14 May 2019

151th Brussels for Breakfast – CPD Notes

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Chartered Institute of Securities and Investment (CISI) and with co-presenters Rachel Kent )Hogan Lovells) and Peter Snowdon (Norton Rose Fulbright).

Highlights from the “Brussels for Breakfast” meeting

Brexit fatigue may have set in, but the flow does not stop – as evidenced by FCA chief Andrew Bailey giving speeches. What should be the City’s relationship with the EU after Brexit (assuming it happens)? First, any customs union will not help banks, so we fall back on the much-discussed questions of mutual recognition and/or equivalence. Bailey highlighted the strong need to come to a common agreement on the rules of the game – and the European Shadow Financial Regulatory Committee was in strong agreement. But the question is what rules? Bailey seemed to be advocating a more principle-based system with the outcome used as the test of equivalence. But he went on to say that British regulation unfettered by the EU would probably differ from the current system.

However, participants pointed to the UK habit of gold-plating more liberal EU directives. The financial conduct regulators might be able to agree but the prudential regulators may take a very different of inadequately capitalised branches on their territory. The debate has a long way to run!

The debate was underlined during discussion of a speech by ECB Vice President de Guindos, who re-iterated the need for further reform of the EU’s banking structure. Profitability – RoE – has now doubled in the past two years but only to 6% which remains well below the typical cost of capital of 8-10%. An unsustainable banking sector cannot provide the private-sector buffer that the EU economy needs for unexpected shocks. Total capital may now be at 18% as we enter the seventh year of expansion but the nexus between and return to lowgrowth and weak banks has not gone away.

MiFID’s unbundling of research costs has produced some bizarre results: the European fund managers who pay for their research seem to have under-performed significantly versus their US counterparts who still charge clients for their research costs. The problems thrown up by the Benchmark Regulation are also compounding to the point that even the auditor feel there has to be some temporary help on hedge accounting for 3-month LIBOR contracts that will now be hedged with overnight money rates. No-one could answer the question of what would happen to the inherent mismatch at a time of rising rates.

“Green” securities triggered much debate as the Commission seeks to define exactly what the “ESG” terms mean in practical terms. Both ESMA and EIOPA have submitted formal advice. EFAMA wants to limit the term just to environmental sustainability but Insurance Europe warned against making it too narrow.

However, we had to discuss the European Parliament elections – now just a week away - and concluded that the EPP/S&D are indeed likely to lose their majority but that the mixture of Eurosceptics/Left/Right extremist may make a lot of noise but they may struggle to exceed 30% of the Parliament so will not threaten sensible legislative activity.

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© Graham Bishop