03 July 2013

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

The European Council meeting of 23/24 June was relatively uneventful as all the fireworks had taken place in the preceding two weeks when decisions were taken on the ESM’s ability to undertake direct bank recapitalisation and a common position was reached by Council on the Bank Recovery and Resolution Directive (BRRD). Moreover, only the most formal details remain to be settled for the Single Supervisory Mechanism (SSM). So the agenda of the meeting seemed rather unambitious but the significance of the event will reflect the behind-the-scenes struggle over the exact mechanics of the Single Resolution Mechanism (SRM).

Muddling through to Banking Union may now be inevitable. The euro area seems to have suddenly (and perhaps inadvertently) plunged into deep and dangerous constitutional waters. If Germany will not accept the European Commission as the Single Resolution Authority and in a way that would shut out a challenge in Karlsruhe, then the success of banking union will hinge entirely on the robustness of the Asset Quality Review (AQR) and stress tests during the 12-15 months. So the onus for any backstops/resolution will rest firmly on the existing national mechanisms/taxpayers.

Financial markets may become restive at such a lengthy delay in finding a solution that supports growth, as well as with the manifest absence of a robust process. If growth resumes as expected in the second part of 2013, then all could be well. The next 12-18 months promise to be nerve-wracking for many stakeholders in the ‘European vision’. (Link to full comment on June Council.)

EP President Schulz reminded the European Council that the European Stability Mechanism must also be managed in accordance with the Community method. It seems unlikely that the Parliament will allow power to shift from that Community method to an inter-governmental system. He also criticised the lack of ambition when “the ESM is to be given funding of €60 billion for bank recapitalisation, but according to reliable estimates the bad loans on bank balance sheets amount to more than €1 trillion”. Concerns about such numbers underscore the need for the AQR to be robust and to settle worries about bank balance sheets once and for all.

The EU launched historic negotiations for an unprecedented Transatlantic Trade and Investment Partnership (TTIP) with the US. Just launching the negotiations was seen as a sign of strong political will on both sides.  For financial services, there are many major topics to be discussed and Commissioner Barnier pointed out that the EU and the US have developed separate regulatory regimes for derivatives: "The next challenge", he says, "is to use those reforms as the foundation for a single, global framework". Contrary to what some US critics have said, EMIR is broader in scope than the Dodd-Frank Act and in many ways, the EU rules are stricter.

All G8 leaders seized and reinforced the momentum in the global fight against tax evasion and tax fraud, sending a powerful signal that they are ready to take action including via promoting automatic exchange of information - already the EU norm for savings income - as a global standard and introducing country-by-country reporting by multinational companies to tax authorities.

The proposed amendment to the Administrative Cooperation Directive foresees the automatic exchange of information on other forms of income from January 1, 2015. These are: employment, directors' fees, life insurance, pensions and property. The revision seeks automatic information exchange of dividends, capital gains, other financial income and account balances. That will mean that Member States share as much information amongst themselves as they have committed to doing with the USA under the Foreign Account Tax Compliance Act (FATCA). However, AmCham EU expressed deep concern over an extension of tax reporting.

The Financial Transaction Tax (FTT) seems to be receding further into the distant future – potentially delayed by at least six months, as participants are increasingly concerned about the impact on sovereign bond markets, as well as on pension funds and personal savings. Despite many meetings, they remain divided on fundamental issues, such as the scope of the tax and how to distribute the revenue. Nonetheless, the EP’s ECON Committee stood by its guns in supporting the Commission's proposal for a wide-scope tax.

Commissioner Barnier also welcomed agreement on the Market Abuse Directive as "an important step in restoring investor confidence in the integrity of Europe's financial markets. Following recent scandals on interest rate, commodity and currency benchmarks, investors will be reassured that manipulation of benchmarks is prohibited and subject to strict sanctions." The ethics of key financial market participants were also questioned in the UK Parliamentary Commission on Banking Standards’ Final Report, 'Changing banking for good'. The report outlines the radical reform required to improve standards across the banking industry and proposes personal accountability, backed up by licensing and criminal sanctions, including jail.

The report also said auditors and accounting rules "fell down in their duty" to ensure that shareholders received accurate information. This view seems to be accepted by nearly two-thirds of the 300 investors surveyed by ACCA, who say that managers have too much discretion over the financial numbers they report. Worryingly, 45 per cent identified the annual report as being of no use. 

Even as Solvency II grinds on, insurance regulators are locked in a dispute on a proposed global capital standard from the International Association of Insurance Supervisors (IAIS). This would create a common framework (known as ComFrame) for the supervision of internationally active insurance groups (IAIGs) and regulation of global systemically important insurers (G-SIIs). But this is not the only international pressure on insurers. Insurance Europe welcomed the IASB’s Insurance Contract proposals as a starting point for the measurement and presentation of insurance contracts. Moreover, Insurance Europe said that in revising the proposals for the accounting for insurance contracts (IFRS 4 Phase II), the IASB had gone a long way towards addressing the significant concerns raised by insurers since the original draft in 2010.

The Commission welcomed EIOPA’s report on Long-Term Guarantee Assessment for the insurance sector  and considers that the findings should form the basis for discussions to enable a deal to be found on Omnibus II this autumn. However, Insurance Europe argued that EIOPA’s assessment showed Solvency II adjustments are essential to avoid unnecessarily damaging insurers' ability to provide long-term guarantees and invest long term.  EIOPA Chairman Bernardino stated: "This year will be a crucial year for Solvency II …we are not anticipating Solvency II, but preparing supervisors and undertakings for the new regime in a consistent way.. We will issue Guidelines that will ensure that national supervisory authorities will put in place certain important aspects of the new prospective and risk-based supervisory approach from the 1st of January, 2014."

Graham Bishop

© Graham Bishop