorized within the EC than to those from
outside the EC, and the provisions of the Directive relating to reciprocity
have been described as trade protectionist measures. 42 Reciprocity
pro138 Id. at Art. 9.1.
139 Id. at Art. 9.3.
140 Id. at Art. 9.4.2.
141 Fine, supra note 94, at 199. See Gruson & Nikowitz, The Second Banking Directive of the
EuropeanEconomic Community and its Importancefor Non-EECBanks, 12 FORDHAM INT'L L.J.
205, 241 (1989); see generally id at 229-40 (on the meaning of reciprocity).
See also id. at 241: "Due to comprehensive pressure, major differences in the Member States are
likely to erode in the course of time. But a prudent choice of the Member State that offers the best
opportunities for a particular business strategy might permit an institution to secure a head start
142 Fine, supra note 94, at 199. Cf G. YANNOPOULOS, CUSTOMS UNIONS AND TRADE
visions do currently exist in the domestic laws of the Member States, and
these provisions may provide for the removal of authorizations which
have been granted.14 3 In contrast, the EC provisions in the Second
Banking Directive and proposed Investment Services Directive seem to
apply only in relation to the initial authorization decision, but
institutions established in a non-EC country would remain subject to provisions
in the national laws of the Member States. The proposed Directive will
involve a substantial change in that the cost of exclusion will become
much higher: a non-Member State excluded from the Community's
internal market will be excluded from an extremely large market.
Enforcement of the Obligations of Member States under EC Law
There are two methods of ensuring that Member States comply with
Community Law. First, enforcement proceedings may be initiated by
the Commission or by a Member State, and second, individuals may
enforce rights conferred on them by the doctrine of direct effect in national
The Commission has the power to act where a Member State has
failed to fulfill an obligation under the Treaty of Rome, which includes a
violation of Community legislation.'" A Member State may also bring
an enforcement action against another Member State. Individuals only
have the right to enforce compliance by a Member State with EC
legislation where that legislation is directly effective. 45 Where the Commission
or a Member State has instituted enforcement proceedings, the European
Court may rule that the defendant Member State has failed to fulfill its
obligations under the Treaty, and the judgment is binding on the
Member State.'" The effectiveness of the Commission's enforcement
proceedings in ensuring compliance with Community legislation is unclear. The
Commission has expressed concern about the failure of Member States to
PUCTS: THE ENLARGEMENT OF THE EUROPEAN COMMUNITY, ch. 7 (1988); R. HINE, THE
POLITICAL ECONOMY OF EUROPEAN TRADE: AN INTRODUCTION TO THE TRADE POLICIES OF THE EEC,
ch. 15 (1985).
143 See, e-g., United Kingdom Financial Services Act, ch. 60, Part IX (1986). The reciprocity
provisions ofthe United Kingdom legislation differ from those established by the EC. The Secretary
of State may issue a notice where institutions connected with the United Kingdom may only carry
on investment, insurance, or banking business in a foreign country on terms less favorable than
institutions connected with that country. Id. at § 183. Notices issued may disqualify institutions
connected with the foreign country from carrying on business in the United Kingdom, or may
restrict or partially restrict their activities in the United Kingdom. Id. at § 184.
144 Treaty of Rome, supra note 1, at Art. 169-171; see T. HARTLEY, supra note 44, ch. 10;
Dashwood & White, Enforcement Actions underArticles 169 and 170 EEC, 14 EUR. L. REv. 388
145 Treaty of Rome, supra note 1, at Art. 170.
146 Id. at Art. 171.
comply with judgments of the European Court which "undermines the
fundamental principle of a Community based on law". 47 It has been
suggested that, "[s]ince the Community mechanism functions only if
there is mutual trust and good will between the Member States and
Community Institutions, excessive resort to enforcement actions might do
more harm than good."' 4 8
Certain Community legislative measures confer rights on
individuals which they may enforce in national courts. It seems unlikely,
however, that Directives which impose positive obligations on Member States
could confer such rights on individuals. 4 9 In addition, it appears that
Directives are not capable of imposing obligations on individuals. 150 It
follows that persons wishing to bring an action to enforce compliance
with obligations must bring that action against an organ of a Member
State.'5 1 When that happens, national courts must interpret national
legislation designed to implement a Directive in order to give effect to the
Directive, if possible.' 5 2 However, if Community law is applied by
national courts there is a risk of divergent interpretations.' 5 3 Where
litigation before national courts raises questions of Community law, including
questions as to the validity and interpretation of acts of Community
institutions, these questions may be referred by the national court to the
European Court. 154 Where such a question arises before a court against the
147 See Sixth AnnualReport to theEuropeanParliamenton Commissionmonitoringof the
application of Community Law, 81 O.J. EUR. COMM. (No. C 330) 1, 6 (1989).
148 T. HARTLEY, supra note 44, at 293.
149 See H. SCHERMERS & D. WAELBROECK, supra note 44, at 135: "Positive obligations usually
leave a margin of discretion to the Member State as to the manner in which the acts are to be made
and are therefore often not unconditional, clear and precise."
150 See Marshall v. Southampton and SouthWest Hampshire Area Health Authority (Teaching),
Case 152/84,  ECR 723. Cf Foster v. British Gas PLC, Case C 188/89,  2 WLR 258,
(distinguishing the position of a body which had been made responsible for providing a public service
under the control of the state, whatever its legal form).
151 See T. HARTLEY, supra note 44, at 208-10 (suggesting there may be a problem in ascertaining
which bodies are organs of the State). Cf R v. Panel on Take-overs and Mergers ex parte Datafin
plc,  2 WLR 699; R v. Panel on Take-overs and Mergers exparte Guinness,  1 All E. R.
152 See Von Colson and Kamann v. Land Nordrhein-Westfalen, Case 14/83,  ECR 1891;
Litster v. Forth Dry Dock & Engineering Co. Ltd,  2 WLR 634; see also Duke v. GEC
Reliance,  1 All E. R. 626, 635 ("Where an Act is passed for the purpose of giving effect to an
obligation imposed by a directive or other instrument a British court will seldom encounter difficulty
in concluding that the language of the Act is effective for the intended purpose"); but see id. at 637
("The EEC Treaty does not interfere and the European Court in the Von Colson case did not assert
power to interfere with the method or result of the interpretation of national legislation by national
153 H. SCHERMERS & D. WAELBROECK, supra note 44, at 352.
154 See Treaty of Rome, supranote 1, at Art. 177. See also Barav, Some Aspects of the Preliminary
Rulings Procedurein EEC Law, 2 EUR. L. REv. 3 (1977); Mashaw, Ensuringthe ObservanceofLaw
Northwestern Journal of
International Law & Business
decisions of which there is no appeal the question must be referred by
that court to the European Court.
The availability of interpretative rulings from the European Court
limits the opportunity for divergent interpretations of Community law
which would arise for example, from the interpretation of "adopted in
the interest of the general good." The usefulness of the procedure,
however, is limited. The procedure only applies where the decision on the
question of Community law is a necessary element of the national court's
decision. In addition national courts may prevent a question from
reaching the European Court if they apply the acte clair doctrine, and state
that the meaning of an EC legislative provision is clear, and therefore
does not require interpretation. 155 A national court could therefore hold
that it is unnecessary for the European Court to define the phrase "legal
rules... adopted in the interest of the general good" because the meaning
of the phrase is clear. If different national courts were to decline to refer
this question to the European Court on the basis of different, 'clear',
meanings of the phrase, significant differences could develop between the
regulatory environments in the different states.
RACE TO THE BoTToM OR STRUGGLE TO THE ToP? A.
The Start of the Race
The EC legislation and proposals for legislation which are designed
to achieve the single market in financial services provide for minimum
standards which must be adopted by the Member States. These
minimum standards may not yet be adequate. The politics of the legislative
process in the EC often result in harmonization Directives which are
"watered down to make them politically acceptable". 6
An examination of the Second Banking Directive and the proposed
Investment Services Directive, and the process of negotiation they have
involved, illustrate the difficulties the Community faces in developing
legislation acceptable to all Member States. Although both the Second
Banking Directive and the proposed Investment Services Directive will
lay down minimum capital requirements, capital requirements alone will
in the Interpretationand Application of the EEC Treaty: The Role and Functioning of the Renvoi
d'interpretationunderArticle 177, 7 COMMON MKr. L. REv. 258 (1970), 7 COMMON MKT. L. REV.
155 See T. HARTLEY, supra note 44, at 268-72.
156 J. PELKMANS, supra note 11, at 183. But see Zavvos, Banking Act, supra note 78, at 269
(suggesting that minimum standards are adequate, because minimum harmonization means
"sufficient minimum elements.. .to ensure the protection of the depositor and investor as well as the
safeguarding of the financial system taken as a whole").
not achieve all of the desired goals of regulation. Both the Directive and
the proposal fail to harmonize conduct of business rules because Member
States could not agree on what such rules should cover. Conduct of
business rules are necessary because, for example, minimum capital
requirements do not prevent a financial intermediary which manages funds from
depleting a client's funds by churning.
The flexibility of the Directive as a legislative instrument may be
advantageous as it avoids the application of legislative provisions in
inappropriate cases, but the interests of investors and depositors may suffer
where the minimum standards laid down in the Directive are weak and
where national authorities are unwilling to take stronger action. Because
the Directives impose minimum standards, the requirements actually
imposed by the Member States may vary enormously in scope and
stringency.'5 7 The use of Directives to achieve harmonization causes many
small differences between national laws relating to regulation of the four
economic freedoms: free movement of goods, services, labor and
capital.'5 In theory, interpretative rulings by the European Court under
Article 177 of the Treaty of Rome"5 9 should mean that EC rules are applied
in the same way in all of the Member States." ° Nonetheless, even if this
result is achieved, equal application of inadequate rules is unsatisfactory.
Divergence between national laws within the EC may be caused by
the sensitivity of businesses and governments to the risk of driving
business offshore. 6 ' A Member State may decide to encourage financial
institutions to subject themselves to its jurisdiction by imposing only the
minimum requirements laid down in the relevant Directives. 162 Such
financial institutions would benefit from a real competitive advantage163
157 See Cary, Federalismand CorporateLaw: Reflections Upon Delaware,83 YALE L.J. 663,
70103 (1974) (suggesting that the imposition of federal minimum standards of conduct for management
and corporations could resolve the problems caused for investors by the competition in laxity
between the states in the United States in the context of corporate law). Cary points out that a federal
minimum standard, once interpreted by the federal courts, could then be applied by state courts, and
uniform rules would apply throughout the USA.
158 J. PELKmANS, supra note 11, at 157.
159 See supra note 1.
160 See, eg., Litster v. Forth Dry Dock & Engineering Co. Ltd.,  2 WLR 634.
161 See, eg., TheSingle EuropeanMarket"Survey of the UKFinancialSeriicesIndustry, BANK OF
ENGLAND Q. BuLL. 407, 409 (Aug. 1989) "It was felt.. .that the United Kingdom needed to make
efforts to retain its competitiveness, and that the authorities needed to ensure that the regulatory
environment did not reduce the attractions of the UK market." Id.
162 See Meessen, EuropeEn Route to 1992: The Completionof the InternalMarket and itsImpact
on Non-Europeans,23 INT'L LAW. 359, 366 (1989) (suggesting that there may be a "competition of
standards" in the EQ.
163 The competitive advantage would derive from reduced costs of compliance. See Winter, State
Law, ShareholderProtection,and the Theory of the Corporation,6 J. LEG. STUD. 251, 258-62 (1977)
over financial institutions subject to more severe rules laid down in
another jurisdiction. All financial institutions would have a strong
incentive to be regulated under the most relaxed system. This in turn would
provide an incentive for all other Member States to relax their own rules
in the hope of attracting financial institutions to their jurisdiction, or
preventing flight from it. This is the famous "race to the bottom".' 64
Already, there are signs that this race is beginning: the International
Stock Exchange in London relaxed its rules for euro-currency securities
in April 1989,165 and announced further relaxations to its rules,
including a reduction in the length of the trading record required of companies
admitted to the Official List and the Unlisted Securities Market, in
The only inevitable benefits which would accrue to a Member State
seeking to market a relaxed regulatory regime would be fees charged for
authorization, and subsequent periodic fees. The real revenues to be
gained from financial services firms would derive from sources such as
taxes, and employment, rather than from fees imposed by the regulatory
authorities. In any event, Member States will remain obliged to impose
some regulation in order to comply with their EC obligations, which will
reduce their opportunity to profit from regulation. The real benefits will
arise in the Member State where firms carry on business. In theory,
financial services firms are supposed to be subject to the rules that their
home state imposes on them, but they will also be affected by rules in the
states where they carry on business. 67 It is the failure to harmonize
conduct of business rules which may lead to a meaningful competition in
(regarding costs imposed by regulation); Stigler, Public Regulation of the Securities Markets, 37 J.
Bus. 117 (1964).
164 Some argue that there is a race to the bottom. See eg., Cary,supra note 157, at 668 ("state
action cannot be effective in providing a responsible corporate statute"); Weiss & White, Of
Econometricsand Indeterminacy:A Study ofInvestors'Reactions to "Changes" in CorporateLaw, 75
CALIF. L. REV. 551, 554-59, 603 (1987) ("there is little evidence that there exists an
investor-dominated market for corporate law"); Fox, The Role of the Market Model in CorporateLaw Analysis A
Comment on Weiss and White, 76 CALIF. L. REV. 1015, 1042-45 (1988). See also K BRYANT, supra
note 17, at 129.
165 For the new rules see Admission ofSecuritiesto Listing,at § 7 (Nov. 1984), issued by authority
of the Council of the Stock Exchange.
166 See FitzSimons, EC Directives ChangeSecuritiesMarkets, Fin. Times, Feb. 15, 1990, at 37,
167 On the factors which may influence the development of financial centers see C.
KINDLEBERGER, ECONOMIC RESPONSE: COMPARATIVE STUDIES IN TRADE, FINANCE, AND GROWTH
ch. 4, at 134 (1978) (predicting "very tentatively" that Brussels would eventually be the EC's
financial centre). For a suggestion that businesses will not become involved in regulatory arbitrage see
Price Waterhouse, Banking and Securities Regulation in Europe: A Survey of Senior Management
The method of coordination which the Community has adopted will
not inevitably result in competitive deregulation. It is possible that some
institutions would consider that the investor and depositor confidence
which would result from regulation under a strict system could outweigh
the competitive advantage provided by regulation under a relaxed
system. A Member State could market its regulatory system as a system of
tough and effective regulation designed to promote investor confidence.
This phenomenon is the "struggle to the top".'68 Some Member States
apply rules stricter than those of the relevant EC Directives and there are
signs of a reluctance to weaken these rules.169 The International Stock
Exchange in London has recently begun to market a listing in London as
a product which can ensure investor confidence, 70 although it
simultaneously relaxed its rules. It is a small step from marketing an investment
market to the marketing of an entire regulatory system.
It is clear that each Member State will have an interest in developing
its own system as the leader of the EC regulatory systems for financial
services, and in making its system the most popular. The possession of
such a system would provide considerable advantages to that Member
State in terms of revenue and employment if financial services firms were
to carry on business in that Member State. These advantages are the
foundation for a serious conflict between the interest of that Member
State as part of the Community and its own national interest.' 7 ' These
168 For the view that the state corporate legal systems protect shareholders see, e.g., Winter,
supra note 163, at 276: "so long as the capital market is concerned, it is not in the interest of
management to seek out a corporate legal system which fails to protect investors, and the
competition between states for charters is generally a competition as to which legal system provides an
optimal return to both interests"; Fischel, Efficient CapitalMarket Theory, the Marketfor Corporate
Control, and the Regulationof Cash TenderOffers, 57 T.x. L. REv. 1, 28-29 (1978); Romano, Law
as aProduct:Some Pieces ofthe IncorporationPuzzle, I J. L. ECON. & ORG. 225 (1985) (an empirical
study of reincorporation and competition between the states); Romano, The PoliticalEconomy of
Takeover Statutes, 73 VA. L. Rav. 111, 121-22, 189 (1987); Macey & Miller, Toward an
InterestGroup Theory of Delaware CorporateLaw, 65 TEX. L. REV. 469 (1987); Easterbrook, Antitrust and
the EconomicsofFederalism,26 J. L. & EcoN. 23 (1983); Baysinger & Butler, The Role of Corporate
Law in the Theory of the Firm, 28 J. L. & EcON. 179 (1985).
169 See, eg., Dept. of Trade and Industry, DisclosureofInterestsin Sharev" The EC
MajorShareholdings Directive. A ConsultativeDocument4 (Feb. 1991) ("In the United Kingdom, Part VI ofthe
1985 Act already contains provisions on the disclosure of interests in shares which are in most
respects stricter than those in the Directive. The Government believe that the UK should continue
to impose stricter requirements.").
170 The International Stock Exchange, A Listing in London (undated pamphlet on file with
author). See also Fin. Times, Feb. 15, 1990, at 3, col. 4 (recent advertisement for NASDAQ:
NASDAQ "offers.. .the proven efficiency, liquidity and regulatory standards of a screen-based electronic
171 Coordination of national laws is supposed to involve the adjustment of national law so that
solutions are adopted which take account of national interests and also of the interests of other
Community partners, a real change in the national law-making process. See Vogelaar, The
ApproxiNorthwestern Journal of
International Law & Business
problems are not new, and they are not unique to the EC. The ongoing
discussion about Delaware's race to the bottom in the context of
corporate law in the United States provides food for thought in the European
However, the parallel is not exact, because EC legislation covers
areas reserved to the states in United States law when it provides for
minimum standards in relation to corporate law, in addition to covering
matters which are regulated in the United States by federal securities
laws. In the United States, it is possible to remedy defects in the
corporate law of the states through federal securities rules, and to ensure that
states adopt a single interpretation of federal law. EC legislative
provisions do lay down minimum standards, but there are weaknesses in the
EC mechanisms for ensuring compliance by Member States with their
EC obligations, and for ensuring comparable interpretations of
provisions of EC legislation in different Member States.
Thus, the debate about whether the states are racing towards the
lowest possible level of corporate law in the United States, and about
possible solutions to this problem, if it exists, may not be directly relevant
to the EC's single market in financial services. There may be significant
differences between the market for corporate law and the market for
investor and depositor protection rules. Even if Winter is correct in saying
that investors can ensure the existence of the corporate law regime which
protects their interests,172 it is not clear that the same argument would
apply to the market for investor and depositor protection rules.
Shareholders are not entirely reliant on the protection provided by corporate
law, partly because they enjoy some protection by market forces. The
market for corporate control may, for example, provide protection for
shareholders in companies with inefficient managements. 173 There is,
mation of the Laws ofMemberStates under the Treaty ofRome, 12 COMMON MKT. L. REv. 211, 211
172 See Winter, supra note 163.
173 See, e.g., Manne, Mergersand the Marketfor CorporateControl, J. POL. ECON. 110 (1965);
Manne, Some TheoreticalAspects ofShare Voting, 64 COL. L. REv. 1427 (1964); R. MARRIS, THE
ECONOMIC THEORY OF 'MANAGERIAL' CAPrrALSM (1964); Fama & Jensen, Agency Problemsand
ResidualClaims,26 J. L. & ECON. 327 (1983); Fama & Jensen, SeparationofOwnershipand Control,
26 1. L. & ECON. 301 (1983); James, An Analysis of the Effect ofState AcquisitionLaws on
ManageHal Efficiency: The Case of the Bank Holding CompanyAcquisitions, 27 J. L. & ECON. 211 (1987);
Fischel, supra note 168, at 1; Leebron, Games CorporationsPlay: A Theory of Tender Offers, 61
N.Y.U. L. REv. 153 (1986); Easterbrook & Fischel, CorporateControl Transactions,91 YALE L. J.
698 (1982); Dann & De Angelo, CorporateFinancialPolicyand CorporateControk A Study
ofDefensive Adjustments in Asset and OwnershipStructure, 20 J. FIN. ECON. 87 (1988); Comment,
TwoTier and Negotiated Tender Offers. The Imprisonment of the Free-ridingShareholder,19 J. FIN.
EcON. 283 (1987); Jensen & Ruback, The Marketfor CorporateControk The Scientific Evidence, 11
J. FIN. ECON. 5 (1983).
however, no market-based equivalent to investor and depositor
protection rules, because those rules are intended to remedy market failures.'7 4
Ending the Race?
It was not always inevitable that the EC would choose to regulate
financial services in the way that it has. For example, commentators
have suggested that there should be an EC Securities and Exchange
Commission.175 It has been suggested that, although powers could be
given to the national authorities, it was "seriously worth considering
whether the primary implementation by national authorities should not
be supplemented by a subsidiary power of intervention on the part of a
community organ"." The introduction of an EC supervisory authority
with responsibilities in the financial services sphere would help to ensure
that rules would be applied in the same way in all Member States. The
draft EC legislation which is designed to achieve the single market in
financial services would make the Commission responsible for exercising
supervisory functions, but it is doubtful whether the Commission has the
resources necessary to perform this function given the wide range of its
Although there is no Euro-regulator for financial services, the EC is
aware of the risks of competitive deregulation within the single internal
market in financial services. The preamble to the Second Banking
Directive states that Member States should not authorize banks which appear
to be trying to avoid the stricter rules of another Member State. 177
However, the Recital expresses no more than a pious hope, because the
operative provisions of the Directive do nothing to force the supervisory
authorities in the Member States to turn away banks applying for
author174 See, ag., Gordon, Ties That Bind Dual ClassCommon Stock and the Problem ofShareholder
Choice, 76 CALiF. L. REv. 1, 68-69 (1988).
175 See Hopt, Report, 13 COMMON MxT. L. REv. 245 (1976).
176 Id. at 250. See also Leleux, CorporationLaw in the United States and in the EEC, 5 COMMON
MKT. L. REV. 133 (1967-68) (suggesting the need for a European agency responsible for securities
regulation based on the American model).
[Iarmonization presents very great difficulties when the actions of the authorities in the
various countries are based on different ideas, and even if harmonization is achieved, the
disadvantages of having parallel but multiple procedures that have to be gone through are obvious.
Id. at 159.
177 Second Banking Directive, supra note 14, at Recital 8 ("the principles of mutual recognition
and of home Member State control require the competent authorities of each Member State not to
grant authorization or to withdraw it where factors such as the activities programme, the
geographical distribution or the activities actually carried on make it quite clear that a credit institution has
opted for the legal system of one Member State for the purpose of evading the stricter standards in
force in another Member State in which it intends to carry on or carries on the greater part of its
activities.") Cf Proposed Investment Services Directive, supra note 56, at Recital 4.
ization. This hope will not avert a race to the bottom in the single
market in financial services, and, if such a race does occur, resulting in the
development of one or more financial centers in the EC, it is unlikely that
future harmonization of regulation within the EC could reverse this
The EC rules which are designed to create the single internal market
in financial services are the basis of an important attempt to develop
common approaches in countries with diverse economic and social
environments, and the conclusion of the rules is an impressive achievement.
However, there are weaknesses in these rules: the EC still relies too much
on territorial concepts which are no longer appropriate to modem
financial markets; there is too much scope for individual action by the
Member States, which could interfere with the development of the single
market; and the single market may become a market in which lax
regulatory standards prevail. These weaknesses have two sets of implications.
First, Member States will still, after 1992, be able to impose rules within
their own territory which affect firms authorized to carry on business in
other Member States and may act as a barrier to entry. Second, the
terms of the EC's Directives may give rise to competitive deregulation of
financial services within the EC, so that only the minimum standards
imposed by those Directives prevail. There is considerable doubt whether
the minimum standards set out in the Directives are sufficient.
25 Conglomerates now carry on banking, insurance, and investment business . See, eg., J. MAYcOcK, FINANCIAL CONGLOMERATES: THE NEW PHENOMENON 75-83 ( 1986 ). The Second Banking Directive, supra note 14, covers securities activities of banks, as well as banking activities, but does not extend to insurance activities.
26 After the Market Crash in October 1987, attention focused on the use of derivative products and the use by institutions of passive investment strategies . See, eg., SEC Staff Report, supra note 18 , at ch. 3.
27 See COOPER & FRASER, International Trends and Influences in FinancialRegulation, in BANKING DEREGULATION AND THE NEW COMPETITION IN FINANCIAL SERVICES ch . 3 ( 1984 ).
28 SEC Staff Report, supra note 18 , at 11-1. On international diversification see INTERNATIONAL FINANCIAL HANDBOOK § 8 .2 ( George & Giddy eds. 1983 ).
29 SEC Staff Report, supranote 18 , at 11- 1 ("Although the markets are increasingly interdependent, they also have retained their individuality and have resisted complete integration. Globalized markets continue to have different structures and operating rules . ") . Id.
30 See, e.g., the United Kingdom, Financial Services Act , 1986 , ch. 60 , § 3, which requires authorization for the carrying on of investment business in the UK, and Section 1, which defines carrying on investment business in the UK . Other provisions of the statute with territorial limitations include Section 47(5), which deals with market manipulation, and Section 57, which deals with the issue of investment advertisements; see also Section 207(3) for the circumstances in which an advertisement is treated as being issued in the UK . 1149 ( 1983 ).
37 See Japan-United States Memorandum ofthe United States Securities and Exchange Commission and the Securities Bureau of the Japanese Ministry of Finance on the Sharing of Information , May 23 , 1986 , reprintedin 25 ILM 1429 ( 1986 ).
38 See UK-United States Memorandum of Understanding on Exchange of Information in Matters Relating to Securities and Futures , Sept. 23 , 1986 , reprinted in 25 ILM 1431 ( 1986 ). See also Canada-US Memorandum of Understanding on Administration and Enforcement of Securities Laws , reprintedin 27 ILM 412 ( 1988 ); Goelzer, Mills, Gresham & Sullivan, supranote 34 , at 636-41.
47 See Price-Waterhouse Report , supra note 2, at Introduction 3, Main Report 3.
48 See supra note 13.
49 See supra note 12.
5o See, e.g., Recital number 18 of the Second Banking Directive, supra note 14; F. BURROWS, FREE MOVEMENT IN EUROPEAN COMMUNITY LAW , Part III ( 1987 ); the Price Waterhouse Report, supra note 2 , at App.; Forwood & Clough, The Single European Act and Free Movement-Legal Implicationsof theProposalsfor the Completion ofthe InternalMarket, I1 EUR . L. REV. 383 , 391 - 92 ( 1986 ) ; Governor of the Bank ofEngland, The SingleMarket andits ImplicationsforEurope'sMonetaryArrangements,BANK OF ENGLAND Q . BULL. 62 ( Feb . 1990 ); Oliver & Bache, FreeMovement of CapitalBetween the Member States:Recent Developments, 26 COMMON MKT . L. REV. 61 ( 1989 ) ; 54 See, eg ., Council Directive coordinating the requirements for the drawing up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public, 32 O.J. EUR. COMM. (No. L124 ) 8 ( 1989 ) (Recitals numbers 2 and 3). Cf the Listing Particulars Directive, supra note 51, at Recitals numbers 5 and 6 .
55 On the harmonization of accounting standards see , e.g., INTERNATIONAL PRESSURES FOR ACcOuNTING CHANGE (A . Hopwood ed. 1989 ) ; Blanchet, IASC E32 and the Future of InternationalHarmonizationofAccounting, 6 J. INT'L BANKING L . 257 ( 1989 ); F. CHOI & R. LEVIcH , THE 123 ( 1984 ) ; Chappatte, Freedom to ProvideInsurance Services in the European Community, 9 EUR . L. REv. 3 ( 1984 ).
83 Proposed Investment Services Directive , supra note 56 . The investments covered by the proposed Directive are: a) transferable securities including units in undertakings for collective investment in transferable securities; b) money market instruments (including certificates of deposit and eurocommercial paper); c) financial futures and options; and d) exchange rate and interest rate instruments . See id at Annex , § B.
84 Second Banking Directive , supra note 14 , at Art. 3 .
85 Id. at Art. 4 .
86 Id. at Art. 9 .
87 Id. at Art. 10 .
88 Article 14 of the Second Banking Directive, supra note 14 , substitutes a new Article 12 for the existing Article 12 in the First Banking Directive, supra note 78, and requires Member States to ensure that information obtained by competent authorities and persons involved with them, including those who carry out statutory audits, is subject to an obligation of professional secrecy .
89 See supra note 78.
90 First Banking Directive , supra note 78 , at Recital 10.
91 Id. at Recital 4.
93 Id. at Recital 3.
94 For a description of the Directive as "tepid and compromising" see Fine, The Second EEC BankingDirective:A PracticalOverview, 5 J. OF INT'L BANKING L . 197 , 198 ( 1988 ). For a suggestion that the First Banking Directive was an important step to the creation of a European Banking law, introducing banking regulation where there was none (the United Kingdom), and introducing important changes elsewhere (the Netherlands, Luxembourg, Denmark) see Clarotti, The Harmonization ofLegislation Relating to CreditInstitutions, 19 COMM . MARKET. L. REV. 245 , 266 - 67 ( 1982 ).
95 Second Banking Directive , supranote 14 , at Art. 6 ( 1 ). Cf First Banking Directive, supra note 78 , at Art. 4.1, which allowed a host Member State to require such an institution to apply for authorization in the host Member State . Banks established in other Member States were entitled to enter the host state's market on the same terms as domestic banks, but the requirement that a branch ofa bank authorized in another Member State should possess adequate minimum endowment capital, referred to as "own funds", operated as a barrier to entry .
96 See Second Banking Directive, supra note 14 , at Art. 4 .1., Art. 4 .2, for exceptions to this rule.
97 Id. at Art. 5. A qualifying holding is a direct or indirect holding in an undertaking which represents 10% or more ofthe capital or ofthe voting rights or which makes it possible to exercise a significant influence over the management of the undertaking in which a holding subsists .
98 See infra text accompanying notes 106-125 . 2.