Simple and Clear Rules, Not Necessarily in English

an Interview with Chairman Lamberto Cardia

Lamberto Cardia
Chairman of Ferrovie
dello Stato

Mr. Chairman, how can the cooperation between investment advisers in the Mediterranean be improved?
Lamberto Cardia: The stock exchange market is in every country a driving force for development, provided that it works well and correctly. In this case, the outcomes are both impressive and useful to business and investors; otherwise, the results are modest or even worse. In Europe, stock exchanges are coordinated by the CESR (European Security Regulators Commission). Starting next year, a new institution (Esma) will be established and it will have wider powers and not only those of coordination. So far, English, which has its foundation in the principles of Common Law, has been the language used for communication, in particular in the sector of finance. Obviously the English language, as well as its underlying principles of law, can be rather influential, if not relevant, in all regulated markets. The need to broaden knowledge and dialogue has been long felt to help relations with the countries where the English language is not popular and where laws are based on other legal systems. I am referring to the nearest countries such as Portugal, Spain, France and, of course, Italy. These countries have even more pervasive and significant interests in the Mediterranean. In finding direct and easily manageable connections, market supervisor authorities from these countries arranged a meeting with representatives from North African countries (Morocco, Tunisia, Algeria and Egypt) overlooking the Mediterranean. The aim of the aims of the meeting were to examine national regulations, relevant laws and points of contact or convergence in the functioning of each market to line up the most relevant points. I would like to stress an aspect of this meeting that others may consider unimportant…

Which one?
CARDIA: We talked in our own language through an interpreter, thus avoiding the uneasiness of using a technical English language, which is not culturally close or commonly used by everyone. We decided that in advance and unanimously. It was a good decision that has paid off.

Which are the specific objectives?
CARDIA: we laid the groundwork for a meeting of the laws regulating this sector between North African countries - whose legislation is still developing - and our legal system, which is strong and binding in some respects but poor in others. Certainly, we did not set ourselves immediate outcomes, but in this first meeting we began to seek a middle course between us. It was an initiative in which I was interested in joining in actively. I hope that other countries will join it, attracted by the need to seek more freedom in trade, define a common legal basis to help the development of their markets.

Which are the crucial factors and the better locations to ease this meeting?
CARDIA: The easier starting point is the idea of a market itself. In northern counties, where financial legislation complies with international standards, the concept of market is linked to the idea of an ideally regulated space where the various elements come together and interact. It is different for the countries of North Africa bordering the Mediterranean, where the market itself may not be adequately regulated. Indeed, it is often partially regulated by a legal system different from ours. However, starting from the ancestral forms of contract, where a handshake was enough, the awareness of the need for clear rules is gradually emerging, that is, a need for a properly regulated market characterized standard and equally set up laws. Certainly, it is not easy. However, these countries are on the road to develop this sector, thanks to the availability of capital in North African countries bordering the Mediterranean, especially as a result of production of oil and gas or thanks to a gradual development of the agricultural and food sector. This would help us converge towards them, to strengthen trade and common interests with simple, shared and effective rules.

Do you reckon that in the Old Continent there is a vague fear of sovereign wealth funds from countries of different culture (or religion )? Given our history and tradition of dialogue, should Italy be favoured or not in this deed?
CARDIA: At first, the influx of these funds in the markets made market operators uneasy. Indeed, they were looked or with suspicion because they were considered interested in acquiring strategic sectors or “Family silver.” Italy has progressively sought and developed the acquisition of such funds and it is now at the cutting edge because it realized that, while respecting common rules, these funds lead to economic development, instead of preventing or reducing it. When a fund purchases a participation in a large national company it must be accepted as a factor of progress and not as a concern. Of course, we must proceed with caution and follow a balanced regulation especially in the case of strategic sectors such as energy, communication, banking and insurance by clearly establishing some safe limits. However, the sovereign wealth funds investing in Italy lead to economic development and expand Italy’s relations not just in the economic sector but even in the dialogue between civilizations. Therefore, we should not fear the influx of Islamic sovereign wealth funds. Besides, it should be of no concern for sovereign founds from other countries to invest in Islamic countries. However, there is a need for simple and clear common rules and an open-minded attitude also based on effective tools of surveillance and monitoring to be reinforced by a satisfactory system of sanctions.

It is a refrain to say that to ride out the economic crisis it is necessary to enter the global competition. Does the stock exchange market help Italian small and medium-sized companies?
CARDIA: Confidence is the key to attract capital. It is necessary that the investor provides resources reckoning that these resources will be properly used and invested and they will generate profits. Stock exchanges should then properly function, should be run by experienced staff and supervised without omission or oppression. Today, the Italian stock market reached an agreement with the LSE (London Stock Exchange) and I had regarded this agreement with suspicion. This agreement was reached with a world that speaks only English, and since then English has become the standard. Besides, the agreement is based on underling principles of common law, which is culturally and practically burdensome to [Italian] small businesses. This context is sometimes too different from ours. Besides, the agreement with the LSE has produced a gradual weakening of the Milan Stock Exchange. First, we stood back from the position of administrator, previously held by the chairman of Italian Stock Exchange Mr. Massimo Capuano, now it is the turn of Mr. Angelo Tantazzi. According to the news, the Vice-Chairman of LSE Mr. Paolo Scaroni - CEO of ENI, a man of solid and extensive experience and international importance- could be appointed to this position. I hope this will be true. Nevertheless, the headquarters in Milan has lost effectiveness: the staff has been reduced and a higher responsibility personnel is working in London for part of its time. About your question, to help small businesses seeking capital, it is necessary to bring back funds to the bank. The crisis has changed the investor’s attitude: they prefer to keep money at home to avoid the risk of losing it or to give it to the bank given the low yields... The return of confidence is therefore necessary as well as a competitive yield.

This is an argument in favour of banks
CARDIA: The Bank of Italy knows to which the extent the institutions are doing their duty in financing our business. However, to help small and medium enterprises there is a need for a functional stock exchange, simple, clear and shared rules and an ever-present and qualified staff: when an enterprise wants to be listed in the Milan Stock Exchange, it must be helped by the staff working there. Even if a small enterprise has few employees but a good patent, the representatives of the enterprise should be listened, advised properly and the enterprise should have the opportunity to grow.

The listed firms from the South of Italy are only a few. Even if there is a massive influx of sovereign wealth funds in Italy, paradoxically, the South would not benefit from them.
CARDIA: It is known that the influx of capital stock is not largely coming from the South and that there are just a few funding requests from Southern firms that are finally supported by banks.

Why?
CARDIA: the truth is that there is no practice but rather a fear of the stock exchange. If, as I said before, a partnership between the stock exchange of Southern Europe and that of North Africa was developed and if there were more of a culture of legality, which means more trust in institutions, then the potential would have been significant, perhaps huge. There would be results even in the short term.

Is there a lesson to learn as we try to ride out the crisis? Given that the indicators of economic recovery do not seem positive with regard to social aspects and employment, what kind of economic recovery are we talking about?
CARDIA: to make the rules of twenty-seven European Union countries consistent is one of the most complex tasks ever. As from 2011, three different authorities will be operational with binding power in the event of market failure or malfunction, one for each sector: banking, finance and insurance. If this helps investors to trust banks and financial markets, the result will be a new influx of capital, hoping to rely on good management. The lesson learned from the crisis is twofold: on the one hand, it is necessary to simplify and enforce the laws; on the other there is a need to consider new options, just as the closer cooperation between the stock exchanges in the Mediterranean ... should it be like that, I expect encouraging developments for our country. Otherwise… I would not go through thoughts of apprehension.

To speak English is not enough. We need more Arabic
CARDIA: The agreement with the LSE should had been reached with more responsibility from those who bought a share of the deal and then sold it (fortunately, not everyone!). Although gaining for the benefit of their budget for just one year, they weakened our “critical mass” of share and thus the strength of our representation in London. If at that time I had a magic wand, I would have used it to prevent the divestiture of share and I would have approved simple and clear rules, enforceable by the parties involved. In addition, I would have promoted the choice of a closer cooperation with North Africa. From my point of view, if no agreement with the LSE had been reached, I would have imitated the choice of Germany, a strong country that knows how to deny itself. Germany decided to reach no agreement with other stock exchanges and it was not damaged by its choice. I cannot state that Italians have had losses. However, certainly I cannot say that we had benefitted. Nevertheless, I hope that there will be positive developments in the near future, especially if the outgoing Professor Tantazzi will be substituted by a prominent public figure.

Finally, as a former chairman of Consob, you are entitled to advise your...
CARDIA: I would appeal to our financial system so that it operates better and complies with the basic laws. In addition, I would appeal to the single, small investor to whom I suggest to regain confidence and to invest a part of their savings. The manufacturing sector, which in our country is made of talented, creative (even brilliant) people who are willing to risk, will benefit from that.