RegTech Intelligence

Taking stock of EU financial services regulation

In December of 2015, the European Parliament released a reporton stocktaking and challenges of EU financial services regulation” and, on Tuesday 19 January, the text was adopted by a majority vote of the Parliament in Strasbourg.

So, what does it say?

Compiled by the Committee on Economic and Monetary Affairs (ECON), the report assesses the best way forward towards a more efficient and effective EU framework for financial regulation and a Capital Markets Union.  The report offers some important insights into the perceived problems currently faced by the sector and it makes some suggestions that could be adopted in the future to mitigate these issues.

The Parliament’s report asserts that the aim of EU Financial Services regulation is to serve the real economy and, it is in this way, that regulation should be coherent and proportionate.  So, with that in mind, let’s look at five of the key points highlighted.

Regulatory complexity

One of the primary concerns outlined by the report has been the move towards increased complexity in the approach taken by regulatory bodies.  It says that regulations are too dense, too numerous and are attempting to cover too vast an area.  There is recognition that this development has stemmed from the need for a strong regulatory response to the ramifications of the financial crisis.  EU lawmakers are now at a point where they need to pay attention to possible contradictions and overlap between different legislative initiatives, as well as the depth and breadth of the regulatory scope.  This complexity must be addressed to avoid a negative imposition on stakeholders, including non-financial end-users of financial products, who are now finding themselves subject to the latest wave of regulatory action.

Legislative exemptions

There is also a specific focus on the operation of EMIR in the report.  In particular, it is argued that the exemptions for non-financial companies, which EMIR established, have effectively been undone by the Capital Requirements Directive and Regulation with regard to the application of the Credit Valuation Adjustment charge.  It goes on to recommend that such exemptions and specialised provisions for non-financial companies need to be preserved and promoted in order to limit the administrative burden and ensure that valued capital for future investment is not reduced.

Ensuring the protection of investors

Investor protection has also been a priority in terms of the provision of all relevant information to an investor prior to the sale of a financial product.  The emphasis has been placed on the quality and comprehensibility of the supplied information prior to the decision-making process.  The current trend has been towards large volumes of information, whereas it is felt that a balance needs to be struck whereby the appropriate information, including a summary of the risks, is provided in a format that is easily digestible yet provides a comprehensive overview.  Digitalisation of information, where accessible, could offer a long-term solution and further exploration of technological systems should be encouraged.

Institutional transparency

There has also been a call for the Commission to be more transparent when making changes to draft documents, for example draft regulatory technical standards (RTS) and implementing technical standards (ITS).  In particular, it is stated that any amendments to these draft documents should be clearly communicated to the co-legislators and stakeholders.  There has also been a clear demand for the Commission and the ESAs to complete regular coherence and consistency checks on adopted legislative measures, as well as including a cross-sectoral assessment and a detailed analysis of draft legislative acts.  This should ensure that coherence and consistency of regulatory objectives is maintained, and create a regular opportunity to step back and do a stocktake of the current regulatory framework.

Encouraging small and medium enterprises (SMEs)

Throughout the report, one of the main points of focus has been SMEs and the importance of encouraging their growth and development.  It has been acknowledged that there needs to be a stronger emphasis on diversifying traditional funding channels, as the current reliance on banks may not be the most conducive to fostering the development of these creative and innovative enterprises.  Similarly, it is put forth that regulators should specifically consider the impact of regulatory measures on SMEs, as complex and costly specifications can impose an unreasonable burden on these stakeholders.

Now that the resolution has passed, its findings will be brought before the Council and the Commission for an assessment before the results are presented back to the Parliament.  The report specifically calls for the Commission to complete a full-scale review of a broad range of topics relating to EU financial services before the end of 2016.  This review process should facilitate an open dialogue about the current state of the current regulatory space, however, it remains to be seen whether the outcome will give rise to any systemic shift in the process of regulating the financial services industry.

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