Compliance aspects of EMU

The introduction of the Euro will have a major effect on the UK financial services industry even though the UK itself will not be a participant in the first wave of membership. There are a number of reasons why the Euro will affect firms' business and there will undoubtedly be compliance implications to the introduction.

What effect will the Euro have?

The introduction of the Euro will lead to a number of changes which will have wide-ranging effects throughout the EU and beyond. For example:

• There is likely to be a redenomination and reconvention of interest rates and periods on their bonds;

• Governments will begin to issue Euro bonds;

• Equities will begin to be quoted in Euros; and

• some corporates will redenominate debt and equities into Euros.

How are the regulators reacting to the introduction of the Euro?

The Bank of England, IMRO, PIA and SFA have all issued guidance on the effect on their rules of the introduction of the Euro. Other than some consequential changes to financial rules (for example, foreign exchange risk will cease to exist between participating currency units, affecting the Foreign Exchange Requirement) none of the regulators is intending to introduce specific rules for firms on how they should prepare for the introduction of the Euro. The regulators have given general guidance, but all insist that firms must have regard to their own circumstances and apply existing rules in the light of the introduction of the Euro. For example, the way in which a firm meets requirements to provide best execution may alter with the introduction of the Euro if certain brokers offer better terms in products denominated in Euros than in those denominated in national currencies.

How should firms prepare for the introduction of the Euro?

Whenever a firm introduces a new product, or alters the procedures for meeting its regulator's requirements in relation to existing products, there are compliance implications. For example, compliance departments should always be consulted at an early stage when a firm intends to introduce a new product or change its procedures. The Euro is a development with major compliance implications, for the simple reason that products and procedures will change. There are a number of ways in which firms need to deal with these implications:

• Firms should review their business strategy. The Euro may result in change of economic and investment circumstances which should be borne in mind when advising clients.
• Firms should review their infrastructures to ensure that they are able to cope with the introduction of the Euro. For example, firms must be able to account to clients and the regulator in relation to products which may be denominated in Euros.
• Firms need to review their compliance procedures to ensure that they remain sufficient to comply with the regulator's requirements. For example, is a firm able to promptly execute transactions in Euros, and have staff been fully trained in order to do this?

Conclusion

It is essential that firms develop robust procedures to identify and control the wide range of implications which the introduction of the Euro may have on their business.

It is also important that this process is thoroughly documented. Regulators will incorporate "Euro compliant behaviour" into monitoring processes in the run-up to 1st January 1999, and therefore it is essential that firms can "prove" that they have both considered the implications of the introduction of the Euro and taken reasonable decisions in relation to those implications.