Specialist Press Release (EP/SP09/2005) - September 28th , 2005

SUMMARY

The European Parliament today adopted new EU directives on company audits and on capital requirements for banks and credit institutions.

In backing what is known as the 8th Company Directive, MEPs overruled the Commission proposal that all publicly listed companies must have a separate audit committee to supervise financial reporting procedures. Amendments adopted give Member States the possibility to determine the way in which firms are to supervise their internal auditing.

Also controversial was the obligation for public interest companies to change auditors every five years and audit firms every seven, the so-called rotation. The approved amendment requires rotation, every seven years, only for key audit partners/statutory auditors, and not for the audit firms.

MEPs also adopted their 1st reading of the Capital Adequacy Directive, which aims to create a more flexible approach to capital requirements for banks and credit institutions. The new rules provide the EU's response to the Basel II agreement and should ensure a more efficient use of capital, better suited to today's complex financial markets.

Under one of the amendments adopted by Parliament today, banks will have to explain their rating decision to SMEs (small businesses) and other corporate applicants for loans - if a voluntary agreement does not achieve this, then national rules will have to be established.

Both directives have now received their 1st reading. Informal negotiations between the European Parliament and the Council of Ministers mean that the amendments adopted this week are likely to be accepted. Member States have two years to implement the Company Directive in domestic law; the first stage of the Capital Adequacy Directive implementation should be from 1 January 2007. Agreement has also been reached on the "comitology" system which, for a maximum of 2 further years, gives the European Commission authority to decide on the detailed implementation of EU law.

CONTACT

Simon Duffin, Press Officer, European Parliament UK Office, tel 020 7227 4300, email simon.duffin@europarl.europa.eu

DEBATE

On audits

Commissioner McCreevy: We must have proper auditors in the EU. This benefits everyone: the companies themselves, investors and savers, both large and small. Economic confidence will grow…

Arlene McCarthy MEP (Labour, North West): when we first discussed the issue of corporate governance it was in the context of Enron and the WorldCom scandals. Experts from the EU accounting industry said that ’it could never happen in Europe’, but then we had Parmalat, which had an audit committee - as did Enron - made up of eminent independent professors. The problem was that they did not show any independence of mind in challenging culpable business partners and the executive board.

Prescriptive audit committees were never the answer under this proposal, which is more about changing audit culture and practice… It was sensible to remove the prescriptive obligation for mandatory audit committees and replace it with a proposal to assign those functions to a body that meets audit standards and objectives and can implement the requirements in a transparent way. I also welcome compromises around the issue of audit partner rotation and the issue of non-audit work.

Commissioner McCreevy : At the outset I probably should have declared that in my past life I was an auditor and I still pay an annual subscription to the Irish Institute of Chartered Accountants… The question was also raised about audit committees. Audit committees are often necessary to help auditors keep their backs straight against possible pressure from management. The European Parliament and the Council support the view that as much leeway as possible should be left to the Member States of the EU to invent their own system for audit committees of listed companies as long as they perform all the functions listed in our Directive. We have been flexible here to accommodate these concerns as far as possible.

On capital requirements

Commissioner McCreevy: A state-of-the-art accepted supervisory framework for both credit institutions and investment firms is important for the financial stability of the European market and in creating a level playing field, not just within the European Union, but across the global financial community compared to those countries also following the Basel II process… By adopting this proposal, the EU will be the first international organization to implement the new Basel II framework. This will be a major step towards better banking supervision and will foster greater effectiveness of the European financial markets.

John Whittaker MEP (UKIP, North West): Mr President, capital requirements are regarded as useful in preventing bank failure because they make shareholders bear more of the cost of failure. The international Basel II proposals, which this directive implements, are designed to achieve a better match between capital and risk than the simple 8% capital asset ratio of Basel I. However, no amount of bank capital, short of 100% of risk assets, can safeguard against failure. The minimum amounts of capital specified in any regulatory scheme are arbitrary.

The rapporteur recommends that, owing to doubt, this directive should be reviewed in the future. The banking industry does not need that. Banks spend their time dealing with risk and uncertainty. Adding further uncertainty over future regulation will not help them to plan or look after our interests as customers and shareholders.

John Purvis MEP ( Conservative, Scotland): Almost every European banking, insurance and asset management business will be affected by this new regime and will have to shoulder the costs of adjusting their systems. In America, on the other hand, only the largest international banks will have to comply. The competitive benefits will probably induce at least some of their medium-sized competitors to adopt Basel II too. However, even the smaller European financial institutions will have to comply and bear quite substantial financial costs in so doing, while their American competitors, such as asset management firms, will not have to. How will the Commission ensure a level playing field for our financial institutions of all shapes and sizes in the global marketplace?

Commissioner McCreevy: A recent study estimated that banks would have reduced capital requirements of about €80 to 120 billion as a result of the proposed directive. It is also said that this directive will reduce the capital requirements for loans to SMEs by more than 50%. This Parliament has tabled amendments to our proposals that improve the rules for retail and SME lending still further.

… Mr Purvis raised the question of a level playing field for Europe and the United States. Firstly, I would like to point out that the small and medium-sized American banks have asked for the benefits of Basel II also to be extended to them and I understand that the United States is on the verge of making such proposals within the next month. Secondly, as regards this level playing field, all the big American banks which are in direct competition with European globally-operating banks will be covered by the Basel framework.

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