51993AC1304

Opinion on the proposal for a Council Directive amending Council Directives 77/780/EEC and 89/646/EEC in the field of credit institutions, Council Directives 73/239/EEC and 92/49/EEC in the field of non-life insurance, Council Directives 79/267/EEC and 92/96/EEC in the field of life assurance, and Council Directive 93/22/EEC in the field of investment firms in order to reinforce prudential supervision (1) (94/C 52/05)

On 1 September 1993 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Economic Community, on the abovementioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 3 December 1993 in the light of the Report by Mr Moreland.

At its 311th Plenary Session (meeting of 21 December 1993), the Economic and Social Committee adopted the following Opinion unanimously.

1. Summary of Commission's proposal

1.1. The proposed Directive concerns the banking sector, the insurance sector and the securities sector. Its aim is to strengthen the powers of supervisors, making them better equipped to prevent cases of fraud and other irregularities in the financial services sector.

1.2. To support its proposal the Commission refers to a certain number of cases of fraud in the financial services sector, and in particular the case of the Bank for Credit and Commerce International (BCCI). (Consequently the proposal is often referred to as the 'BCCI' Directive.)

1.3. There were certain inquiries consequent upon these cases, notably a study by the EC Banking Advisory Committee, the Report prepared by the Basle Committee on Banking Supervision and the Bingham Report in the UK.

1.4. The draft Directive results from the conclusions of these inquiries and the following changes to legislation are proposed:

a) Where financial undertakings are part of a group, the group structure must be sufficiently transparent to enable the financial undertakings to be supervised effectively.

b) To enable close contact between the supervisory authorities and the decision-making body of the financial undertaking the head office and the registered office must be in the same Member State. (This is a strengthening of the existing provisions on banking supervision, as the Second Council Directive of 15 December 1989 on the Coordination 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 (89/646/EEC) (2) stated merely in a recital - 8th - that 'for the purposes of this Directive, a credit institution shall be deemed to be situated in the Member State in which it has its registered office'. However, the measure is already provided for in Article 3(2) of Directive 93/22/EEC on Investment Services in the Securities Field (3).

c) Authorities which supervise liquidators and auditors respectively can exchange confidential information. The potential list of recipients of confidential information should also include company law inspectors and bodies which are responsible for overseeing payment systems and settlement services.

d) Auditors should communicate any irregular circumstances regarding statutory accounts to the competent authorities.

In essence the objective is to strengthen the powers of supervisors, making them better equipped to prevent cases of fraud and other irregularities in the financial services sector by ensuring that they are provided with more information.

2. General comments

2.1. The Committee welcomes the concern of the Commission to strengthen the powers of supervisors, making them better equipped to prevent cases of fraud and other irregularities and correct, in good time, certain errors of management prejudicial to the general interest.

2.2. The Directive will have a limited effect on the prevention of fraud and other irregularities, partly because it is only about 'tidying up' the existing regulatory structure, and partly because the responsibility for the repression of fraud must fall upon national authorities for the enforcement of the penal law.

2.3. The Committee is concerned at the lack of precision in certain articles which could give rise to different interpretations. Consequently the translation of the Directive into national law and the operation of the legislation needs to be monitored with a view to ironing out inconsistencies and the avoidance of unnecessary regulation.

2.4. The Directive brings into play the conflict between auditors as being responsible to (and appointed by) shareholders and their increasing use as an arm of regulatory bodies. There are advantages in laying down in law the responsibilities of auditors (as outlined in the Bingham Report, p. 189, 3.45). Nevertheless, the role of auditors, their professional obligations, and to whom they are responsible should be the subject of a comprehensive review. It should be stated quite clearly that the mission of statutory auditors must remain within the limits necessary for the supervision of financial institutions.

3. Specific comments

3.1. Preamble: Penultimate recital

This recital says: '.... it is desirable to have a single auditor for the organization and coordination of the separate audits wherever possible; whereas it is however not appropriate to lay this down as an obligation in this Directive.' The Bingham Report pointed out (page 188, 3.39) that there are drawbacks as well as benefits in having a single auditor. In any event it is a bias in favour of large international accounting firms. Consequently the recital should be deleted.

3.2. Article 1 - Definition

3.2.1. In the context of prudential supervision 'control' rather than 'participation' is relevant. Article 1 of Directive 83/349/EEC referred to in (b) is comprehensive. In other words (a) participation is redundant.

3.2.2. 'Groups' should explicitly cover non-EC companies operating in the Community.

3.3. Article 2 - Group structures

3.3.1. As the Bingham Report states (page 184, 3.16) 'The structure of the BCCI group and the inability of any supervisor to get to grips with it, made possible the frauds that were practised.' Consequently the Committee supports moves which remove obstacles which deny supervisors a clear view of the group structures. However, 20 % participation is low and could lead to the supervisor with more information than he needs perhaps making it difficult to pick out easily situations for concern.

3.3.2. Articles 2.1, 2.2 and 2.3 are unduly vague. In particular 'sufficient details' needs to be spelt out (see comments under 2.3).

3.3.3. Articles 2.4(a) and 2.4(b) could be simplified in line with the redefinition of Article 1 (see 3.2)

3.4. Article 3 - Head office and Registered office

The Committee supports this requirement which should provide more effective contact between the competent authorities and the 'decision-making bodies'. This does not present an obstacle to the spread of enterprises in the Single Market.

3.5. Article 4 - Exchange of information

3.5.1. The Committee understands this is designed primarily to cover the situation in the United Kingdom.

3.5.2. What is meant by 'members of the administrative, managerial and supervisory bodies of companies' ?

3.5.3. Consideration should be given to seeking a general regime under which there would be a harmonised set of gateways through which information may be passed between EC competent authorities and by them to other agreed bodies. Where the information originated from a competent authority in another Member State, disclosure could still be made through national gateways, but only on the basis of consent by the originating authority.

3.5.4. In Article 4.1(b), the text should read: '- persons responsible for carrying out statutory audits of the accounts of the financial undertaking and, in cases where it is deemed necessary, the authorities which are responsible for the approval of statutory auditors'.

3.5.5. The addition of a fourth indent to Article 12(5) of Directive 77/780/EEC as amended by Article 16 of Directive 89/646/EEC, Article 16(5) of Directive 92/49/EEC and Article 15(5) of Directive 92/96/EEC and Article 25(5)(b) of Directive 93/22/EEC, and allowing information to be forwarded to banking supervisors for the detection of breaches of company law, seems unacceptable, at least where such information does not concern banking supervision. It is not the job of the banking supervisory authorities to flush out and denounce violations of penal law. The first duty of such an authority is to try and correct situations of irregularity within the limits necessary for the supervision of financial institutions.

3.6. Article 5 - Role of statutory auditors

3.6.1. This has considerable long term implications for the role of auditors (see 2.4) which needs to be thought through carefully by all concerned.

3.6.2. It is understandable that in an area where the structure of regulation varies across the Community the Commission would not wish to be overly prescriptive. However, the article is written in very general terms and leaves much room for a subjective interpretation on the part of auditors. For example it is not clear at what point between having a strong suspicion of irregularities and having definite facts the auditor should contact the competent authorities. Consideration should be given to establishing a code of practice with the accounting profession to provide reasonable guidelines in relation to reporting fraud.

3.6.3. The Commission has stated that it is reasonable for the auditor to discuss irregularities, for the sake of clarification, with its client. In these circumstances the word 'immediately' is misleading and should be eliminated.

4. Further considerations

4.1. Consideration should be taken of a further recommendation of Bingham, namely that the involvement of financial institutions with 'certain financial centres which offer impeccable secrecy and which tend, for that reason, to be favoured by those with something to hide', should, in appropriate circumstances, be grounds for refusing or revoking authorizations (p. 186, 3.28).

4.2. The Community should take a lead in promoting proposals relating to international supervision.

Done at Brussels, 21 December 1993.

The Chairman

of the Economic and Social Committee

Susanne TIEMANN

(1) OJ No C 229, 25. 8. 1993, p. 10.

(2) OJ No L 386, 30. 12. 1989, p. 1.

(3) OJ No L 141, 11. 6. 1993, p. 27.