Europe’s new regulatory agenda

We had a fascinating and packed meeting at the Financial Services Club this week with David Doyle, EU Policy Advisor, discussing the challenges of the new Barosso European Parliament and their legislative drive in financial services.

David is a regular visitor to the Financial Services Club, and runs our European Financial Regulatory Advisory Group.

In a broad and wide ranging speech, he presented key views around MiFID, the PSD, Solvency II, UCITS IV, Basel III and more, as well as commentary on Jacques de Larosière’s committee and the appointment of Michel Barnier to succeed Charlie McCreevy.

Here’s a summary of the key points David made.

The Commission is taking a 'safety first approach' to regulating capital markets and market actors, and will fill in the gaps where European or national regulation is insufficient or incomplete.

The over-riding principles of their approach are that:

• All that is of systemic importance should be regulated and supervised;
• There is a need for a better well-capitalised finance industry, with less leverage;
• The Commission must leglislate to avoide the perverse incentives in the financial sector that encourage excessive risk taking or over reward;
• Supervision should have the right tools to grasp complex, inter-connected and globalised financial activities; and
• To restore trust, investors and consumers should benefit from clearer, more coherent and effective safeguards.

At this point, audience members asked lots of questions about whether the European approach would be the same as, or coordinated with, the US approach.

David’s feeling is that it is being co-ordinated on the big ticket items – risk, leverage, capital, bonuses and such like – but the rest is still open competition in terms of the way payments, capital markets and specific aspects of the market are operating, such as hedge funds.

There are then the key changes that should be introduced by the new Barosso team in the near term as a result of the Jacques de Larosière. Of these changes, David believes that the new supervisory bodies:

• European Securities and Markets Authority (ESMA)
• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)

Will be the key here.

These new authorities will have teeth, and will be responsible for ensuring that any EU member states who are not following the line of regulatory oversight are brought to order.

This will be in play within two years:

2009-2010 ►national FSAs powers strengthened + focus on harmonising national rules to reduce cross-border differences

2011-2012 ►implement Pan-EU-wide supervision via ESMA/EBA/EIOPA

and will mean that the large states who are proactively interpreting directives will be in a far stronger position than those states resisting such supervision.

In practice, this means the UK, Netherlands are going to be fine; France and Germany will have some wrinkles to iron out; other nations will get a note to say they need to fine tune some stuff; and Spain and Italy will get a large wet fish slapped around their chops.

After all, every Directive I deal with – MiFID and the PSD in particular – it’s Spain and Italy who always seem to be dragging their heels.

David also made an interesting point here, which is that not only will the new regulatory bodies have teeth to drag member states before Brussels to explain why they are dragging their heels, but also resources to assist when assistance is needed. Therefore, in the case of Sweden where their key person for transposition of the PSD left at a critical juncture, this future structure would allow the EBA – the European Banking Authority which is not to be confused with the EBA, the Euro Banking Association, that operates STEP2 and EURO1 – to provide people to fill the gaps. These people may be promoted in from regulatory authorities in other EU member states for example and, in so doing, it will fill the gaps.

David then rifled through all of the areas for legislation and key directives including:

• The Payment Services Directive
• MiFID and Market Abuse updated rules
• Capital requirements Directive III & IV
• Remuneration
• Pan-EU Supervisory Mechanisms
• Hedge Funds & Private Equity
• OTC Derivatives
• Solvency II – Insurance
• Responsible Lending & Borrowing
• Packaged Retail Investment Products
• UCITs IV
• Credit Rating Agencies

It was real insight and incredibly useful stuff.

Unfortunately, if you want to know what he said about the above, you’ll have to hire our experts in the European Financial Regulatory Advisory Group or join the Club.

It might be worth you doing that anyway as our next meeting is on SEPA!