Twenty-five different sets of contract law - one for each of the EU's individual member countries - looked recently as if they might soon be joined by a "26th Regime" applicable for certain areas in financial services.However, that proposal has now been put on the back burner by the European Commission's Internal Market Division, which oversees the EU's financial legislation.

The new regime would have comprised a new set of parallel systems of legislation providing optional, but uniform, bodies of law that eventually might lead to a borderless legislative structure.

The commission pullback could have been prompted by pragmatic reasons. High priority has to be applied to reduce any risk to the vast swathes of mainstream financial legislation now in the pan-European pipeline, and Europe's snail-pace economy (expected to grow a scant 2.1 percent in 2006) could not afford any delays in legislation over the coming years by 25 national governments.

The official damper on the proposed 26th Regime comes via European Commissioner Charlie McCreevy's white paper on EU Financial Services Policy 2005-2010, which was published in December. His paper expressed widespread skepticism about the feasibility and usefulness of "optional instruments" in the area of financial services. It added that the promoters of the proposal would need to explain their ideas in more detail. While "the commission remains open to the idea, it is yet to be convinced that optional instruments can bring significant benefits to market participants."

However, the EC's internal market section is not intractable over its position. A representative explained that, whether it be in the field of investor protection or insurance, the commission is open to proposals.

"We don't want to shut the door, but as yet there were not clear signals from industry on the matter," he said.

One leading advocate of a 26th Regime is a Dutch member of the European Parliament, Ieke van den Burg. She sees its usefulness for the sale of securities and in insurance products, especially to internationally mobile consumers.

"It would be an alternative to opening up to each other's sets of rules," van den Burg told Accounting Today. She takes the view that other routes to harmonization of any of the 25 different sets of rules would be a nightmare. "A '26th Regime' would help us avoid this discussion, while providing a solution for certain consumers," she said.

Uncertain insurers

Reaction from one major financial sector - insurance - is divided.

According to the Comité Européen des Assurances, the Brussels- and Paris-based representative of the European insurance industry, some large insurance companies like the idea, because it would enable them to sell the same product right across Europe.

William Vidonja, the deputy secretary general of the CEA, whose members have a fee income of nearly $1.2 trillion and investments on the order of $6.6 trillion, explained that other parts of the insurance industry are skeptical. They doubt if it could be made to work. They question how a single contract law can function when there remains across the EU such differences in areas like taxation codes, family laws and inheritance laws.

Pensions come into the equation as well.

Ideally, if an employee were posted from one office to another across EU internal borders, his pension contract could remain unchanged. However, vast differences in personal taxation rates could wreck such a harmonious arrangement. Some big insurers indicated that they would support a pan-EU product, for instance for corporate pensions.

A recent paper on pension plans from the European Financial Services Roundtable - which represents the banks and insurance businesses - refers to the general idea of a pan-Europe pension plan as a family of products for additional retirement savings, "conceived under the 26th Regime." This would include a single set of autonomous rules for pension solutions that would apply uniformly across the EU.

Another approach to improving the portability of supplementary pension rights was recently tabled by the section of the European Commission dealing with employment matters. It has published a directive to tackle the pensions rights obstacles to free movement of employees across Europe.

Currently, the problem "stifles the development of companies ... because of the problems of recruiting qualified personnel," it stated. The directive is now being processed by the European Council (representing national governments) and the European Parliament.

Overshadowing the issue of the 26th Regime, McCreevy clearly believes that completing the single market in financial services in Europe is essential for the EU's global competitiveness.

For starters, the commission section wants a boost in the efficiency of pan-European markets for long-term savings products. Then there is the need for a huge pension deficit to be financed, while the financial retail internal market is a long way from completion. The list continues, for instance with an objective of achieving a better-functioning risk capital market, which is needed to promote new and innovative firms in order to raise economic growth.

In the context of insurance, with the Solvency II project, a major codification exercise is now underway. Sixteen insurance directives will feed into the new single EU insurance directive. During 2006, a new policy paper will describe initiatives to integrate the EU mortgage credit market. Proposals for a payments services directive will enhance competition and clarify rules for users and providers.

The commission has sought to create a single European payment area by 2010. The financial services policy paper adds that cross-border clearing and settlement infrastructures are far more costly than at the domestic level. The problems are technical, legal and fiscal. As yet, there is no regulatory framework at EU-level. The commission said that it would decide on a plan during 2006.

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