Article initially published on Wealth Briefing. Read the article here.
There have been moves to harmonise financial regulations in different European countries over recent years – including those not in the European Union. Depending on one’s viewpoint, this has meant a reduction in the complexity and burdens of complying with rules in different countries when doing cross-border business, but for some, also a general increase in the regulatory cost.
Harmonisation is not the same as a mutual recognition of rules (“you respect my laws and I’ll recognise yours”) which can be the basis for trade in goods and services between nations with distinctive rules of their own. The debate about the UK’s push to leave the EU clearly affects the degree of harmonisation that there is, even suggesting a move away from this trend. But it is not all about Brexit – Switzerland, which has been in talks with the EU about a framework pact to replace more than a hundred of its bi-lateral treaties, can butt heads with Brussels over certain rules.
Cross-border harmony – or disharmony – is a major concern for wealth managers handling areas such as tax, estate transfer and property rights. Some firms specialise in trying to lubricate the wheels of this process, so to speak. One such business is Luxembourg/US-based Lombard International Assurance. Here, its regulatory affairs director, Valerie Mariatte-Wood, considers where Europe is heading over harmonisation and how wealth managers and clients should act.
"Europe has a legacy as a hub of financial innovation, from Renaissance merchant Venice, across the birth of the first Stock Exchange in Amsterdam in 1602, to the modern-day hubs of London, Luxembourg, Ireland and Switzerland. Throughout this history, Europe’s strong economies have played a key role. In recent years, however, it has been the steady growth of a harmonised financial framework that has helped Europe sustain its leading position in the global financial market. The pre-eminence of our wealth management industry on the global stage depends on this harmony to keep attracting the world’s wealthy investors.
Since the early 1990s, Europe’s financial services industry has grown increasingly connected. This began in earnest with the Third Life Directive in 1992 introducing a cross-border financial framework which aimed to leverage the single market more effectively for financial services companies.
For the first time, financial services companies were able to compete for clients across Europe without the need to establish a local presence. Unencumbered by prohibitive costs and spurred by competition, companies across Europe experienced rapid growth and innovation.
Similarly, this directive offered an opportunity for European countries to specialise in financial services, especially smaller countries that could be agile in their adoption of competitive policies. Previously, less diversified economies such as Luxembourg, Monaco and Lichtenstein enjoyed astronomic growth in spite of having local markets a fraction the size of their neighbours.
For the wealth management industry, greater financial harmony has meant that companies have been able to develop niche expertise while still reaching a vast customer base. The high net worth clients that we serve have benefited from truly cross-border services with local advisors they know and trust. Moreover, the introduction of passporting in 2004 by the Markets in Financial Instruments Directive, cemented Europe’s reputation as one of the most connected, innovative and secure markets in the world for international investors. HNW individuals have since flowed into the continent bringing investment and generating revenue for European businesses. Despite the success of the past three decades, this process of harmonisation is facing some headwinds. For financial services, this can be observed through the introduction of country-specific "general good" provisions from 2000 onwards - regulations originally implemented to promote transparency for cross-border activity between European countries. These may instead have had the effect of erecting barriers to foreign (cross-border) entrants in Europe’s financial services industry. This points to a notable trend towards greater complexity in the financial mosaic. Moreover, the recent upsurge in European regulation is threatening to hinder the industries that have been the driving force in Europe’s smaller countries that specialise in financial services.
For high net worth individuals, both inside and outside the EU, this is a worrying trend. With global mobility increasing, wealthy individuals have come to expect cross-border solutions that do not impede their international lifestyles. This has been the key factor driving clients to European wealth managers: access to a coherent regulatory framework across some of the world’s leading markets.
Global recognition of countries like Luxembourg has been built on political and economic stability, as well a deep expertise of international and cross-border wealth solutions. This has helped smaller economies across the continent to thrive and develop industries that attract global clients and the best talent from across the world.
The wealth management industry needs to be a vocal advocate of sensible regulation that considers the role that a harmonised financial framework has played in Europe’s economic growth. As global economic headwinds grow, we need to remember the ethos that has helped Europe become one of the leading financial markets in the world. Innovation, expertise and global leadership are bred by regulation that opens markets to competition."
Regulatory Affairs Director
Lombard International Assurance