RegTech Intelligence 
Following the announcement of a landmark deal on international cooperation over tax avoidance last week, Tuesday saw the signing of a transatlantic pact on data transfer. Even when the EU are in the process of stocktaking the cumulative effects of regulation so far, there is clearly no break in the ongoing pace of financial markets regulation. We have seen developments from new capital buffers in the UK, digital market reform in China and continued progress in the EU Banking Union’s Single Resolution Fund. MiFID II continues to be a major worry for firms awaiting further detail, but it does seem this might now be just round the corner.
Trading
Research published by ESMA last week, revealed that 1 in 7 EU-regulated UCITS funds are closet trackers, meaning that they make their investment decisions by closely following stock market benchmark indices rather than using their own expertise. ESMA have now issued a statement on this and a subsequent warning to UCITS investors that they may be exposed to a different risk-return profile to what they had expected when paying fees.
The latest information on MiFID II has suggested that an official commission proposal for a one-year delay can be expected this week, with the long-awaited Regulatory Technical Standards likely being published in March and the Delegated Acts around the end of this month.
Structural
The announcement of the EU-US privacy shield this week – the follow-up attempt to allow businesses to transfer personal data on EU citizens to the US without compromising EU human rights laws – marks an important step in the easing of personal data transfer legal issues that have been hindering multinational operations. The agreement may have set out some broad principles for US national authorities to protect EU citizens’ data, but the specific requirements regarding monitoring and supervision are still missing. Our full analysis of the story can be found here.
The new EU financial regulation commissioner’s mandate to take a step back from implementing reform and instead explore the cumulative impact of regulation so far, and the opportunities for streamlining, have seen him publish a call for information from the industry to help him understand the effects. This week there has been no slowdown in the feedback and the key trend seems to be that – in the best case – EU regulation needs a rethink, with a complete overhaul as the worst case. This is not to say the EU’s response to the financial crisis has been unsuccessful, but some would say that the overlapping of regulations has created an environment of reduced liquidity and increasingly unnecessary costs of compliance as deadlines have become splintered and uneven. It should be interesting to see the compiled feedback from this call for information when the report is published in a couple of months.
The EU Single Resolution Fund (SRF) is now moving a step closer to being up and running, as the Single Resolution Board announced this week that the transfer of €4.3 billion from the national resolution funds to the SRF is complete. The next step is for EU institutions to be notified of their ex-ante contributions and to transfer them no later than the end of June this year. But there are still many national political barriers that remain for the SRF to be the sole answer to a bank-funded, rather than taxpayer-funded, bailout.
Risk
The EU last week experienced its first sector wide stress test for pension funds. In particular, the Belgian occupational funds fared well, citing the presence of strong sponsors and substantial buffers. EIOPA concluded that EU pension funds pose a lower risk of passing on financial shocks, as the links between the sector and other financial institutions were limited.
The Bank of England have set an additional capital buffer (the systemic risk buffer) for systemic financial institutions, in order to increase the resilience of the firms that would affect the economy the most in a downturn. Under this new buffer, systemically important institutions should hold enough equity to absorb substantial shocks and, thus, retain liquidity provision to the market during times of economic stress.
Financial crime
Unruly activity in China’s P2P lending market has been rippling through the entire economy. While China’s market share of the industry is the largest in the world, due to the high returns offered, the sector is fraught with mismanagement and fraud. A combination of explosive P2P growth and a decelerating economy have led to enormous collapses, such as one lender who owed $7.6 billion to 900,000 investors. In December, the Chinese regulator revealed that, of more than 1,000 P2P lenders, 30% of the platforms were found to have problems. The recently announced regulation for this market is, therefore, very much a welcome policy.
Another week, another fine. This week the PRA’s target was Milburn Insurance Company, with a sum of £2,863,066, and an additional fine and ban for its CEO, Colin Mackintosh. The reason behind this was a significant failing of systems and controls when the business entered into a contract that gave the counterparty significant control rights over its operations. Using a single reinsurer for all their business, it was to be expected that, when the reinsurer stopped paying claims, there was no capital left for Milburn to pay its own policyholders.