Shake-up promised for Europe's financial rules

European Commissioner Charlie McCreevy tonight promised a shake-up of Europe’s financial rules to protect taxpayers from irresponsible risk-taking by global money manipulators.

He criticised the failure of financial institutions to understand the scale of risk they took on in the run-up to the worldwide turmoil in the markets, declaring: “No doubt the size of the profits that were rolling in blunted serious risk analysis.”

The man responsible for the EU’s single market was addressing Euro-MPs in Brussels, and answering calls in a European Parliament report for new proposals by the end of the year in response to the crisis.

Mr McCreevy refused to set a timetable, pointing out that the “scale of destruction” in the EU finance sector was not the same as in the US.

But he admitted: “No-one is out of the woods yet. There are difficult trading conditions ahead. The downturn in economies will have its effects – vigilance and transparency are key if confidence is to be restored in markets.

“At EU level we must continue to improve our supervisory arrangements for cross-border financial institutions. There is a window of opportunity that must not be missed.

“All of this leads me to believe we are going to have a different financial services sector when this is all over and we will have a different regulatory framework as well.”

The commissioner went on: “If moral hazard cannot be shown to work then the taxpayer cannot be expected to pick up the bill for the excess and irresponsible risk-taking of private institutions.

Moral hazard is the idea that companies which have hedged their bets on high-risk deals will take chances because the taxpayer – and not themselves - will lose out if the gamble fails.

Mr McCreevy went on: “The ultimate shape of whatever new regulatory approach will be adopted will be designed over the coming period as the lessons from this crisis and the appropriate response become clearer.”

The crisis started with “reckless” selling of mortgages in the US, “promoted by banks and others who did not care about lending standards because they could offload the loans to others”.

Financial institutions around the world bought up these products, said Mr McCreevy, seemingly without doing any serious risk assessment of their own.

He said: “It has been incredible to see how little understanding senior managers of financial institutions had of the risk they were taking on board. No doubt the size of the profits that were rolling in blunted serious risk analysis.

“Supervisors seemed to have no better idea of the risk in these hugely complex products. Things were so sliced up, diced up and repackaged that no-one knew where the real risk was.”

MEPs were debating a report they are due to approve tomorrow, calling for tougher rules across Europe, particularly to increase regulation of hedge funds and private equity companies.

Mr McCreevy said he was already working on responses to the crisis with the aim of increasing financial stability in the EU, but cautioned against singling out hedge funds and private equity companies: “They were not the cause of the current turmoil. It has turned out that it was the regulated sector that had been allowed to run amok.

“I don’t believe it is necessary at this stage to tar hedge funds and private equity with the same brush.”

Hedge funds and private equity companies were already authorised and supervised entities throughout Europe, subject to the same market abuse disciplines and transparency as other parts of the financial markets.

“This does not mean that we are turning a blind eye to hedge funds and private equity.” said Mr McCreevy.

“As these business models evolve and their role in financial markets changes, regulators around the world need to remain vigilant. The industries themselves must assume all the responsibilities that accompany a prominent role in European and global financial markets.

"Our role should be to monitor closely these and other developments in the market and be ready to respond if and when necessary.”

The European Parliament report under discussion was prepared before the global economic crisis, but calls for sweeping reforms of the entire EU financial market to step up investor safeguards, to enforce major shareholder registration and to require full transparency of the pay and bonus packages of company bosses.

The report, expected to be approved by a majority of MEPs in a vote tomorrow, emphasises that “reward packages” for financial executives should be geared to reflect losses and not just profits.