European Banking Federation

ANNUAL REPORT

FBE Activities

2005

European Banking Federation

ANNUAL REPORT

FBE Activities

2005

Editor ResponsibleGuido Ravoet

Secretary GeneralT. +32 (0)2 508 37 26F. +32 (0)2 511 23 28

email: g.ravoet@fbe.be

Contact personFlorence Ranson

PR & Communications AdviserT. +32 (0)2 508 37 34F. +32 (0)2 511 23 28

email: f.ranson@fbe.be

European Banking Federation10 rue MontoyerB- 1000 Brussels

T. +32 (0)2 508 37 11F. +32 (0)2 511 23 28

email: fbe@fbe.be

www.fbe.be

Copyright 2006 - Brussels

Pictures: “White time” automatic a.k.a Steven Parry (33) Oshawa, ON, Canada Canon(s), Sony, Lomo http://www.hansonparry.com steven.parry@uoit.ca

“Clock Tower” markmiller a.k.a Mark Miller (39) Exton, PA, United States http://www.studioeec.com markemiller@comcast.net

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Table of Contents: I - Banking Supervision, Financial Markets and Accounting (P.2) A - Banking Supervision (P.2) 1) Basel Implementation and Capital Requirements Directive 2) The Committee of European Banking Supervisors 3) IBFed 4) Task Force on the Future of Banking Supervision B – Financial Markets (P.4) 1) Markets in Financial Instruments Directive (MiFID) 2) Clearing and Settlement of Securities 3) Investment funds (UCITS) 4) Transparency Directive 5) Pensions 6) Horizontal Issues and Lamfalussy Process C – Accounting (P.6) 1) CEBS FINREP Project 2) Accounting Standards: Mutual Recognition 3) FASB Exposure Draft: “Fair Value Measurement” II – Consumer, Legal and International Affairs (P.9) A – Consumer Affairs (P.9) 1) Proposal for a Directive on Credit to Consumers 2) Mortgage Credit B – Legal Affairs (P.10) 1) Civil & Procedural Law 2) Company Law and Corporate Governance 3) Legal Framework for Securities 4) Antitrust EU Law C – International Affairs (P.17) 1) Liberalisation of Financial Services 2) International Regulatory Dialogues 3) Financial Sanctions 4) Co-operation with International Institute of Bankers III – Physical Security, Fight against Money Laundering and Terrorist Financing (P.19) A – Physical Security (P.19) B – Fight against Money Laundering and Terrorist Financing (P.19) 1) Third AML Directive 2) Report on Anti Money Laundering Legislation 3) FATF Special Recommendation VII on Wire Transfers 4) Co-operation with the FATF IV – Social Affairs (P.22) 1) BCESA Position on Cross-Border Directive 2) Portability of Pensions 3) Social Dialogue: CSR 4) Social Dialogue: Enlargement 5) Social Dialogue: Demography

V – Payments, Securities Clearing and Settlement Systems (P.24) A – Payments; FBE Co-operation with the EPC in the SEPA Project (P.24) B – Securities Clearing and Settlement Systems (P.24) C – TARGET (P.25) VI - Economic and Monetary Affairs, Cross-border Consolidation, SMEs, Export Credit, Statistics (P.26) A – Economic and Monetary Affairs Committee (P.26) 1) Outlook for the Economy of the Europe Area 2) Economic Governance in the Euro area B – Cross-Border Consolidation in EU Banking (P.26) C – Small and Medium Sized Enterprises (P.27) D – Export Credit Insurance (P.27) E – Statistics (P.28) VII – Fiscal Affairs (P.29) A - Taxation of Savings (P.29) B – VAT (P.29) C – Company Taxation (P.30) D – Transfer Pricing (P.30) E - Qualified Intermediary Agreements (P.30) VIII – Associates and Enlargement (P.32) IX – Communications (P.33) A – Publications and On-line Communications (P.33) 1) FBE NEWS 2) FBE Web Site 3) Member Net B – FBE Perception (P.33) 1) Members’ Satisfaction Survey 2) External Positioning Survey C – External Relations (P.34) 1) Press relations 2) Events and Conferences 3) PR Activities and Memberships D – Communications Committee (P.35) X – Observations and Reflections by FBE Committee Chairs (P.36)

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I - Banking Supervision, Financial Markets and Accounting

A - Banking Supervision

1) Basel II implementation and Capital Requirements Directive

The main focus of the FBE’s Banking Supervision Committee during 2005 was lobbying on the Capital Requirements Directive (CRD) in the European Parliament. The European Commission published its proposal for a Directive to implement Basel II in the EU in mid-2004 and by late 2004 the Council had already completed its first reading without substantial change. In order to deliver an improved Directive, industry worked closely with Members of the European Parliament’s Economic and Monetary Affairs Committee (ECON) for most of 2005. The Parliament’s rapporteur, Alexander Radwan (EPP, D) published his first set of proposed amendments in April 2005. In the following months, the FBE maintained close contact with both the European Parliament and the European Commission to ensure that the Directive reflected the realities of industry risk management practice. In addition, parallelism with the Basel Accord was crucial which was particularly relevant for the Trading Book provisions developed by the Basel Committee in conjunction with the International Organisation of Securities Commissions (IOSCO). These provisions were only finalised during the summer. The level of application of the capital adequacy rules and the need for lead supervision were central to the development of the FBE’s strategy in early-2005. The FBE took a pragmatic approach to lead supervision and successfully pushed for review of the Directive 5 years after its adoption. The FBE lobbied actively on a number of specific issues including Intra-Group exposures, the recognition of mitigation effects, the implementation date, the definition of default and the disclosure of ratings to SME customers. Despite concerns in the final phases of the legislative process regarding the inclusion of commitology provisions in the Directive, it was adopted in a single reading as a result of the UK Presidency’s outstanding management of the final inter-institutional negotiations. The FBE, along with six other trade associations, issued a public statement supporting the inclusion of the commitology provisions to ensure that the Directive can be updated in the future to keep pace with developments in industry. The European Parliament’s report was adopted in September and Council adopted the amended Directive in mid-October. In late-2005, the European Commission set up a working group to deal national transposition of the Directive. Implementation issues The FBE set up an E-Forum on CRD implementation in early-2006 to allow exchange of views across Europe on implementation concerns. The forum allows both the FBE’s member associations and bankers to post questions and to receive feedback from other Member States about the national treatment of any element of the Directive. The FBE is also working directly with bankers involved in cross-border implementation to identify inconsistency and super-equivalence in the Directive. At an institutional level the European Commission has set up a working group to resolve interpretation issues and to promote consistent transposition of the Directive in cooperation with the Committee of European Banking Supervisors (CEBS). This working group, which is composed of representatives of the Member States’ finance ministries, supervisory authorities and of European Commission officials met for the first time in

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late-2005, and a second time in March 2006. The FBE attended this meeting as part of a delegation of the European Banking Industry Committee (EBIC) to learn about the objectives and the working procedures of the group, and to inform it about industry’s concerns. EU/US gap In September 2005 the US agencies decided to delay the implementation of Basel II in the US for one year following a result of the QIS4 results, which showed a considerable drop of overall capital in the system. The QIS4 results, combined with political pressure from Congress, led to the agencies committing to re-examine the rules to ensure that they would not have adverse economic effects. Furthermore, because of the perceived competitive impacts on smaller banks in the US which are not subject to Basel II, the agencies also published guidelines on a revised capital framework for banks not moving to Basel II. This framework, known as Basel 1A, but does not include an operational risk charge or a Supervisory Review Process but adds more risk categories to the current rules. The status of the Basel 1A rules remains uncertain. The FBE responded to the Advanced Notice of Proposed Rulemaking to encourage the US agencies not to base the Basel II floors on Basel 1A calculations. If they were to do so, European banks intending to move to Basel II, would have to build a throw-away Basel 1A model for the purposes of calculating the floors. In November an FBE delegation travelled to the US to underline the concerns of the European banks for whom the delay raises uncertainty in respect of validation of the advanced models. The FBE also worked closely with the Institute of International Finance and the Institute of International Bankers to coordinate a meeting of industry with both the EU and US supervisors.

2) The Committee of European Banking Supervisors

During 2005 the FBE worked hard to further strengthen its relationship with CEBS. CEBS was particularly focussed on implementation of the CRD in 2005 and issued a substantial number of consultation papers. The FBE responded to all of its consultation papers on the application of the CRD and met on several occasions bilaterally with the respective CEBS working groups. In addition, CEBS’ (then vice-) Chair Danièle Nouy spoke at the FBE’s October conference on the European regulatory environment. The FBE continued to support the objectives of CEBS during 2005 and, in particular, the substantial progress that has been made in terms of trust and cooperation between European supervisors. The FBE was broadly happy with the guidelines produced by CEBS. The Supervisory Disclosure Framework which CEBS hopes to have in place by early 2007 will be central to promoting supervisory convergence. In addition the FBE responded favourably to the consultations on the Supervisory Review Process (Pillar 2) and on the guidelines for cooperation between home and host supervisors. There was, however, a negative reaction across industry to the Common Reporting Framework (COREP) which will not reduce the reporting burden on banks given the scope of national discretion within it, and the validation guidelines which are overly-prescriptive. CEBS did make improvements to both documents after the consultation period and, in the case of COREP, as a result of bilateral work with the FBE and the Consultative Panel. These changes are not, however, sufficient to alleviate the concerns of industry.

3) IBFed

The FBE continued to provide the Secretariat for the IBFed Basel Working Group during 2005. The Working Group exchanged news on global implementation of the Basel framework on monthly conference calls. After the delay in the US was announced, Richard Spillenkothen of the Federal Reserve participated in a Working Group conference call to answer questions on how the framework would progress in the US. The IBFed Basel Working Group also had continuous contact during 2005 with the Basel Committee Accord Implementation Group and with its Validation sub-group and in this context pushed for a consistent global approach to implementation. In this context the Working

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Group produced an analysis of the Colleges of Supervisors currently in operation. This survey will be updated on an annual basis as the Colleges progress in their work.

4) Task Force on the Future of Banking Supervision

In May 2005 the Task Force on the Future of Banking Supervision was set up to take forward the FBE’s work regarding the review of the Capital Requirements Directive after five years, and the FBE’s objective of consolidated supervision. It responded to the banking supervision part of the Commission’s Green Paper on Financial Services Policy 2005-2010, and to the Commission’s two consultations on deposit guarantee schemes. The Task Force organised a roundtable on consolidated supervision in Bratislava in February 2006 to allow members to reach a common vision. The Task Force continues to shape the FBE’s position and to push the Commission to make progress in delivering a streamlined supervisory framework in the EU. B - Financial Markets The FBE’s Financial Markets Committee (FMC) continued to be very active on all the key European initiatives related to capital markets issues throughout 2005. Preparation, at times involving intense rounds of consultation, was to be a common theme for the Committee’s work. Throughout the year the FMC consolidated its position as partner of choice to its key interlocutors in the European Institutions and the supervisory community by working closely with the Committee of European Securities Regulators (CESR). The FMC maintained its tradition of meeting with the incoming presidencies of the EU, forging good working relations with the Luxembourgish and British Finance Ministries before and throughout their respective Presidencies in 2005.

1) Markets in Financial Instruments Directive (MiFID)

Following political agreement on the high level principles (Level 1) for MiFID in 2004, preparation for the implementing measures (Level 2) was the overriding theme in this high priority dossier of 2005. The implementation of MiFID will involve the most far reaching reform of any major financial market ever undertaken and will impact upon most companies that are involved in trading in financial instruments and businesses which deal in advisory services. Therefore, it was crucial that the nature, level of detail and scope of the implementing measures were right, so to adequately protect retail consumers whilst allowing for the smooth functioning of wholesale markets. The FBE responded to each of the consultations launched by CESR in 2005 to prepare its advice to the European Commission on technical implementing measures, demonstrating expertise drawn from all corners of the EU delivered in a timely manner. In parallel, the FBE worked closely with the European Commission as it translated the CESR advice into draft legislation. Despite the, at times gruelling, schedule of consultations, the FBE welcomed the opportunity afforded to stakeholders to influence the shape of the implementing legislation. When the proposed implementing measures for MiFID were released in early 2006, although some important issues remained to be addressed, it was clear that in general the proposed legislation had benefited from industry consultation reflecting greater proportionality in respect of the needs of retail and professional investors alike.

2) Clearing & Settlement of Securities

Industry continued to make good progress on the technical issues which must be addressed to facilitate a truly pan-European market in the clearing and settlement of securities. On the policy side, the FMC continued to prepare for the results of the European Commission’s eagerly awaited Regulatory Impact Assessment (due out in mid-2006). It is anticipated that the Regulatory Impact Assessment will justify the

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Commission’s decision as to whether or not public policy intervention is needed to address the problems of the currently fragmented clearing and settlement market in the European Union. Meanwhile, the FBE’s most notable lobbying action on clearing and settlement in 2005 was to clearly state the banking industry’s position on the possible CESR-ESCB Standards. In the second half of the year, in response to a joint statement made by CESR-ESCB of 1 August 2005, the FBE stated that until after the Commission’s decision is made, no action should be taken that would have the effect of finalising the content of the Standards or restricting the options that will be available to CESR-ESCB in the future. Once the Commission’s decision is made, we argued that CESR-ESCB should review their options, based on whether a Directive will be proposed, and if so, what its content will be.

3) Investment Funds (UCITS)

UCITS, the term applied to fully harmonised investment funds typically sold to retail investors, came fully into the FMC’s focus in 2005. The FBE positioned itself as the voice of banks active in the UCITS market in all their respective functions, be they asset management, depositary and custodian business, distribution or brokerage. As such, the FBE responded to the three CESR consultations on its proposed advice to the European Commission on the transitional requirements for UCITS, eligible assets for UCITS and the simplification of the notification procedure for selling UCITS cross-border. The CESR consultations form part of a package of short-term measures identified by the European Commission in its Green Paper on the enhancement of the legislative environment governing investment funds. The Commission’s proposals set out in the Green Paper gained a good deal of support from the banking industry, principally for the pragmatic approach adopted. In preparation for the Commission’s White Paper on the same subject (due in late 2006) the FBE secured a number of places for several high calibre nominees that will work throughout 2006 in the European Commission’s Expert Groups on value chain efficiencies, hedge funds and private equity.

4) Transparency Directive

Preparation was again the priority in the Transparency Directive. CESR consulted industry on its draft advice for the technical implementing measures (Level 2) for the Transparency Directive and developed its thinking on the central storage and filing of regulated information under the Transparency Directive. Representing both issuers and investors, FBE responded to each CESR consultation in 2005 and is preparing for the publication of the European Commission’s proposal for Level 2 measures in 2006.

5) Pensions

In 2005 the FBE created a separate Pensions Issue Group reporting to the FMC, drawing on expertise from Member States, new and old, large and small. The Pensions Issue Group was created so to be in a position to offer financial markets input into the various themes in pensions that began to emerge in 2005. One such theme to which the FBE contributed was the initiative developed by the European Financial Services Roundtable (EFR) to deliver pan-European pensions via the 26th regime (i.e. a regime separate to that in place in any current EU Member State).

6) Horizontal issues and the Lamfalussy Process

The FMC continued to build up experience and expertise in relation to the Lamfalussy Process throughout 2005 in turn providing thought leadership on how the Process could be improved and streamlined. CESR consulted the industry on its thinking in two important areas during 2005, firstly the general question of the supervisory tools it deemed necessary to adequately supervise the EU’s securities market (the so called “Himalaya Report”) and secondly more specifically, in relation to a mediation mechanism

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between CESR members. In each case FBE came to its own conclusions in respect of the areas CESR was considering and from that starting point commented on CESR’s thinking. Throughout the year FBE closely monitored developments in CESR’s strategic thinking and has exchanged views with the Committee bilaterally on a number of occasions. C - Accounting

1) CEBS FINREP Project

The CEBS Consultation paper which proposed to establish a standardised consolidated financial reporting framework for credit institutions that is consistent with IFRS was strongly criticized by the FBE.

The FBE fully supports the principle of harmonising both the financial and prudential reporting formats within the European Union for regulatory purposes. The use of common reporting requirements throughout the EU would facilitate the production of financial and prudential data and enhance their cost-effectiveness as well as their comparability. Furthermore, achieving a level playing field across the European Union in this area is of paramount importance. Finally, harmonization within this area would also contribute to reducing one of the major barriers to cross-border mergers and acquisitions which currently exists within the financial sector. The FBE particularly supported the idea of harmonising financial statements to be provided to prudential regulators on the basis of IFRS consolidated accounts as such an approach would help avoiding conflicting definitions and requirements in this area which generate additional burden. FBE regretted, therefore, that a considerable number of the proposed items which needed to be reported went beyond the extensive disclosures which are required under IFRS. Although it may be true that banking supervisors sometimes have specific information needs which may diverge from what is required under IFRS, reporting of financial information which is not required under IFRS should be restrained to a minimum and the onus should be on banking supervisors to explain in terms of value added any cogent need which would justify deviating from IFRS. The proposed package of reporting requirements was criticized furthermore for merely having put together all existing reporting requirements instead of focusing on best practices. This was clearly demonstrated by the fact that the proposed package provided each supervisory authority with the possibility of determining which data need to be reported. Each supervisor would, moreover, have been allowed to set additional reporting requirements over and above those contained in the package. The proposed requirements, therefore, failed to make any substantial progress towards achieving an internal market for financial services – which the FBE qualified as “a missed opportunity” as it is difficult to understand why the information needs of banking supervisors in this area would differ across the EU. Finally, the FBE regretted that the proposed package did not aim at reducing substantially the number of different reporting requirements which currently exist in the various EU Member States.

2) Accounting Standards: Mutual Recognition

Mutual recognition of IFRS and US GAAP is important if international companies are to avoid the costly and time-consuming process of preparing duplicate accounts or extensive reconciliations. Since the US Securities and Exchange Commission (SEC) does not yet recognise IFRS accounts as equivalent, US-listed European companies continue to be subject to the additional burden of filing either a complete set of US GAAP financial statements or a reconciliation to US GAAP. Against this background, the FBE regards the agreement between the European Commission and the SEC on a roadmap for mutual

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recognition of IFRS and US GAAP as an important step. It believed, however, that the European Commission should defer final recognition of US GAAP in Europe until the SEC takes a corresponding decision with regard to IFRS in the US. Concerning the Joint Working Program of the IASB and the FASB, the FBE supports the efforts currently undertaken to level differences between IFRS and US standards. However, it strongly insisted that there is also a case for a breathing space before the IASB seeks further radical change. Particularly the proposals which the IASB has published on ‘Business Combinations’, ‘Provisions, Contingent Liabilities and Contingent Assets’, ‘Employee Benefits’ and ‘Consolidated and Separate Financial Statements’ are too radical and contentious. The aim should be to concentrate on refining existing standards and filling evident gaps before devoting resources to such ambitious projects. Instead, it should, amongst others, continue to devote resources to finding short-term fixes for IAS 39 with respect to financial instruments on issues unrelated to fair value. The FBE, moreover, expressed its concern that short-term convergence issues are being resolved almost exclusively on the basis of US GAAP. So, for example, under proposed changes to IAS 12, changes in deferred taxes previously recognised in equity as a result of changes in the law or rates would remain in equity and no longer reflected in the P&L. Such instances are creating a growing belief that the IASB is not proving to be an equal partner to the US FASB in discussions on the short-term convergence programme. For both the IASB and the European Commission, the overarching aim must be to achieve mutual recognition of high quality standards.

3) FASB Exposure Draft “Fair Value Measurements”

The European banking industry has commented on an Exposure Draft entitled “Fair Value Measurements”, issued by the US Financial Accounting Standards Board (FASB) to examine if there was any need to prepare guidelines on how to measure fair value. It welcomed that the IASB has agreed to work with the FASB on this issue with the aim of achieving convergence as it is essential for both standard setters to adopt a common view on the various issues set out in the FASB Exposure Draft. The main criticism made to the Exposure Draft was that it adopted a rules-based approach The European banking industry would have preferred for the Exposure Draft to have established instead a principles-based framework which should, moreover, have been combined with sound corporate governance requirements, a requirement to apply fair valuations in a consistent way within an entity from period to period and, finally, appropriate disclosures. As to the definition of fair value, the European banking industry agreed that the focus should be on the transaction price. However, the Exposure Draft was criticised for not having recognised that there may be particular circumstances in which it may be justified to adjust a transaction price. Therefore, the solution which is contained in IAS 39 is far more preferable as IAS 39 allows the transaction price to be adjusted if the fair value of the instrument is evidenced by other observable market transactions or based on a valuation technique whose variables include only data from observable markets. The Exposure Draft established a hierarchy of fair value measurements based on the reliability of the inputs used in their determination (“Fair value Hierarchy”). The European banking industry believed such a methodology to be overly prescriptive and artificial. Accounting standards should not interfere with the processes and methods which entities use to determine fair values but limit themselves to outlining a few basic principles that need to be observed, i.e.: (i) market prices should be used whenever they are truly representing a fair value; (ii) if not, models should be used that faithfully represent an item’s fair value; (iii) such models need to be back-tested by the reporting entity against actual market transactions on a regular basis. Entities should, therefore, be allowed to select a methodology in any level of the Fair Value Hierarchy, provided that the method

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produces a reasonably reliable estimate, that it is used in a consistent way and, finally, that it relies on an entity’s governance structure and controls over the fair value process (validation and verification functions, risk oversight and governance controls).

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II –Consumer, Legal and International Affairs

A - Consumer Affairs

1) Proposal for a Directive on Credit to Consumers

After the First Reading vote by the European Parliament adopting more than 150 amendments to the original proposal for a directive on credit to consumers, a non-consolidated modified proposal was presented in October 2004 by the EU Commission. Following the entrustment of the new EU Commission in November 2004, a consolidated version of a modified proposal was adopted only in October 2005 and has been currently examined by the EU Council in view of the adoption of its common position. The modified proposal has incorporated the great majority of the amendments from the European Parliament and has been consequently improved to some extent; nonetheless, certain concerns expressed by FBE and the banking industry as a whole since its adoption still remain to be addressed. In particular, the current version of the proposal still includes provisions that appear problematic as regards: (i) the scope of application; (ii) the information overload produced by requirements to be fulfilled at the advertising, pre-contractual and contractual stages; (iii) the misleading use of the “total cost of credit” for the calculation of the Annual Percentage Rate of Charge; (iv) the principle of “responsible lending” and the unclear consequences for the lender of non-compliance with it, in particular with the duty to provide assistance and to explain “advantages and disadvantages” of a range of products; (v) the lack of flexibility in the right of withdrawal, in particular when applied to specific forms of credits (credits at the point of sale; linked credit agreements). The main modification of the current version of the proposal is however the introduction in the text of an article aiming at laying down the rules governing the level of harmonisation throughout the directive. A new concept combining (full) harmonisation and mutual recognition has been elaborated by the Commission in order to respond to the approached proposed by the European Parliament pleading for a targeted harmonisation, i.e. full harmonisation of (only) key issues of the credit to consumers. At a first analysis the new mechanism appears quite complex and will require further analysis before a political consensus is reached at Council level. FBE and the European Banking Industry Committee have been elaborating the industry’s position since the publication of the modified proposal in October 2005 and will be interacting with the EU legislator in order to ensure that this proposal for a directive achieves the goal of favouring internal market and economic growth in Europe.

2) Mortgage Credit

Following the publication at the end of 2004 of the Report from the Mortgage Credit Forum Group which highlighted the potential areas where barriers to further integration of the mortgage credit sector in Europe still lay, the EU Commission adopted in July 2005 a Green Paper inviting stakeholders to express their views on the way forward towards a more integrated market for this sector. A public consultation followed until end of November 2005 and was concluded by a public hearing held in Brussels on 7 December 2005. The consultation, to which FBE and also EBIC contributed, has been of great value to the Commission which will draw conclusions for the next steps forward in a forthcoming White Paper awaited by the end of 2006. During the first quarter of 2006, a specific measure was already undertaken following the results of the consultation, namely the set up of an Experts group entrusted with the task of advising the EU Commission on the issues of funding techniques and influence from

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primary and secondary markets functioning on the integration of mortgage markets in Europe. The Expert Group will start its work in April 2006 and will conclude by November 2006. Besides, the banking industry published in January the 2nd Progress Report on the Implementation of the Code of Conduct on Home Loans, from which it appears a progress in the taking up of the Code of Conduct by all EU Member States, in particular the new ten countries that have adhered to the EU in 2004. B - Legal Affairs

1) Civil and Procedural Law

Conventions on the law applicable to contractual and non-contractual obligations (Rome I and Rome II)

The proposal for a Regulation on the law applicable to contractual obligations (‘Rome I’) was published by the EU Commission on 15 December 2005. Its purpose is to modernise, for the sake of its application in the Internal market, the Rome Convention of 1980 which already harmonises the rules governing the law applicable to contractual obligations in case of a dispute concerning an international contract. The proposed Regulation defines the rules governing the law applicable to most contracts (such as consumer contracts, employment contracts, leases, carriage, credit or distribution contracts, etc) concluded by individuals or firms in Europe, which contain an international element. As a general rule, the free choice of the parties to a contract should be, according to the proposed Regulation, the criterion to identify the law governing it; should the choice have not been made by the parties, specific criteria would apply to identify the applicable law for defined types of contracts (in particular Articles 5 and 6 regulate the choice of the law applicable to contracts concluded with consumers and to individual employment contracts, respectively). The proposal of Regulation will be discussed by the European Parliament and the Council under the co-decision procedure. Another proposal for a Regulation has been brought forward to harmonise the rules on the law applicable to non-contractual obligations by incorporating into an EU regulation the content of another international convention (Rome II). The goal is to ensure that courts in all Member States apply the same law to cross-border disputes involving non-contractual obligations (e.g. traffic accidents, accidents caused by defective products, unjust enrichment, etc.), thereby facilitating mutual recognition of court rulings in the EU. The proposal also aims to achieve a greater transparency and predictability on how these disputes are resolved. Among the amendments voted by the EU Parliament in the first reading, many were aiming to simplify the original proposal by introducing the concept of general rules for determining the law applicable to torts. It was suggested to first consider whether the parties have agreed on what the applicable law should be. Other amendments provided for special rules for cases of defamation and torts arising out of industrial disputes, while deleting the special provisions on defective products, unfair competition and violations of the environment. After the vote in the first reading by the European Parliament in July 2005, the EU Commission has put forward a modified proposal thereby incorporating those amendments which it considered acceptable. In addition to the general principle of freedom of choice of the applicable law by the parties, the Commission has accepted, among others, the amendment that specifies that unjust enrichment and administration of others' affairs without a mandate are to be considered as breaches of non-contractual

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obligations for the purposes of the Regulation; the amendment that excludes non-contractual obligations governed by specific provisions of company law or specific provisions applicable to other corporate bodies such as associations; the amendment excluding liability for acts of public authority, including liability of publicly appointed office-holders. The modified proposal for Regulation will be examined by the Council in the course of 2006. EU Contract Law

The project of building a Common Frame of Reference (CFR) was officially launched by the EU Commission on 15 December 2004. A network of more than 150 experts in the area of European Contract Law nominated from a large range of stakeholders (CFR-Net) participated in the opening conference and will work on 32 topics addressing basic definitions of Contract Law as well as specific contracts. An indicative timetable was set for future workshops to be held in Brussels over a period of 3 years and starting in March 2005. Each of the topics scheduled for 2005 has been discussed both during workshops and by exchange of written comments on a dedicated website made available by the EU Commission. The so called Principles of European Contract Law (PECLs) – i.e. the result of a comparative law study published in 2000 and 2003 by a group of academics and originally aiming at identifying common principles underpinning contract law in many European countries with the purpose of building up an EU Civil Code – were used as the basis for the drafting of the materials for a CFR and as underlying concepts for the debate between researchers, experts and the EU Commission. Nevertheless, the ultimate goal of this project being to constitute a set of common definitions and to make them available to the EU legislator for review of existing legislation and addressing future law-making, it has been clarified during workshops that the exercise undertaken by both researchers and experts was not aiming at drafting an EU Civil Code at this stage. A second conference held in September 2005 under the joint sponsorship of the EU Commission and the rotating EU Council Presidency was the occasion for the presentation of the first Annual Report on the CFR project. The political statement of the EU Council on the merit of the CFR has subsequently indicated the review of the acquis communautaire in the sector of Consumer Protection Law as the first and foremost objective of the CFR. FBE has been following the work on the project and taken part in most of the workshops held since the launch of the project. Other initiatives under The Hague Programme on strengthening freedom, security and justice in the EU

EU Payment Order Other legislative instruments have been brought forward with a view to approximating substantive and procedural law and facilitating access to justice and to speed up cross-border litigation. While the European Enforcement Order (EEO) for uncontested claims, entered into force in 2005, has abolished the principle of exequatur and enabled a judicial authority in one Member State to enforce an order from another Member State without a formal review, the proposal for a regulation creating a European Payment Order (EPO) presented on 19 March 2004 by the EU Commission aims to create an optional payment order for payment procedure available for uncontested claims for both cross-border and internal cases. The EPO procedure introduces an EU level instrument in order to obtain an enforceable decision in cases of cross-border litigations.

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Following the political general approach expressed by the Council in December 2005 whereby the speedy adoption of the proposed regulation has been given high priority in the 2006 agenda, the EU Commission has presented a modified proposal in February 2006 including most of the amendments voted by the European Parliament in the first reading. The final adoption of the proposed Regulation is expected over the course of 2006. Proposal for a Regulation establishing a European Small Claims Procedure Following a wide-ranging consultation on the relevant Green Paper presented in 2002 and complemented by an extended impact assessment, the EU Commission published on 15 March 2005 a proposal for a Regulation establishing a European Small Claims Procedure to be available to litigants as an alternative to the procedures existing under the laws of the Member States. The new legislative measure may be read as an application of the so called “26th regime”, since its introduction in Member States’ legal orders will not require the modification of the existing national rules of procedure but will make the new procedure available also for “purely internal cases”. The European procedure is meant to apply in civil and commercial matters where the total value of a monetary or non-monetary claim does not exceed EUR 2000. It provides for several procedural simplifications, concerning among others: the service of documents (by registered letter with acknowledgment of receipt or by any simpler means such as simple letter, fax or email); the use of a written procedure, unless an oral hearing is considered necessary by the court (the hearing may be held through an audio, video or email conference); the informal representation of the parties; the means of proof and the extent and method of taking evidence (by telephone, written statements of witnesses, and an audio, video or email conference) according to the court’s discretion; the immediate enforceability of the judgment that must be rendered within 6 months after the registration of the form, notwithstanding any possible appeal and without the condition of the provision of a security. In December 2005 the Council reached agreement on a number of specific issues on the proposed Regulation, in particular on its scope of application which should be, in the EU Council’s view, restricted to cross-border matters and should not cover cases which are purely internal to a Member State. The European Parliament will have to adopt its position on the proposal over the course of 2006. Proposal for a Directive on certain aspects of mediation in civil and commercial matters

In December 2005 the EU Council reached a political agreement on the content of the proposal for a directive published by the EU Commission on 22 October 2004 and aiming at promoting the further use of mediation as a cost-efficient and quick means tailored to the needs of the parties for extrajudicial resolution of disputes in civil and commercial matters. The European Parliament has not yet delivered its opinion at first reading.

Under the terms of the proposal, a court before which an action is brought may invite the parties to use mediation in order to settle the dispute and, in any event, require the parties to attend an information session on the use of mediation. This is without prejudice to national legislation making compulsory the use of mediation or subject to incentives or sanctions. The decision to use mediation to settle a dispute implies the suspension of the prescription period regarding the claim. Member States must ensure that, upon request of the parties, a settlement agreement reached as a result of mediation can be confirmed in a judgement or any other form by a court or public authority that renders the agreement enforceable in a similar manner as a judgement under national law. Green Paper on European Bank Arrestment

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The EU Commission has been preparing a Green Paper on the creation of an EU procedure for Bank arrestment, the publication of which is expected during the first half of 2006. The announced EU procedure should be available to creditors seeking to recover a monetary claim in Europe irrespective of the domestic or cross-border nature of it. The EU Bank Arrestment would allow the creditor to obtain the freezing of the debtor’s account(s) so that the debtor can no longer remove/transfer his monies from one account to another and, by doing so endanger the creditor’s chances of recovering his credit. The EU procedure should mirror many Member States’ national rules of civil procedure as a protective measure for a later enforcement of the creditor’s title. Its added value compared with the existing instruments at national level seems to lie in its harmonised form, its availability in all EU official languages, the possibility to be granted based either on an existing title for payment or even prior to obtaining the latter from a court, based on the demonstration of the need to urgently secure the creditor’s right, its enforceability in a Member State other than that of the creditor, without the need of having it declared enforceable by a local court. This action is already made possible by EC Regulation 44/2001 implementing the Brussels I Convention, but the efficiency of the current system is often thwarted by differences in the treatment of such preventive measures in Member States and/or by the overly cumbersome costs thereof. The implementation of this EU procedure would imply that banks might be obliged to freeze one or more accounts held by their client upon order of the competent enforcement authority. At this stage, no solution has been adopted to determine who would bear the related costs of the bank as third party, and how and at what stage these costs would be defined and the payment thereof done. FBE has had the opportunity to be involved in its conception at an early stage by the Commission and will closely follow the development of the file. Other initiatives at international level - The Hague Convention on Choice of Court Agreements The Hague Conference adopted in June 2005 a Convention on Choice of Court Agreements, which is due to apply in international civil or commercial cases to agreements which are concluded by the parties in order to designate the courts of one Contracting State or one or more specific courts in one Contracting States - to the exclusion of the jurisdiction of any other courts - for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship between the same parties. The Convention does not apply, inter alia, either to matters related to employment contracts, insolvency, antitrust, or to the validity, nullity or dissolution of legal persons and the validity of decisions of their organs. The text adopted has been sent to The Hague Conference’s member states for signature/ratification.

2) Company Law and Corporate Governance

Shareholders’ Rights Following the first consultation organised in 2004, the EU Commission submitted in the course of 2005 a second working document on the way to enhance shareholders rights to the public consultation. A proposal for directive was then published in January 2006 in accordance with the Action Plan modernising Company Law and Corporate Governance. FBE took part in the various stages of the debate and generally welcomed the adoption of the proposal for a directive, which aims to remove obstacles to the exercise of voting rights by shareholders, in particular the removal of share blocking arrangements, and

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anticipates on possible further legislative proposals to harmonise other shareholders rights. The proposal puts forwards minimal requirements which in turn are subject to Member States’ implementation variations. Advisory Group on Corporate Governance and Company Law In February 2005 the EU Commission set up an Advisory Committee to obtain technical advice on the implementation of the 2003 Company law and Corporate Governance Action Plan. The Committee is composed of 20 members representing expertise from the private sector, the academic world and the civil society in areas covered by the Action Plan. Although corporate governance and company law are not a bank-specific issue, the representation of banks in the Advisory Committee has been ensured. Consultation on the overall Action Plan’s remaining issues At the accomplishment of the package of short-term measures envisaged in 2003, Commissioner for Internal Market Charley McCreevy launched a review of the whole Action Plan as the context in which future priorities in the field of corporate governance and company law are cast, has evolved since its adoption. The Lisbon Agenda and the Better Regulation objectives now need to be taken into account to a greater extent. The remaining medium and long term priorities under the Action Plan need to be conducive to entrepreneurship. Thus the consultation closing at the end of March 2006 aims to identify market needs and define future priorities. Other initiatives at international level - Enhancing Corporate Governance for Banking Organisations & IOSCO/BASEL Committee Business Continuity Principles The Basel Committee on Banking Supervision published in July 2005 a review of its guidance adopted in 1999 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organisations in their countries. This guidance drew from principles of corporate governance that were published earlier that year by the Organisation for Economic Co-operation and Development (OECD) and were also updated in 2004 with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets. FBE participated in the consultation organised during spring 2005 by the Basel Committee and contributed directly and together with the International Banking Federation (IBFed) to the finalisation of the guidelines. A joint document was issued by IOSCO and the Basel Committee addressing financial industry participants and authorities and containing principles on how to ensure business continuity under particular critical circumstances (terrorist attacks, natural disasters, etc) by underlining the substantial risk of major operational disruptions to the financial system. FBE has been following the debate together with IBFed and takes part in the public consultation organised on the document published.

3) Legal framework for Securities

With the view of addressing an increasing number of legal issues related to the sector of securities FBE has set up in 2005 a working group whose task is to give technical advice on existing and forthcoming legislative and non-legislative initiatives at EU as well international level with regard to securities.

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The Hague Convention on the law applicable to certain rights in respect of securities held with an intermediary Following the recommendation in 2003 from the EU Commission to the Council to sign The Hague Convention, an opinion was adopted in March 2005 by the European Central Bank on the need to conduct an impact assessment from both a legal and economic perspective. The EU Commission has undertaken this study and the release of a document is expected in the course of the first half of 2006. In June 2005 the updated Explanatory Memorandum to the Convention was published. Since the approval by the intergovernmental session of the final version of the Convention, no Contracting State has yet singed it. The future UNIDROIT Convention The International Institute for the Unification of private Law (UNIDROIT) has started in May 2005 the intergovernmental negotiations of a draft Convention on harmonised substantive rules regarding intermediated securities. The project of convention aims at harmonising substantive rules governing the securities held by intermediaries at international level and at increasing legal certainty over transaction therewith. FBE has been actively following, as observer, the progress of the intergovernmental negotiations and contributed, over the course of 2005 and the first quarter of 2006, with detailed comments on the draft convention as amended, in particular in the light of the possible interaction and convergence between this project and the analogous initiatives undertaken at EU level. Since February 2006 the EU Commission has been given the mandate by the Council to negotiate the content of the draft convention to the extent the latter covers matters falling into the competence of the European Community, namely the regimes for collateral and settlement finality already regulated at EU level by Directive 2002/47/EC and 1998/26/EC respectively. The G-30 Monitoring Committee– Interim Report In April 2005 an Interim Report was published by the Global Monitoring Committee established by the Group of Thirty (G-30) and given the task to evaluate progresses made in 15 major markets (Canada and the United States in North America; Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Spain, Switzerland and the United Kingdom in Europe; Australia, Hong Kong, Japan and Singapore in the Asia-Pacific region) in the implementation of the 20 recommendations adopted in January 2003 by the G-30 in its report “Global Clearing and Settlement: A Plan of Action.” Building upon the G-30’s earlier work in domestic clearing and settlement, the plan of action encompassed wide-ranging reforms including creation and implementation of global standards in technological and operational areas, improvements in risk management practices, further harmonisation of global legal and regulatory environments, and improved governance for providers of clearing and settlement services. The Committee is expected to published a final report during the first half of 2006 which will help to identify what needs to be done, where and by whom, in order to make substantial progress in meeting the recommendations. The interim report set out a series of next steps necessary for progress toward completion of the 20 recommendations within the proposed timeframe that are being used as benchmarks of progress. FBE has taken part in the work of the sub-committee for legal issues reporting to the Committee.

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The Legal Certainty Group The Legal Certainty Group was set up by the EU Commission in 2004 to tackle legal barriers to the integration of the clearing and settlement functions in Europe. The Group, which comprises around 35 legal experts drawn from academia, the public and the private sectors, started its work in January 2005 by focused as first priority on a first stocktaking exercise of existing rules at national level regarding various aspects of the legal framework for securities. The EU Commission provided the Group with a questionnaire aiming to identify discrepancies between national legal systems in the following areas: (i) Content and structure of a legal system; (ii) Corporate actions and voting rights; (iii) Choice of the securities location/place of issue; (iv) Cross-border dimension; (v) Public law and regulatory context.

Besides, the Group submitted in February 2005 to its secretariat a note concerning the UNIDROIT Preliminary Draft Convention on Harmonised Substantive Rules regarding intermediated securities highlighting the considerable overlap between the mandate of the Legal Certainty Group and the object of the Draft UNIDROIT Convention, since they are both focusing on issues of legal uncertainty (in relation to securities/clearing and settlement). The link between the two initiatives implies that any evaluation of their respective outcomes will require a comprehensive approach from the FBE.

4) Antitrust EU Law

Commissioner Kroes in charge of the Directorate General for Competition (DG Comp) launched formally, in close liaison with Commissioner McCreevy of DG Internal Market, a sector inquiry into retail financial services on 13 June 2005.

Sector inquiries give extensive powers to DG Comp to investigate an entire business sector for possible anti-competitive behaviour, where it can require companies to provide data, provide copies of agreements and give explanations. On-site inspections may be carried out and the penalties for misleading or incomplete answers can be substantial.

The Commission’s inquiry aims to probe into three separate areas, i.e. payment cards, business insurance and retail banking, with a view to identifying possible distortions of competition that can be addressed under the EC Treaty’s antitrust rules. Although not one of the inquiry’s main addressees, the FBE monitored preparations by the Commission ahead of each inquiry into the banking sector. The addressees of the payment cards and retail banking questionnaires were individual banks – large and small – across the EU-25.

The task of replying to all questions appeared very onerous to a significant number of banks for separate reasons, such as due to unfortunate timing and logistics surrounding the launch of the first inquiry whilst the second inquiry coincided with banks’ year end exercise, which for a first time had to be done according to the newly introduced International Financial Reporting Standards. Closer coordination between the Commission and the industry as well as the FBE will hopefully reduce the burden of any further queries that may yet arise from the probes already underway.

Preliminary findings will be released over the course of 2006.

Damages action for breach of EC antitrust rules On 20 December 2005, the EU Commission published a Green Paper on damages actions for breach of the EC antitrust rules, which explores the conditions under which private parties can bring actions for damages before the national courts of the Member States for breach of the EC antitrust rules. The Commission has found evidence that in the majority of Member States actions for damages for the infringement of EC and national competition law have been extremely limited. In Europe, competition law is mostly enforced by competition

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agencies, subject to review by the courts. Awards for damages by national courts at the initiative of private parties are much less common. It is believed that facilitating damages claims for breaches of the antitrust rules would not only strengthen the enforcement of competition law, but will also make it easier for consumers and firms who have suffered damage from an infringement of competition law rules to recover their losses from the infringer. The purpose of the Green Paper, which sets out a number of possible options to facilitate private damages actions, is to stimulate debate and facilitate feedback from stakeholders. A Several key issues are touched upon, such as the possibility to “better protect consumers interests” through collective actions, the definition of damages and an option of doubling damages, making fault a standard requirement for damages claims, introducing obligations to turn over documents or otherwise provide access to evidence, etc. A public consultation has been launched until end of April 2006. C - International Affairs

1) Liberalisation of financial services

In November 2005, a meeting between the European Commission (DG Trade) and a delegation of the FBE Committee for International Affairs allowed bankers to take stock of the current WTO negotiations and to reassess the priorities of the European banking sector for further liberalisation. It was re-stated that the negotiations on further liberalisation of banking services should continue both in the WTO and in bilateral EU negotiations, with a preference for the plurilateral negotiations. The FBE Secretariat took also part in several visits organized by the European Services Forum (ESF) to WTO officials in Geneva in order to convey this message by presenting its model schedule, its list of barriers resembling a catalogue of market access problems and a list of priority countries for their banks. An on-going exercise across the year consists of keeping the barriers list up-to-date.

2) International Regulatory Dialogues

The Commission issued in June 2005 a working paper addressing the state of play of the ongoing regulatory dialogues between the Commission and certain third countries on DG MARKT issues. The paper identifies new priorities (country-and policy-wise) and sets out a strategy for dialogues with relevant third countries. The document follows some points of the Green Paper on financial service policies regarding the issue of the strengthening of regulatory dialogues with some third countries. On the basis of contributions received from different FBE consultative committees, an FBE position was sent to the Commission services. In its position, the FBE recalled the need for the banking industry to be kept informed and consulted on ongoing dialogues.

3) Financial Sanctions

The European Banking Industry Committee (EBIC) had expressed concerns with the Commission (DG RELEX) about the sanctions taken by the US authorities under the USA Patriot Act for instance against the Commercial Bank of Syria (CBS). The measure prohibits any US bank, broker-dealer, futures commission merchant, introducing broker or mutual fund from opening or maintaining a correspondent account for or on behalf of CBS. Correspondent accounts involving CBS have to be terminated without exception. Through its extra-territorial effects, this measure could have a serious impact on Contacts are still taken with the European Commission in order to ensure that as a matter of general principle more coordination is developed at international level in the area of financial sanctions.

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4) Cooperation with the International Institute of Bankers

The Federation has continued its cooperation with the International Institute of Bankers (IIB) consisting of an early warning system regarding US banking/securities legislation of interest to European banking associations and their member institutions. The objective of the system put in place is to enable the FBE to properly influence the legislative process in the US in the interests of European banks. Under the Early Warning System, the IIB informs the FBE of any legislative proposal in US Congress that has a reasonable prospect of becoming law and which has possible implications for European banks.

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III Physical Security; Fight against Money Laundering and Terrorist Financing

A – Physical Security For the thirteenth consecutive year, the Federation published in October 2005 its Report on Bank Robberies and other Bank Raids. The report (restricted circulation) contains figures on bank raids, risk rates, modus operandi, etc..., and gives an overview of the situation regarding robberies and respective security arrangements as of the end of 2004. It focuses on European countries but also includes information from other industrialized states such as Australia, Canada, New Zealand and Japan. The general conclusion of the report is that there has been a considerable rise in the level of violence used by raiders. The figures speak for themselves:

- A total of nearly 205.513 bank branches in FBE member countries were raided 5.864 times in 2004, as opposed to 5.830 in 2003.

- The risk rate, i.e. the number of robberies divided by the number of bank branches in the FBE Members amounts 1 in 35, as opposed to 1 in 37 in 2003.

- Total losses in the FBE countries amounted to € 96.579.747 (€ 119 million in 2003).

- The average loss per raid amounts to nearly € 59.193 (€ 49.168 in 2003).

Raids on ATMs are a persistent trend: Attacks on ATMs, which ranged from raids against the staff servicing the ATMs to actual ram-raids where the ATMs are entirely hauled away, are growing in numbers. A worrying trend is the increase and intensity of violence deployed in the attacks against security transports: organized criminal gangs operating across borders use any means available to them, including heavy weapons and explosives to threaten the security transports. Transport vans but also the cash centres are targeted. Following the publication of its 13th report on bank robberies and other bank raids (distributed internally only), the FBE Working Group on Physical Security agreed to publish an executive summary of its report to be distributed to the public. The executive summary, posted on the FBE website on 22nd December 2005 led to an important coverage in the international press. B - Fight against Money Laundering and Terrorist Financing

1) Third Anti Money Laundering Directive

The Federation generally welcomed the text of the third Anti- Money Laundering Directive as published in the Official Journal of the European Union on 25 November 2005. The introduction of the “risk-based” approach is particularly welcome, as it will guarantee a focused and efficient fight against money laundering and terrorist financing, without disproportionately lumbering the banking industry with unworkable and impractical obligations. Accordingly, banks should be obliged to implement customer due diligence requirements proportionally to the concrete risks involved, because risks may differ depending on inter alia the types of customers, countries and transactions. The European banking industry’s remaining concerns related to the treatment of beneficial owners and politically exposed persons should, however, not be forgotten: Banks still have serious concerns about the approach taken on beneficial owners since the third Directive includes an obligation to identify and verify the identity of the beneficial owners. The main problem is that banks often do not have access to reliable

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information enabling them to carry out such an identification (e.g. gazettes or registers are not present everywhere). Non domestic “Politically Exposed Persons” (PEPs) are subject to enhanced due diligence. The European banking industry would have preferred that the European Union be considered as a single jurisdiction and that PEPs from EU Member States be excluded from the definition, especially since credit institutions in the Member States already apply appropriate due diligence procedures which cover PEPs. This point of view was unfortunately not followed. The banking industry will in 2006 continue to closely monitor the adoption by the European Commission of the implementing measures (A second consultation on the issue was published on 17 February 2006) subject to the necessary consultation with the industry. The different EBIC positions to which the Federation substantially contributed are posted on the FBE website.

2) FBE report on Anti-Money Laundering Legislation

On 26 April 2005, the Federation published the updated FBE report on Anti-Money Laundering Legislation. This extensive document offers an inventory of national measures of national regulations on anti-money laundering in more than 35 countries in Europe and beyond. It has been drafted by the FBE Anti-Fraud and Anti-Money Laundering Committee, based on contributions collected from national banking associations from July 2004 to February 2005. Due to recent developments in this matter, a particular interest was shown in the issue of terrorist financing. The report has been posted on the FBE website. Copies are available on request from the FBE Secretariat.

3) FATF Special Recommendation VII on Wire Transfers

In July 2005, the European Commission issued a proposal for a regulation on the information on the payer accompanying transfers of funds, which is meant to implement at EU level the Special Recommendation VII (SR VII) on wire transfers of the Financial Action Task Force (FATF). The FBE Secretariat provided input to the European Payment Council (EPC) which published an official position on the Commission’s proposal for a regulation. The following points in particular were expressed:

• There is a need for the text to stay as close to the content and wording of the original text of the FATF as possible, in particular regarding the definitions.

• The text should try to limit the impact on existing payment processes and focus

on the most cost efficient methods for achieving the desired ends.

• It is crucial to make sure that the text stays consistent with other existing EU legislation, in particular with the third Anti Money Laundering Directive but also with existing data protection laws.

• Finally the timing issue has become critical: The Interpretative Note to the FATF

SR VII on wire transfers requires an implementation of the recommendation by FATF countries before 1st January 2007. The FBE is concerned that the institutional legislative timeframe has been slipping and might not leave banks and payment operators sufficient time to adapt their systems and procedures. Practitioners estimated that they would need about one calendar year to adapt the banks’ systems to the changes required by the implementation of the FATF

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SR VII. The timetable is already looking unfeasible (the Report of the European Parliament should be finalized by mid June 2006), even without any allowance for the consideration by the European legislators of any final concerns from stakeholders.

The FBE is now closely monitoring the discussions taking place at the level of the European Parliament and will seek to ensure that the measure to be applied to European banks be as effective and proportionate as possible.

4) Co-operation with the FATF

The Financial Action Task Force (FATF) organised on 8 & 9 December 2005 a meeting in Brussels between a number of FATF members and a sample of representatives of the banking and security sectors. The aim of the meeting was to establish an on-going dialogue between regulators and industry with a particular emphasis on issues and concerns of practical nature that resulted from the implementation of the 40+9 FATF Recommendations. The FBE, as a member of the International Banking Federation (IBFed) attended the meeting. It is understood that in future, the European Banking industry Committee (EBIC) will also be invited as a regional grouping. The meeting led to an interesting exchange of views, and possible regular follow-ups and sessions. Because the important number of participants could not always allow an open discussion, it was agreed that small working groups would be set up in order to discuss in detail some specific issues (e.g. it was suggested to have discussions within the framework of these small working groups on the issue of risk factors). The IBFed should be a direct interlocutor for the FATF in this process, as will be the EBIC.

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IV. SOCIAL AFFAIRS

1) BCESA's position on Cross-Border Directive

The FBE Banking Committee for European Social Affairs (BCESA) had requested the European Commission to reconsider applying Directive 2001/86/EC on workers’ participation to cross border mergers, arguing that the necessary compromise for the Societas Europea (SE) cannot be acceptable for cross-border mergers, and would frustrate the proposal’s purpose, i.e. increasing cross border merger activity. The European Parliament endorsed a compromise achieved by the Rapporteur Mr Lehne with the Council: employees’ participation in the newly created company (by way of merger) will be subject to negotiations based on the model of the SE statute. For companies with less than 500 employees, the legislation of the country where the company has its headquarters will continue to apply. The Directive was adopted on 20 September 2005 and published in the Official Journal on 25 November 2005. The Directive enters into force on 15 December 2005 (20 days after its publication in the OJ). Member States are required to implement the directive by 15 December 2007.

2) Portability of Pensions

The European Commission published on 20 October 2005 a proposal for a Directive on the portability of pension’s rights. According to the proposal,

•Workers would be granted the right to take their pensions with them when changing employer or maintain an acquired pensions’ right in the former employers’ scheme

•Labour markets should be made more open by facilitating worker mobility both at EU and national level (c.f. 2006: European Year of Mobility)

•Retirement savings in occupational pension schemes should be eased and backed up by not punishing people who are mobile and a non-discriminatory approached adopted throughout Europe.

A task force of experts (Pensions WG) from both the BCESA and the FBE Financial Market Committee should be established in order to determine an FBE position on the Commission’s proposal.

3) Social Dialogue: CSR

As members of the Sectoral Social Dialogue Committee for the Banking Industry, the BCESA, together with the European Savings Banks Group (ESBG), the European Association of Cooperative Banks (EACB) and the financial services department of the trade unions UNI-Europa, has been running a project on the Social and Employment Aspects of Corporate Social Responsibility (CSR) in 2004 and 2005. Five key themes were identified for closer examination:

- Training, Learning and Development; - Core Labour Standards; - Work-Life Balance; - Internal Communication; - Equal Opportunities.

In a first stage, an inventory of national measures involving the employment and social aspects of CSR was made. In a second stage, a selected panel of banks was asked to answer a questionnaire on good practices involving the five aforementioned key themes.

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A conference was then held on 10 December 2004 to discuss common findings with the employees’ representatives.

On 23 May 2005 a joint statement on CSR was obtained from discussions held with representatives of the trade unions, savings banks and cooperative banks.

Whilst the European social partners agreed on the importance of a follow-up procedure in order to offer the possibility to the Sectoral Social Dialogue Committee to continue the process, they agreed that the use of such practices on social and employment aspects of CSR is enhanced through voluntary means and in full respect of national/company practices.

4) Social Dialogue: Enlargement

• Background: After two successful projects run in the accession countries (Hungary, Czech Republic, Poland, Malta, Slovakia, Slovenia and Cyprus) from November 2000 till February 2003 during which social partners on both sides exchanged information and experiences on national industrial relations’ structures in the banking sector and on the European Social Dialogue, the Sectoral Dialogue Committee for the Banking Sector started a project aiming at enhancing the knowledge of the social partners of "new" Member States of industrial relations practices in the "old" Member States.

• The aim of the project is twofold: 1. To render the social partners of "new" Member States more familiar with the practice of industrial relations in "old" Member States; 2. Through the first objective, to integrate more easily the social partners of the "new" Member States in European social dialogue structures (the Social Dialogue Committee for the Banking Sector). One-day bilateral meetings between social partners of the "new" Member States and the social partners of the "old" Member States was held during which the latter demonstrated in a practical way to the former how industrial relations are organised in the banking sector. The project was started in 2005 and completed in January 2006 with three of the "new" Member States, i.e. Slovakia, the Czech Republic and Hungary. After the three bilateral meetings, a conference was held in Brussels in order to discuss the findings of the bilateral meetings and to draw conclusions from these findings.

5) Demography

A project on demography is currently running with the aim to collect data in order to find out whether the banking sector would face challenges whist adapting itself to the demographic changes when recruiting staff or retaining older staff members. Our common aim in this project must be clearly to assess the implementation of the Lisbonne goals in the banking sector. In cooperation with other Credit Sector Associations a joint questionnaire will be sent to European banks. A catalogue of good practices will be prepared on the basis of the data collected and may lead to the signature of a joint statement.

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V Payments and Securities Clearing and Settlement Systems

A – Payments; FBE co-operation with the EPC in the SEPA- project The FBE was very active in 2005 within the framework of the activities of the European Payments Council (EPC). The FBE provided the Secretariat for the Legal Support Group (LSG), including the New Legal Framework Task Force and for the SEPA Credit Transfer Working Group (SCT), including the E and M-payments Task Forces. Within the ambit of the LSG, work concentrated on providing support to the preparation of the SEPA Credit Transfer and Direct Debit Scheme Rulebooks and the SEPA Cards Framework. Extensive high level comments as well as detailed comments of a legal nature were provided to the Payment Instrument Working Groups and an issue-spotting function in relation to questions that may carry legal risk was performed. Support was also given to work involving external legal council covering the provision of a legal opinion on the binding nature and legal soundness of the rulebooks/framework, the validity and applicability in national jurisdictions, considerations of the application of competition law etc. Regarding European legislation the LSG provided extensive input to the discussion regarding the Payments Directive, which was finally published by the European Commission in December 2005. In addition, work concentrated on the Regulation proposal regarding information accompanying wire-transfers which was published on the 26th of July 2005. The SEPA Electronic Credit Transfer Working Group (SCT) has been responsible for drafting the SEPA Credit Transfer Rulebook. Throughout 2005 a number of draft versions were taken through SCT iteractive revisions with national community consultation on an “ongoing” basis. Subsequently a more stable version of the Rulebook was referred to supporting Groups OITS and LSG for review. The final Rulebook Version was approved by the EPC Plenary in March 2006. In the field of E and M-payments the aim of the Task Force’s work was to identify whether the SEPA schemes and framework would allow E and M-payments to be built upon in the future. Results of the study and recommendations on ‘the way forward in E and M-payments’ will be ready for the June 2006 EPC Plenary. The E-payments Task Force has developed a generic E-payment scheme outline during 2005, which will also be presented to the June 2006 EPC Plenary. B – Securities Clearing and Settlement 2005 has again witnessed a flurry of activity on the securities clearing and settlement front. The Federation's European Securities Infrastructure Working Group (ESI) has been actively involved in many fronts in coordination with the Financial Markets Committee to provide operational input to the policy setting of the Financial Markets Committee. The ESI has continued its efforts on the follow-up of the Second Giovannini Report, focusing on what was identified as “barrier 3” – harmonizing Corporate Actions. Two new set of recommendations have been published on Interest Payments and Maturity Redemption. The work has also been extended to the implementation field with a structural gap analysis of the countries against the published sets of recommendation and a workshop dedicated to define the action plan for the months ahead. More broadly, through the participation of the FBE in the CESAME – the established advisory group to the commission on clearing and settlement – the ESI was and will

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continue to be involved in the consultation on all Giovannini barriers. For example, besides “barrier 3”, the ESI and the FBE Secretariat have been instrumental in helping SWIFT to define an harmonized protocol in the framework of “barrier 1”,common interfaces and standards. Furthermore, the FBE has continued to provide input to the G30 European Monitoring Group as the prime responsible to follow-up 3 specific recommendations (Number 1 on dematerialization; Number 11 on final simultaneous transfer and availability of assets and Number13 with the ECB on addressing the possibility of failure of a systemically important institution). As privileged interlocutor of the ECB, the FBE, with the 2 other European Credit Sector Associations, has reviewed and agreed the “Best Practices for market participants involved in CCBM operations”. The ESI has again this past year been heavily involved in determining and voicing the FBE position and concerns on the CESR Standards on Clearing and Settlement. Finally, the FBE has decided to collaborate and help the STEP project on short term European paper. C - TARGET The TARGET 2 (T2) system is planned to start in November 2007. Since 3 years already, the banking industry, representing the only users of T2, has worked in close cooperation with the Eurosystem both at European level through the Target Working Group of the FBE (TWG) and at national level with the National Central banks through the national user groups. This fruitful cooperation has resulted in the publication in July 2005 of satisfactory specifications for the project (called UDFS for User Detailed Functional Specifications). Since then however, the users have repeatedly approached the Eurosystem to receive answers to a limited number of unresolved issues which, if not solved properly, could impact the usage which banks would make of T2. These issues are more of a political nature and have to do with the new “centralized” nature of T2. This is a concern for banks that need answers to these key issues as soon as possible in order to launch developments in the banks to connect to T2, if we are to meet the revised project deadlines.

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V Economic and Monetary Affairs, Cross-Border Consolidation, SMEs, Export Credit

A - EMAC

1) The Outlook for the Economy of the Euro Area

The Economic and Monetary Affairs Committee (EMAC) is composed of chief economists from banks and banking associations around the EU and EFTA countries. EMAC provides a forum for discussion of economic and financial themes of interest to the banking sector. Twice a year EMAC conducts a poll among its members to gain an idea of the sentiment and the range of economic forecasts in the banking community. Publication of the results, in the middle and towards the end of the year, is timed to precede the publication of the ECB’s mid-year and end-year staff forecasts. EMAC’s mid-2005 Outlook showed that economists were revising down their expectations for the already modest recovery. Entitled “The Euro Zone at the crossroads,” this Outlook saw external factors (high oil prices and a strong euro) as important influences on the performance of the euro area economy at that time. But they reported that sluggish growth was not so much the result of these influences, which tend to cause moderate fluctuations in the growth rate, but more the result of structural difficulties in the euro zone. The euro economy is at a crossroads because public expenditures need to be controlled and structural reforms launched if it is to meet the objectives of the Lisbon agenda. EMAC’s end-2005 Outlook anticipated the 25 basis point hike in ECB rates which took place later that day, 1st December. The main message of the report was that the ECB should tread carefully in raising rates any further, as inflation pressures were likely to be contained, while growth remained weak and uncertain. A common theme in the Committee’s analysis of the economy is the need for EU governments to make structural changes, particularly in labour markets. Although the chief economists paint a cloudy picture in their analysis, they see the possibility of a stronger and more resilient economy emerging from the current under-performance, if EU politicians are ready to take the necessary measures.

2) Economic governance in the euro area

EMAC has a particular interest in EU-level fiscal controls and has made a number of public statements stressing the importance of adherence to the terms of the Stability and Growth Pact. The committee issued a new FBE Letter entitled “The Stability and Growth Pact needs to be revived, not enfeebled”, on the eve of the ECOFIN Council meeting of 18th January, 2005. The paper pointed to the need for urgent action to restore the credibility of the Pact, and supported the European Commission proposals of September 2004 as a good basis for reform. The committee is continuing to follow closely the implementation of the revised rules. B - Cross-border consolidation in EU banking In April 2005, the European Commission launched a survey into the obstacles to cross-border mergers and acquisitions (M&A) in the financial sector. The FBE replied with a study carried out among its members, listing the major obstacles and suggesting

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priorities for action. EMAC carried out the preparatory work for the FBE study. An ad hoc Working Group of experts chaired by Freddy Van den Spiegel, Chief Economist of Fortis Bank, then completed the FBE’s official response to the survey, in collaboration with EMAC and other specialist groups within the FBE. A FBE Letter which transcribed the FBE’s response to the Commission survey was published on 19th October 2005. The FBE supported the EU institutions’ decision to study this issue. As its response to the survey reported, for banks, growth by cross-border M&A is one way to extend their business beyond the domestic market. M&A enables banks to achieve economies of scale and scope, which allow them to offer their customers a wider range of services, at a better price. Banks will not undertake the costs and risk associated with M&A unless they see that these “synergies” are achievable, yet a range of barriers are currently reducing the potential synergies. In the view of the FBE’s members, the priorities for action lie in the areas of banking supervision, taxation, and the legal framework. The FBE pressed the EU institutions to prioritise, and address the most problematic obstacles which cannot be justified on grounds of customer value or financial stability. Some of the obstacles identified as priorities by the FBE mainly affect a transaction’s feasibility. In the field of banking supervision, for example, these include: lack of transparency in the use of “Article 16” powers; lack of supervisory cooperation and convergence; and approval processes. Other important barriers identified mainly affect efficiency after consolidation, for example the national fragmentation of supervision and different reporting requirements. Examples from the field of taxation include: VAT on financial services; execution costs from VAT on transfer of a financial business; on-going corporate tax costs from transfer pricing; and taxation on dividends. Another concern is the inadequate harmonisation of rules or law, for example, in consumer protection. The Commission’s report on the results of its survey was submitted to the ECOFIN Council on 8th November, 2005. The Council concluded that further discussion of the framework for cross-border consolidation in financial services should be encouraged. It gave support in particular to further work on supervisory rules and practice. Since then the FBE has lobbied in support of its position also in the European Parliament whose ECON Committee will publish an own initiative report. Further developments on this dossier are likely after the next review of the issue in ECOFIN Council, expected to take place in May, 2006. C - Small and Medium-Sized Enterprises Activity has intensified since the beginning of 2006 with the commencement of work on the Fifth Bank-SME Round Table, which will continue through into 2007. The main topics to be discussed, with a view to identification of examples of good practice, are transparency; mezzanine finance and business transfers; and securitisation. A total of ten meetings are scheduled for 2006, two of which will be high-level events chaired by the Austrian and Finnish Presidencies respectively. D - Export Credit Insurance The FBE’s Working Group (WG) on Export Credit takes part in the regular consultations of stakeholders (including NGOs and social representatives) organised by the OECD Trade Directorate in the context of the OECD Arrangement - a “gentleman’s agreement” which sets guidelines for official support for export credits - and other OECD accords affecting export credits. In particular, these meetings have discussed the Recommendation on export credits and the environment, which is due to be reviewed before the end of 2006. The FBE’s WG monitors the impact that the implementation of these so-called “Common Approaches” on the environment has on export credit insurance practice in the EU, and lobbies accordingly. Also within the OECD, the WG has been following developments in the Action Statement on Bribery and Officially Supported Export Credits. The OECD

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Working Party is discussing enhancements to the Action Statement in light of experience over the past five years. The groups stands ready to offer advice and lobby if necessary on any other aspect of export credit regimes - at global, OECD or EU level – which may impact banking practice and business. E - Statistics Last year was marked by several new improvements in the field of the availability of statistics on the national banking sectors from 38 European countries. F