Transcript EU Financial Services Plan

EU Financial Services
Legislative agenda – An
Update
Financial Services Club
15 January 2013
Dr.
David P. Doyle
Policy Adviser – EU Financial Services
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Heavy ongoing EU Agenda in Financial Services
Legislation
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Regulating capital markets
and market actors
The Commission adopting
'safety first’
approach' to regulating capital
markets and market actors.
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Filling-in the gaps where
European or national regulation
is insufficient or incomplete
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More focus on Pan-EU
centralised authorisation and
supervision
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Less directives and more
regulations – assures faster
implementation
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Capital requirements
Directive IV
Remuneration and bonuses
Pan-EU supervisory
authorities
Hedge Funds and Private
Equity
EMIR: OTC derivatives,
CCPs, trade repositories,
short-selling
Deposit Guarantee Scheme
Solvency II – insurance
Packaged Retail Investment
Products
UCITs IV
Credit rating agencies
Investor Compensation
Scheme
Bank Resolution Framework
Regulation
Shadow Banking &
Systematically Important
Institutions (SIIs)
MiFID
Market Abuse Directive
EU Mortgage Credit
Directive
Pensions
Corporate governance
reform within financial
institutions
Insurance Mediation
Directive
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The EU response to the Financial Crisis
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All that is of systemic importance should be regulated and supervised
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Need for better capitalised finance industry, with less leverage
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Perverse incentives in the financial sector should be tackled
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Supervision should have the right tools to grasp complex, interconnected and globalised financial nature of activities
Restore trust, investors and consumers should benefit from clearer,
more coherent and effective safeguards
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The European Central Bank – the new sheriff in town
The Single Supervisory Mechanism – what powers
will it have?
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Monitors capital, liquidity and leverage
requirements
Authorises and revokes ban licence
Enforces recovery plans
Conducts stress tests
Approves bank mergers & acquisitions (domestic
and cross-border)
Supervises early intervention in case of breaches
of prudential rules (recovery plans, intra-group
financial support arrangements, etc.)
Empowered to request information directly from
banks, conduct office visits, investigate
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Irish EU presidency – focused timetable
going forward
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Key legislative texts to be ratified before the end of
2013 …
• Reaching consensus between EU Parliament and
Council on CRD IV –
• Banking Union package (especially the EBA and ECB
Regulations)
• Bank Resolution Directive
• EU-wide Deposit Guarantee Scheme
Other “priority files”…
• Progress on Markets in Financial Instruments Directive
(MiFID/MiFIR)
• EU mortgage credit directive.
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Liikanen Report (2 October 2012)
Strengthen capital levels, especially model for
measuring risks in trading book assets and real
estate related loans.
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Separation of activities based on an assessment of
a firm’s recovery & resolution plans or a mandatory
separation of proprietary trading and other high risk
activities.
Scope
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All bank’s with assets held for trading and available
for sale exceeding :
(i)
a relative examination threshold of 15-25% of the
bank’s total assets or
an absolute examination threshold of EUR 100bn
(US$ 129bn, £80.7bn).
(ii)
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Supervisors would determine the need for
separation based on the share of assets to which
the separation requirement would apply
The trading entity
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cannot engage activities mandated to the
deposit bank - banned from holding any
deposits
- cannot fund itself with insured deposits
- not allowed to supply retail payment
services.
- Deposits, and the explicit and implicit
guarantees they benefit from, would no
longer support trading activities.
■ Legally-separate deposit bank and
trading entity can operate within a bank
holding company structure, but must be
capitalised and funded on a stand-alone
basis.
■ Bail-in: powers to write down claims of
unsecured creditors or convert debt claims
to equity
■ Remuneration: move to long term
incentives via bonuses paid in bail-in type
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bonds.
The EU Capital Requirements
Directive/Regulation IV
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Council vs. Parliament divergences
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Flexibility for national regulators to raise capital charges: > 3
- linked to extra capital buffers for large banks (SIIIs)
- MEPs want more prescriptive rules
• Bankers’ remuneration: 1:1 ratio; no shareholder
involvement, majority MEPs favour caps.
• 76% risk weightings for SME financing above €1m or
€2m?
• Liquidity coverage ratio – observation period before
LCR requirement in 2015
• Incorporating the proposed Single Supervisory
Mechanism: role of ECB vis-à-vis home/host
supervisors, and EBA?
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Agenda in the retail investment space
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Insurance Mediation Directive (IMD)
Packaged Retail Investment Products (PRIPS)
Reform of the EU Pensions Regime
Markets in Financial Instruments Directive (MiFID)
 “European consumers deserve better. They need reassurance that their savings, investments
or insurance policies are protected no matter where in Europe they are based “ (Commissioner
Barnier, 2010)
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European Markets Infrastructure Regulation (EMIR)
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Summary of measures agreed:
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Compulsory central clearing
Standardised contracts eligible for clearing
Counterparties subject to the clearing obligation
Risk management/margin requirements for non-cleared contracts
Reporting Requirements
Requirements for CCPs and Trade Repositories.
Scope
All eligible OTC derivatives trades are subject to central clearing and reporting to
trade repositories.
Exemptions to central clearing and margin requirements granted to:
– Intra-group transactions subject to the opinion that such transactions are
not capable of significantly increasing systemic risk
– Pensions (for 6 years) but subject to the reporting and bilateral
collateralisation requirements during that time
– Corporates (up to a transaction ceiling to be determined by ESMA and
ratified by the EC)
– Covered bonds issued by a non-bank special purpose vehicle may be
exempt, within certain parameters
– Central banks
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Markets in Financial Instruments Directive (MiFID) – review and
update
What has changed?
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►Escalation of Scope of
MiFID I to include fixed
income, OTC derivatives
and commodities
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► Introduction of
maximum harmonisation’
framework with little or no
scope for derogations,
gaps, re-interpretations, or
Member State goldplating.
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► Investor Protection is
taken to a new level of
authorisation, supervision
and enforcement under
MiFID II.
Key characteristics
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Scope: all banks, investment firms,
certain non-financial institutions,
intermediaries, tied-agents,
independent financial advisers, etc
■ Conduct of business obligations
■ Investment advice
■ Informing clients on complex products
■ Client classification:
- eligible counterparty
- professional client
- retail client
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■ Execution quality & best execution
■ Fit and proper criteria
EC abolishing national options and discretions in
MiFID I: A “Single Rule Book” applicable to all
market players.
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MiFID review – and outcome…”less
betting, more investment”
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Latest developments
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The retention of OTFs for non-equity trades (bonds and
derivatives) only and limited to professional investors. This
will affect broker crossing networks.
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HFTs: checks, reporting and filters on orders introduced;
‘Minimum resting periods’ are being proposed to prevent
traders from ‘flashing bids’.
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Commodity derivatives - position limitations except where
there is a proven economic interest in the underlying
asset.
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Removed the ban on commissions – replace with explicit
upfront disclosures:
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3rd party payments prior to investment advice is given if there
are
If advice is given on the basis of a limited number of
instruments.
Commitments on frequency of assessment on suitability of
investments.
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New obligation: when designing new products, specify a
target group within retail or professional category with
offerings meeting their needs and ‘marketed to clients
within the target group’.
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Investment firms to obtain information about ‘the clients’
risk tolerance’.
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Packaged Retail Investment
Products (PRIPS)
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Pre-contractual product disclosure
SCOPE
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Sales practices
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KID Key Information Document:
must provide:
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What is this investment?
What is it for?
Could I lose money?
What are the risks and what might I get
back?
What are the costs?
How has it done in the past?
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What might I get when I retire?
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:Structured term deposits
Retail Investment (or mutual) funds
Closed and open-ended funds
Investments packaged as life insurance policies
Retail structured security products
Unit-linked insurance contracts …
…and the EU Parliament wants to add:
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Shares
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Bonds
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Sovereign bonds
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Bank products, i.e., term deposits, euro-denominated life
insurance, not limited to unit-linked products.
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Other savings products
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Investment products with yield linked to interest rates
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Market Abuse Directive
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Extending the scope to include ‘organised markets’ (i.e., multilateral trading facilities
or ‘MTFs’, systematic internalisers, dealer-brokers crossing networks and other
venues such as OTC trading)
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Extending scope to a greater variety of financial instruments, including financial,
energy and commodity derivatives plus spot commodity contracts, CDSs, and
emission allowances
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Introduction of prohibition on manipulation of benchmarks and market indices
(reaction to LIBOR) rate fixing scandal)
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Transforming MAD into a Regulation – less risk of divergent interpretation, gold plating and late
transposition
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Combating market manipulation through algorithmic and high frequency trading (HFT)
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Sanctioning cases where there is a failed insider dealing attempt to manipulate the market
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Informing regulators of delay in the disclosure of inside information
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Eliminating national differences to enable regulators to obtain Insiders’ Lists from issuers
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Strengthening the effectiveness of the enforcement powers of the national competent
authorities, and introducing a more robust sanctions regime to be applied to market abuse
across the EU. EC noted financial institutions tempted to engage in regulatory arbitrage when
deciding place of business/location of branches.
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Reporting manager’s transactions
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Protection and incentives of whistleblowers
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Thank you!
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[email protected]
Mobile: +33 628 69 40 40
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Published material:
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Cost Control - A Strategic Guide (CIMA/Elsevier: London, 1994/2002)
EU chapter to The Future of Finance after SEPA (Wiley: London, 2008)
EU chapter to A Practical Guide to Corporate Governance (Sweet & Maxwell:
London, 2010).
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