Howard Davies, chairman of the UK Financial Services Authority, says that mutual recognition based on harmonized rules is the best way to achieve an integrated single European financial market.

Canadian regulators are already pursuing a similar initiative here under pressure from calls for a national securities commission or some other national alternative. Last month, a Canadian Securities Administrators group released a first set of proposals for a uniform securities law in Canada. It also proposes mutual recognition and full legal delegation to get around current regulatory fragmentation.

In a speech to a conference on the direction of European financial regulation at the Guildhall London, Davies said, “First, we are convinced that mutual recognition based on harmonized core standards is the best way to go. The trick, of course, is to identify just which standards need to be harmonized, and which can be left to local discretion without damaging the integrity of a single financial market.”

Europe’s effort to get to a single market was pioneered by a so-called group of Wise Men, headed by Alexandre Lamfalussy. The Wise Men concept has recently been adopted in Canada, too.

“It would be helpful if, in relation to each directive, it could be agreed at an early stage just how far the harmonization process needs to go, Davies said. “We lack a proper framework within which to make these decisions. The Lamfalussy Group set out some principles that ought to govern the preparation of directives in the future, which included the important notion of subsidiarity. But we have heard rather less about those principles than we have about other aspects of the Lamfalussy recommendations.”

Davies also says it is important to analyze just what the barriers to cross border activity really are. “As I have already said, many of them are not to do with drafting harmonized regulations. Sometimes they are attributable to the way in which those regulations are implemented in member states. We know ourselves of cases where regulatory approaches which deliver a single market have been agreed centrally, but where inconsistent additional requirements are imposed at local level which have the effect of negating European wide agreements. Yet, at present, those additional protectionist impositions are allowed to remain, and the enforcement effort seems weak.”

“We should not forget that there are other important non-regulatory barriers which block the development of a single financial market,” Davies said. “There are tax and legal obstacles, for example. Even more important are the barriers to cross border acquisitions. In my view the single financial market will not achieve its full potential without significant European-wide financial institutions. Yet there are still countries in which it is quite impossible to buy a bank, or even a significant fund-management operation. These informal barriers, sometimes imposed by prudential regulators, are too little discussed.”