This article is part of our special report European Corporate Reporting.
SPECIAL REPORT / EU trade negotiators are optimistic that they can secure a place for financial services regulation within key trade talks next week (27 November), offering some hope that this will help spur the US towards more convergence in international corporate reporting.
Europe and the US launched negotiations on the so-called Transatlantic Trade and Investment Partnership (see background) earlier this year with Europe hopeful that the deal would include financial regulation and markets-related activity, since the EU and US account for 80% of global financial transactions.
But there were doubts on the US side about whether financial regulation could be incorporated.
The multitude of powerful regulatory bodies affecting financial services in the US, from the Commodity Futures Trading Commission to the Securities and Exchange Commission (SEC), not to mention the US Treasury, make it more complicated.
Over the summer (15 July), the commissioner for the internal market and services Michel Barnier pressed US Treasury Secretary Jacob Lew on financial services at a meeting in Washington, insisting that including rulemaking for banks and markets in the TTIP negotiations would be an opportunity to better align standards.
EU has been applying pressure on financial services
As part of his lobbying effort, Barnier urged progress in aligning US and international accounting standards, warning that some in the EU were questioning the future of the International Accounting Standards Board if headway was not made soon. The IASB sets accounting rules applied in over 100 countries including within the EU.
Europe adopted International Financial Reporting Standards (IFRS) – the IASB standards – in 2005, but in July 2012, the US SEC issued a report on the relation of the IFRS to the US reporting standards, which included no decision as to whether IFRS should be incorporated into the US financial reporting system, or how such incorporation should occur.
The European Commission is set to issue by the end of this year new regulations on accounting standards, overhauling its current standards body and meeting European Parliament concerns that Europe has become a lackey for US influence in the sector.
Nadia Calvino, the EU executive’s deputy director-general for internal market and services, has called for “serious discussions on financial regulation within the TTIP, setting up the necessary instruments to make our regulatory systems work together by agreeing on a common approach to equivalence and substitutive compliance.”
In this context Calvino also linked TTIP discussion of financial services with convergence in accounting standards.
“This has a direct impact on the current convergence process. There is a real risk that the IASB and [US standards bodies] fail to agree on a converged standard on impairment of financial instruments – a crucial norm for financial institutions and markets. .. we need a robust standard on impairment before the end of this year,” Calvino said.
Karel Lannoo, the chief executive of think tank the Centre for European Policy Studies, said the fact that neither bloc had agreed on a globally acceptable accounting standard meant that bank accounts on either side of the Atlantic were not comparable.
Glimmer of hope on financial services
The second round of TTIP negotiations took place on 11-15 November. While there were no discussions on financial services regulation, the EU and US TTIP chief negotiators, Ignacio Garcia-Bercero and Dan Mullaney, made clear afterwards that regulatory cooperation in financial services would be discussed next week (27 November).
Mullaney said that the EU side had requested conversations and the US side was “ready to engage”. He added that all US trade agreements included provisions on such matters as regulatory transparency in financial services.
Inclusion of financial services within the TTIP talks would not open the door directly to the convergence of reporting standards, since these were unlikely to be a direct topic of discussion. The US is believed to fear that discussions of financial services could be used as a back door for the Europeans to apply pressure for the introduction of IFRS.
“The US have made it clear that TTIP is not to be used as a Trojan horse for IFRS to be slipped in through the back door,” said one industry commentator, who preferred to remain anonymous.
Nicholas Veron, a fellow with Brussel-based think tank Bruegel, agreed with that analysis. “There is no direct impact of the trade talks on accounting standards,” he said.
However, he believed that the inclusion of financial services in the talks could provide a nudge at a crucial moment.
TTIP could provide a nudge
“I sense more possibility of the US moving towards convergence, not just as a result of TTIP but because of a change of atmosphere,” he explained.
“Convergence is a decision that would be taken by the SEC, and my impression is that the new chairman – Mary Jo White – has a more open mind to IFRS, and offers more leadership [than her predecessor Mary Schapiro],” Veron said.
“The SEC could also go for optional use of the IFRS by US companies, or the gradual adoption of IFRS. I have a feeling there will be more of a response than during the period that Mary Schapiro was chairman, during which time there has been nothing done on IFRS,” he added.
While this goal of creating a single global set of high-quality accounting standards appears to be currently broader than the scope of the TTIP, “we believe that it would produce significant benefits for transatlantic trade and investment,” said BDO global head of regulatory & public policy affairs, Noel Clehane.
“If TTIP is successfully negotiated, the increased integration of the transatlantic economies will shine a light on the benefits of further convergence of accounting standards between the US and the EU,” he added.