EU retail financial market integration: mirage or reality?

After the successful adoption of the Financial Services Action Plan (FSAP), the integration of retail financial markets is a next frontier for the EU. Several measures covering areas such as payments, retail credit and investment funds, and stretching across different policy areas are under discussion or are in the course of being implemented. In addition, the European Commission has started to look more closely at the sector from a competition policy standpoint. But will the EU manage to create an integrated retail financial market? The single market has been on the agenda since 1992, and progress on the retail side has been extremely limited judging by certain indicators. It could even be argued that it has receded, as the EU’s single market agenda has contributed to national consolidation of operators, which has reduced competition in many smaller and medium-sized member states. This paper starts with a bird’s eye view of retail financial markets in the EU today and their degree of integration. It reviews the EU measures affecting retail financial markets and how rule-making has evolved over the last 15 years. In a third section, we discuss issues raised by EU rule-making in retail financial markets and conclude with some recommendations for policy. Retail financial markets are defined as services to consumers and small and medium enterprises (SMEs). In banking, the most important sub-sector of financial markets, retail represents over 50% of total EU activity in terms of gross income. According to European Commission estimates, retail banking represents a gross income of €250-275 billion per annum, which is equivalent to approximately 2% of total EU GDP (2004).