In recent years we have witnessed a huge influx of political objectives in Europe and not much less reform in the USA. All mainly, have laudable objectives, to improve the markets for the benefit of the customer or consumer, but tend to bring high costs and interminable debate before implementation. The old saying was ‘you can’t buck the markets’ but this can now be modified to ‘you can’t change the markets’.

This week we have seen the French unilaterally delay SEPA direct debits and we will likely see other countries follow suit. This is after years of SEPA designing and planning and with supposedly widespread endorsement across all EU states.

I have long had reservations about the SEPA project based on the narrow bank to bank focus of its original design and the lack of widespread corporate involvement to capture their buy in and subsequent credit transfer volume.

Unfortunately the problems that SEPA had with credit transfer volume look likely to be repeated with SEPA direct debits, if the French have their way.

Why did the Payments Service Directive (PSD) and SEPA not fully engage the banking service suppliers and their corporate customers?

Surely it’s entirely logical if a new EU wide industry change is to be made to systems and practices; all those supplying volume simply have to be engaged as early as possible. I have had it said to me that the European Commission thought that  SEPA was a bank to bank issue and it was left to the banks to fully communicate with their customers. This would have certainly been the case if the banks were going to win massive financial rewards but not if they feared their business and revenue would be under threat. Turkeys voting for Christmas has never been a basis for getting a Christmas dinner.

Despite the fundamental weaknesses of the PSD and SEPA management the real problem lies with the inability of the EU Politicians to understand the financial markets and appreciate the historical relationships that underpin them, across the domestic EU and wider internationally. The market structures, practices and procedures are long standing and solid, with the backing of enormously wealthy governments, institutions and individuals. Simply creating a Directive and transposing it into law is not a sure fire method of making change, especially if the law fails to have strong sanctions for non compliance.

SEPA for example has weak compliance requirements for banks, this meant hardly any real development for SEPA has materialised, with only a kind of phoney agreement was promoted by banks and organisations involved in SEPA, presenting uniformity and conviction to implement, which indicated a willingness to comply but in reality very little happened. This was evidenced by the huge number of software vendors that purported to have developed a SEPA solution when in actual fact only one or two have a real SEPA product.

The EU also introduced MiFID into the securities market and this too created plenty of change and conjecture, with delays and amendments by various EU States and banks delaying its implementation. However, MiFID at least was implemented and has created a shift from traditional Stock Exchanges for orders and executions, too many new trading venues. But, it’s far too early to get a real picture of how effective the changes have been. Certainly there has been plenty of hype in the post trading systems and processes but the full impact will not be evident for a few years. The financial crisis has also masked the true MiFID picture and will cause some delay in measuring the real effectiveness in meeting the political objectives.

The question has to be; should political objectives to change market structure and practice be introduced via Directives and law or by business opportunity?

It’s a fact that the financial services industry rarely makes radical change unless there is a really big carrot. The financial crisis demonstrates how bad financial institutions have become in keeping pace with change, let alone instigating change. However, enforcing change by law, does open up debate and generally culminates in some change but unfortunately the change tends to have been watered down from the original proposal and involves significant costs and take some considerable time as we know.

Alternatively change through business opportunity demands that an environment is created where entrepreneurs and established enterprises can innovate and take risks. The environment is created through political agendas. This approach at least maintains the gap between politics and business and as the saying goes “they don’t mix”

Either way is not perfect, if change is meant to be aggressively sort over a short timeframe but at least the later can positively create economic benefits.

Each change approach to financial markets incurs real-time issues to implement, with perhaps the business approach being more evolutionary. However, with political agendas being different across political parties its unlikely that any changes will carry cross party support.

The global financial crisis will cause all international markets and their governments to reflect on their regulatory structures and capabilities and there is a chance that there will be an international harmonised response. This clearly will take some considerable effort by governments to first agree the approach and then the new rules and laws to be introduced. Some governments will find this harder to introduce than others, as there is hardly going to be interest from countries that could ultimately and rather callously gain, from most of the worlds markets, introducing more restrictions with tougher sanctions. A bit like the French, who are clearly concerned about SEPA direct debits.

At the end of the day it comes down to leadership!

So who is going to lead the global financial markets to more security with harmonious laws and rules able to be enforced across borders with standardised sanctions?

This would not necessarily be some super global regulator but could simply be a single agreed rulebook. Enforcement and sanctions could be adopted worldwide by all countries signing up to the new order and those countries not, would become economically ostracised.

If this model was adopted by the EU, it could create a better environment within the markets for processes and structure to evolve, making Directives and legal transposition easier to implement, as Directives could be matched with the actual capabilities of the market.

This would entail the EU becoming more communicative with the financial services industry ensuring that any committees in a consultative stage, were more widely representative. This should also entail making articles within a Directive easier to understand and where possible should use existing Finance Industry terminology rather than legalise.

There should be more transparency of the political agendas in all EU committees with the names of people and organisations taking part public knowledge. Self protectionism should be made visible to the public and there should be a more democratic voting on, of committee representatives.

All this would not necessarily speed up the early consultative stages but it should make implementation faster and easier. It should also reduce implementation costs and it should mean that there would be less argument at the final stages of projects. The Directives would then have a reasonable chance of achieving political objectives and ensure that they were compatible with the markets ability to change.

By Gary Wright MSI