Latin American Capital Markets

170 RUBEN LEEMutual Recognition and Home Country ControlThe most ambitious legislative and regulatory approach that has been used to promoteregional capital market integration has been the combined use of minimum harmonization,mutual recognition, and home country control, developed in the EuropeanUnion.The central goal of this program is simple, but also powerful: to enhancecompetition in the European Union's regional capital market by allowing market participantsfrom any single country in the European Union to offer their servicesthroughout the European Union and to do so with only a single regulatory authorizationfrom their home country. Given the importance of the European Union'slegislative structure governing the capital markets as a potential model for Latin Americaand the Caribbean, three aspects of it are outlined here: the primary legal foundationsupporting the approach, some secondary pieces of legislation implementingit, and a range of problems to which it has given rise.Legal Foundation 6The legal foundation for the European Union is laid out in the Treaty of Rome, whichestablishes the fundamental European freedoms of movement and of establishment. 7The freedom of movement of services gives nationals who are established in onecountry (or member state) the right to provide services in other member states.Thefreedom of establishment allows a natural or legal person (namely an individual or afirm) from one member state to set up and manage a firm in another member state,under the conditions for the nationals of the second member state. A third and criticalelement of the treaty is that competition should not be inhibited in an inappropriatemanner. These legal rights can be upheld via judicial review in the EuropeanCourt. The European legal and judicial structure applies to those European Unioncountries with a tradition of common law and to those countries with a tradition ofcivil law.The freedoms of movement and establishment are not completely withoutlimits. Member states are allowed to impose restrictions on both these freedoms onvarious grounds, including that of public policy. In addition, the European Court hasrecognized a series of mandatory requirements that member states may impose inthe absence of European Union rules, even if such impositions obstruct the exercise6 This section draws on Lee (1996).7 Treaties Establishing the European Economic Community (Treaty of Rome, 1957).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub