Capital markets - The changing relationship between the EU and Japan

Ruth Taplin (Director, The Centre for Japanese and East Asian Studies) and J. Sean Curtin (Fellow, GLOCOM and Asia Times)

The EU-Japan Financial Markets and Institutions seminar held at Cass Business School on 24th November 2004 brought together sponsors and speakers who are all directly involved in the changing legislation affecting the increasingly complicated financial services (banking and insurance) relationships that are developing within Europe as well as between the European Union and Japan or those who are being affected by these changes.

The seminar was organised and conceived by Dr. Ruth Taplin, Director of the Centre for Japanese and East Asian Studies and Prof. Gerry Dickinson of Cass Business School and Vice Secretary General of the Geneva Association.

Sponsorship was provided by the International Primary Market Association (IPMA). Other sponsors were the Development Bank of Japan (DBJ), the Japan External Trade Organisation (JETRO) and the Centre for Japanese and East Asian Studies (CJEAS).

Sean Curtin: I think that the EU-Japan Financial Markets and Institutions in Transition seminar was one of the most worthwhile conferences I have attended this year. The relentless pace of globalization and the accompanying changes in standards and regulations within the EU and Japanese financial markets made the event extremely timely. I feel that due to a range of factors, especially the European Financial Service Action Plan (FASP), that the relationship between the European and Japanese banking and insurance sectors is getting increasingly complicated. What do you believe were the most important aspects to come out of the seminar?

Ruth Taplin: There was a realisation that attempts to gain greater convergence in regulation and accounting standard setting was more complex than they realised. The European Union had bureaucratic procedures and its time scales were much longer than businesses would like. Even so, the major changes were now taking place in Europe so there should not be too much impatience. It was more important to get the changes right.

Convergence in regulation between the Europe Union and Japan was a long term process and the priority in the short term was for greater mutual recognition of existing systems. Mutual recognition required more flexibility by government policymakers. Mutual recognition was a precondition of greater globalisation of capital and financial markets in the short to medium term.

Sean Curtin: I got the impression that some participants felt frustrated by the growing body of regulations governing the EU and Japanese banking and insurance sectors. Did you also sense this? Do you think the seminar helped improve understanding about some of the key changes occurring within capital markets?

Ruth Taplin: I did not think that there was a great deal of frustration, but there was a feeling that the insurance, banking and securities sectors had not been consulted enough in the policy changes by governments and regulators.

The participants were made aware of the efforts of the main international financial services regulators - the Basel Committee, the International Organisation of Securities Commissions (IOSCO) and the International Insurance Association of Insurance Supervisors (IAIS) were now working closely together. They had now established a common set of core principles to ensure that regulation and supervision evolved on a more coordinated basis across the financial services sector and across nations.

The participants were made aware that the IASB, and prior to 2001 the IASC, had tended in the past to follow its conceptual framework too closely, without taking into account the needs of preparers or users of financial statements. There had not been sufficient market research into user needs - investors, lenders, analysts and rating agencies - in developing accounting standards. But the participants were pleased that this was now changing and the IASB was now actively engaged in a positive consultation process.

Sean Curtin: With such a dynamic conference, you must have already received a lot of feedback. Do you feel that the seminar has made a contribution to advancing our understanding of these vitally important EU-Japan issues?

Ruth Taplin: The recognition that Europe and Japan had similar aspirations and needed to work more closely together in the future. International standards would continue to be set by the major economies of Europe, Japan and the United States, but it was important that there was a greater involvement of emerging markets, especially the large growing economies such as China, India and Brazil.

There was a better understanding that change in the financial sector was a complex process and that businesses and governments must work more closely together than they have in the past.

There were two different sets of issues to be solved: (a) the changing regulation of capital markets to permit easier cross border listing and to allow more international product offerings; and (b) the regulation of financial institutions -banks, insurers and securities firms - to ensure that they are sound but also remain competitive in the wider globalising economy.

Sean Curtin: I was genuinely amazed at the high level of audience participation. There was a real sense of energy during the lively question and answer sections which accompanied each session, producing some fantastic input. Are you planning any kind of follow-up event to build on the success of this one? What new areas would you hope to explore and do you feel you neglected anything in this seminar that you would want to include in the next?

Ruth Taplin: More discussion of how financial services firms are coping with changing market and regulatory conditions and the role that they can play in helping government to make regulations work effectively. Financial services firms do not want any scandals as they tend to spill-over and adversely affect them indirectly.

Sean Curtin: What do you see as major future challenges?

Ruth Taplin: The challenge of meeting the 2005 deadline for having in place International Financial Reporting Standards, IFRS’s for EU-listed companies has been largely achieved. But there are still a few key issues that continue to be unresolved in relation to the accounting standard for financial instruments, IAS 39, in particular the macro-hedging for banks and the fair value option. There are negotiations in place and it is hoped that they will be resolved in the next few months. IASB has recently begun to improve its consultative process and is now more actively engaged with both preparers and users of financial statements. This is evidenced by the establishment of the Insurance Working Group and the Financial Instruments Working Group in September 2004. The IASB seems to be moving away from the pursuit of a full fair value reporting regime for all financial instruments and insurance contracts and are seeking to adopt a more pragmatic and evolutionary approach to the developing international financial reporting standards, but still within its conceptual framework. This closer dialogue with preparers and users of financial statements - investors, analysts, regulators and rating agencies - is to be welcomed. Discussions on the long term convergence between these IFRSs that will become the European accounting standards with other national standards, especially those developed by FASB for the United States and IASJ for Japan, is now beginning to take place. But there is also a short term need for greater mutual recognition of accounting standards between national standard setters, not least for cross-border listings and offerings. In addition to these capital market issues, it is important that sound and workable IFRSs emerge for banks and insurance companies, the two main financial institutions. As the search of international accounting standards is starting in Europe, it is clear that IASB and the European Commission must work more closely together. This is not only to ensure that there are more efficient capital and financial markets in Europe but that the European capital and financial markets themselves do not loose any of their international competitiveness while these changes are taking place.

Sponsors of "The EU-Japan Financial Markets and Institutions seminar"
- International Primary Market Association (IPMA)
- The Development Bank of Japan.
- The Japan External Trade Organisation (JETRO)
- The Centre for Japanese and East Asian Studies

Speakers at the Seminar
- Ruth Taplin - Director, The Centre for Japanese and East Asian Studies
- Gerry Dickinson - Professor of International Insurance at the Cass Business School
- Masatoshi Kuratomi - Chief Representative in London, The Development Bank of Japan
- Maria Velentza - Principal Administrator EU Commission
- Alojzy Nowak - Professor of Economics and Finance, School of Management Warsaw University
- Anthony Murphy - Director, Future of Europe, Department of Trade and Industry.
- Yoshihiro Kawai - Secretary General, International Association of Insurance Supervisors
- Robert B. Gray - Chairman, Debt Financing& Advisory Group, HSBC Bank plc
- Tatsumi Yamada - Member of the International Accounting Standards Board
- Kostas Tsatsaronis - Head of Financial Stability ,Research and Policy Analysis Monetary and Economic Department, Bank for International Settlements