03 June 2013

May 2013 Financial Services Month in Brussels - Graham Bishop's personal overview

Country-Specific Recommendations for 2013 cover a wide range of issues, including public finances and structural reforms in areas such as taxation, pensions, public administration, services, and the labour market, especially youth unemployment. The Commission proposed an extension of the deadlines for correcting the excessive deficit in six countries: Spain, France, the Netherlands, Poland, Portugal and Slovenia. It recommended that the Council abrogate the Excessive Deficit Procedure (EDP) for five countries: Hungary, Italy, Latvia, Lithuania and Romania but recommended that the Council decides that no effective action has been taken by Belgium to put an end to the excessive deficit and that the Council gives notice to Belgium to take measures to correct the excessive deficit.

Commissioner Barnier confirmed that the Commission would propose a single resolution authority, and it "will do more than just coordinate work between national authorities. We have seen the limits of coordination". Moreover, he does not believe a change to the treaties is needed for the SRM to be set up.

The ECB expects several non-euro area Member States to join the SSM as the negotiations on the SSM Regulation have satisfactorily addressed most of their concerns. However, some countries seem to require that more clarity on the functioning of the SRM is provided before they reach their final decision, in particular on the issue of a common fiscal backstop and how “out” Member States could contribute to or benefit from it. The ECB also argued that it is essential that the SRM comprises a strong and independent Single Resolution Authority and single fund financed by ex-ante and risk-based contributions from the banking sector itself. To remove any doubts over resolution financing, the fund should be able to draw on a common backstop if needed – possibly an ESM credit line.

However, France and Germany announced they will take ambitious initiatives to define the next steps of the deepening of the Economic and Monetary Union (EMU) by presenting a joint contribution to the European Council in June. The Bank Recovery and Resolution Directive as well as the Deposit Guarantee Directive should be concluded by the Council by the end of June 2013, to be followed by the approval by the European Parliament. Main features for the operational criteria for direct banking recapitalisation scheme should be decided by the end of June 2013 in parallel with the negotiations on the Bank Recovery and Resolution Directive and the Deposit Guarantee Directive. As soon as these Directives are finalised with the European Parliament, the operational criteria for a direct banking recapitalisation scheme should be finalised as well.

MEP Hökmark – Rapporteur on the BRRD – said that when a bank is taken into temporary public ownership, for instance, moral hazard should simultaneously be addressed by wiping out previous shareholders and bailing in unsecured debt-holders to the largest feasible extent, with uninsured deposits being preferred in the hierarchy. This preferment seems to be increasingly accepted by Europe’s politicians but, inevitably, there will be profound structural changes in the nature of Europe’s financial system. Have the EU institutions really thought this through?

Tax is one of the most sensitive areas of EU policy yet suddenly action is happening in several areas – perhaps another sign of the increasingly close political cooperation, even if driven by economic necessity. FTT might have been held out as one of the success stories except that support seems to be dwindling rapidly. The inherent defects in the design are becoming ever more apparent as potential tax-payers study the details and realise the scale of their potential payments. A Deutsches Aktieninstitut study of 24 large German companies estimated costs of €0.6-1.5 billion. “Politicians obviously don’t realise what damage the FTT would cause for companies in the real economy.” Nine associations wrote to ECOFIN: "We hold serious reservations that policymakers are persevering in putting forward a measure that can clearly unbalance and even harm the internal market for financial services and distort competition among operators". Given the extra costs on the public sector, the net yield of the tax is being questioned by central bankers and government debt managers, leading to Press reports that it may be delayed or substantially scaled back in scope.

However, the review of the savings taxation yielded results as ECOFIN gave the Commission the go-ahead to negotiate with Switzerland, Liechtenstein, Monaco, Andorra and San Marino. But the sudden swing in public opinion against aggressive tax-planning was swiftly seized upon as the European Council agreed to accelerate work in the fight against tax fraud, tax evasion and aggressive tax planning. Priority will be given to extending the automatic exchange of information at the EU and global levels. The Commission intends to present a proposal before year-end for the revision of the "parent/subsidiary" Directive, and is reviewing the anti-abuse provisions in relevant EU legislation. ECOFIN welcomed that France, Germany, Italy, Spain and the UK have agreed to work on a pilot multilateral information exchange facility using the model agreed with the US – aiming to create a new global standard.

The US Securities and Exchange Commission voted unanimously to propose rules and interpretive guidance for parties to cross-border security-based swap transactions when a transaction occurs partially within and partially outside the US. Mary Jo White, SEC Chair, said: “Market participants need to know which rules to follow, and I believe that this proposal will serve as the road map”. Separately, the European Commission urged the CFTC to extend its exemption until leaders of the G20 have agreed international principles on cross-border swap rules. Otherwise, ESMA’s Maijoor and the Commission’s Faull said in a letter that “EU firms would face huge legal and operational uncertainty”.  AIMA stated that, if untreated, some of the conflicting rules may prevent counterparties from complying with either regime, leading to market fragmentation along geographical boundaries. However, these effects could be mitigated for cross-border transactions by firms being allowed to follow the rules of the jurisdiction of one, rather than both counterparties under a concept known as ‘substituted compliance’ in the US or ‘equivalence’ in the EU.

EIOPA’s Bernardino said: "I believe it is still possible to have Solvency II starting in 2016… We are not expecting to have all the guidelines being complied with by all the national authorities on January 1, 2014. What we expect is that national authorities will start on January 1, 2014 to implement in their own national framework these guidelines and then we will see an evolution.” Bank of Ireland’s Elderfield remains concerned, as "The heart of the issue is whether long-term guarantee products should be subject to the same market consistent evaluation framework as other insurance liabilities under the Directive. After considerable debate there is acceptance, but by no means universal acceptance, of a compromise whereby certain annuity products that cannot be exited early and which have clearly defined and matched assets can effectively be carved out from the full rigour of market consistent valuation, by allowing a matched premium adjustment.”

Commissioner Barnier said he will make a proposal for a Directive to improve the governance and transparency of occupational pension funds this autumn but it will not deal with the solvency of pension funds. Effectively, this is being shelved – probably until 2015. Matti Leppälä, PensionsEurope Secretary-General, said: “Commissioner Barnier has made the right decision as it is vital to take more time for a thorough analysis of the effects of possible changes in solvency rules. The European pension funds and other IORPs have to be able to contribute to the growth of European economy and employment and the solvency rules have to enable this.”

President Van Rompuy called for strengthening public sector accounting for sound fiscal policies. "Harmonised public sector statistics are a common language and the basis for sound fiscal policy-making, both nationally and Union-wide…The importance of reliability of government accounts has been illustrated by some dramatic episodes of inaccurate reporting of deficits and debts in the run-up to the sovereign debt crisis."

© Graham Bishop