19 September 2017

今後の注目点は、英国のEU（欧州連合）離脱の移行措置期間、銀行同盟、MiFID II（第2次金融商品市場指令）適用等

Paula Martín/Graham Bishop

Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenter Brian Polk (PWC)

Highlights from the “Brussels for Breakfast” meeting

Transition dominated – from holiday back to work at the trivial level, but the nature of the Brexit transition was really the key topic. The UK Cabinet – or at least most of it – seems to have coalesced around the notion of a transition period lasting perhaps 2-3 years. However, most people who use the term seem to have a different concept in mind. So I began the meeting by quoting para 19 of the EU’s Brexit negotiating directives. The key sentence is “Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply.”

There is no mention of cherries to be picked, or bespoke arrangements, or EEA Lite, or any other new-fangled system. The EU’s concept seems to be “just stay exactly as you are” – but no voting rights – and continue paying! Given Foreign Secretary Johnson’s re-statement of his commitment to getting “£350m per week” back, the scene may now be set for a major rupture – within the UK Government and with the EU negotiating process. A finding by the EU 27 of `insufficient progress’ may turn out to be the last straw for many banks teetering on the brink of deciding that they must follow the SSM recommendation of prepare in detail for a Hard Brexit. Given the scale of the legal/contractual uncertainties that would be thrown up, location decisions are now imminent.

But investment firms – both buy and sell side – already have a full agenda with MiFID II, only three months away from coming into force. Many buy-side firms still seem unprepared for “best execution rules” while a surprising number of high profile investors are changing their mind about research – deciding to pay for it themselves. The new requirement that firms be able to demonstrate that their client-facing staff dealing with securities should be “knowledgeable and competent” – and continue to be so – has created surprisingly few ripples so far.

However, the biggest impact on asset managers may turn out to be ESMA proposals that limit firms’ ability to delegate key functions outside the EU. The ghost of Brexit is everywhere around the City!

*****

Key items in the rest of the month’s news included:

Theresa May, her position weaker than ever and challenged within her own Cabinet, but having regained greater powers for the Government after the Withdrawal Bill passed Parliamentary scrutiny, is set to give a ‘historic’ speech at the end of the week that Graham Bishop expects to be a “massive climb down - rather than crash over - the cliffs.” The clock is ticking while British and European negotiators seem to be worlds apart in key areas, a gridlock that has made MEPs and Michel Barnier pessimistic about the British desires to move on to trade talks in October.

All the talk in the British media seems to be about the “Brexit Bill,” whereas the EU leaders are far more concerned about the destiny of their citizens in the UK – the European Parliament published a report offering a gloomy comparison on citizen’s rights, saying that “the UK position is clearly an unacceptable retrograde step for EU citizens compared to the current situation.” A million of them have already packed up or are considering to leave the country, and EU workers returning home have made the immigration figures drop by almost a third in the last year – a side effect that is contrary to the opinion of 86% of the British public, who told authors of a study by the British Future think tank that they support high-skilled EU migrants working in the UK.

The European nationals’ decision to leave might have been spurred by a leaked  document that reveals the Government plans to deter all but high-skilled EU immigrants and cease free movement of labour immediately after Brexit. Even if this plans aim to benefit British workers and business over Europeans, they may backfire: economists halved UK largest companies’ profit growth forecasts for 2018, whereas analysis at the LSE explained why Brexit has led to falling real wages in the UK. But these figures are unlikely to impress the over 60% of Brexiteers, who told YouGov interviewers that “serious” damage to the UK economy is a price worth paying to achieve Brexit.

Ireland is proving to be a stumbling block in the Brexit negotiations, with the European Commission calling for clarity on customs on the land border and respect for the Good Friday Agreements while the British Government confirmed that Britain will also break with the customs union but secure a seamless flow of goods and services and avoid a hard border in Northern Ireland. The proposals have been slammed as not credible by the Irish foreign minister, who said Britain was trying to use that border as a “back door into the single market.” To this end, Irish PM Varadkar suggested a special EU-UK customs union, but warned that solutions had to be found quickly.

Agreeing on a financial settlement, and finding a fair and balanced formula for citizens’ rights and Northern Ireland are the – at the moment huge – hurdles that are impeding David Davis’ team to move on in October to the issue May’s Government and British business care the most: trade.

UK-EU trade of financial services after Brexit would be divided over two paramount issues: the loss of passporting rights and the fight over the lucrative business of clearing of euro-denominated derivatives. The International Swaps and Derivatives Association warned against EU lawmakers’ proposals to relocate European clearing to countries within the EU, saying that a “CCP location policy would increase costs for market participants and create a more fragmented and less secure clearing house landscape.” The drive to gain overseeing of euro-clearing market unilaterally may also be considered “a violation of trust and co-operation” by the US’ Commodity Futures Trading Commission.

But even if relocation of clearinghouses and EU supervision proposals – to be discussed this month - may threaten a trillion-worth business, it might be the only option for the EU27 to minimise stability risks: “the sheer magnitude of a potential CCP failure could de-stabilise the EU27’s financial, economic and eventually political systems – a massive infringement of their sovereignty by the UK,” as written in Graham Bishop’s evidence to the House of Lords EU Committee on Financial Affairs on Financial Regulation and Supervision following Brexit.

The City has grown tired of delayed clarity and has taken ESMA’s warning into account: firms have started to put Brexit plans into action and have presented to the Government proposals for a 'mutual access' trade pact between Britain and the European Union as a feasible option to allow cross-border business post-Brexit, Reuters reported.

Ambiguity over the financial landscape after the UK breaks with the EU poses greater regulatory problems and AFME has denounced that market participants are having to take important decisions amid considerable uncertainty: it is yet unclear whether British and European traders will operate under the same financial services rules after Brexit, while ESMA has suggested that national regulators should take a tougher line on policing the asset management sector after Brexit – a move that might make it harder for British traders to comply with the AIFMD and UCITS Directive after their review earlier next year.

Banks based in Britain will have to shape up faster if they want to avoid the severe risks of a cliff-edge Brexit as depicted by the Bank of England’s Woods and underpinned by consultants Oliver Wyman, whose findings warned that Brexit will push up costs for banks by as much as 4% and their capital requirements will rise by up to 30%. Furthermore, they have been urged by the ECB to speed up their relocation planning if they want to avoid severe disruption at the departure date.

UK’s digital economy might be another casualty in the run-up to Brexit, and Britain is pushing to closely mirror the EU’s data protection laws - the EU General Data Protection Regulation (GDPR) represents the most significant change in global privacy law in 20 years - to assure the potential £240bn sector. But the move has found a major hurdle in the UK’s beefed-up surveillance law, which seems to violate EU fundamental rights and will cause problems for any eventual arrangement on data flows post Brexit. 

Ambiguity extends to Brussels, The City envoy recognised in a leaked memo: European leaders haven’t got a clear vision for Brexit and care more about preserving their integrity as a bloc than about finding “long-term solutions” to the issue. Their concerns for keeping the single market wholeness go as far as ignoring the interests of European business that trade with the UK, said Jeremy Browne. 

Brexit is being treated like a secondary issue compared with European leaders’ plans to revamp the EU institutions and give another push to the drive for bigger integration: a renewed sense of European confidence marked the State of the Union’s speech, titled “Wind in our sails”, in which the Commission President Jean-Claude Juncker stressed the idea of the bloc taking “a democratic leap forward” in unison and at a single speed and mentioned Brexit as a sad matter only at the end of his address. Good indicators in GDP, volume of retail trade and unemployment shored up a nascent Economic Sentiment in July. Graham Bishop responded to the European Commission Reflections on Deepening EMU proposing the “Eurobills” as a safe asset that blends fiscal rules progressively with market discipline.

A transition period to land Brexit smoothly has been backed by the majority of the British voters, however authors at CEPS have studied the case and argued that the only workable way forward for a Brexit transition is an extension of the two-year negotiation period. In the end, Brexit might not even happen, Liberal Democrat leader Vince Cable has said: research by Morgan Stanley predicted there still remains a 10% chance that Brexit will be reversed. 

Banking Union

European banking has made considerable progress in the past few years – with the EBA CRDIV CRR Basel III monitoring exercise showing further improvement of EU banks capital leverage and liquidity ratios, but its profitability remains weak, posing risks for financial stability, the IMF’s latest Global Financial Stability Report stated. Two new EBA reports showed that banks funding plans paint an optimistic outlook for growth whilst high NPL levels combined with more thinly capitalised banks remain a drag on EU banks new lending.

Will the banking union help reduce risks and rise profits? Deutsche Bundesbank's Andreas Dombret examined four recent examples of European banks running into difficulties and concluded that “closing the gap between national insolvency rules and European resolution rules is a major issue that should be addressed as a matter of urgency.” Some of these cases were also pointed out by the head of the eurozone’s Single Resolution Board, who urged the EU to tighten restrictions on when national governments can pump taxpayers’ money into failing banks. The EBA published its final draft ITS standards resolution authorities should follow when informing the EBA of the minimum requirement for own funds and eligible liabilities (MREL) that have been set for institutions under their jurisdiction.

The BIS updated and enhanced its statistics on cashless payments and financial market infrastructures in the 24 jurisdictions which are members of the Committee on Payments and Market Infrastructure (CPMI), while the European Payment Council illustrated the applications in payments of blockchain technology. Lawmakers are keeping a close eye on new technologies applied to financial services: the Basel Committee issued a consultative document to assess the implications of Fintech for banks and supervisors.

Capital Markets Union

EFAMA supported the conclusions of the European Post Trade Forum (EPTF) report and welcomed the launch by the European Commission of a public consultation to seek views on remaining barriers in post-trade markets in the context of the Capital Market Union.

MiFID II implementation is set to start in January 2018, and ESMA updated its Q&A to address all doubts. But only 6 per cent of asset managers are ready for MiFID II best execution standards, according to a new survey carried out by Liquidnet. Asset managers have been warned that they may miss the deadlines for MiFID II and PRIIPs as they’re too focused on the end of year regulatory starting point and ignoring full preparation time.

ESMA published the responses received to its consultations on guidelines on CCPs conflict of interest management and on trading obligation for derivatives under MiFIR.

Clients Union

The European Supervisory Authorities published further guidance on the requirements for Packaged Retail and Insurance-based Investment Products (PRIIPs), while the European Commission laid down rules for an Insurance Product Information Document (IPID) that will allow consumers to have all information necessary to make an informed decision when buying insurance products.  The UK government published new rules for insurance-linked securities (ILS) to “ensure that UK gets a share of this rapidly growing market”.  

The ethical challenges posed by the digital technology need to be addressed urgently, according to a report by ACCA that raises questions about how prepared businesses are to face ransomware attacks; crypto-currency transactions; intellectual property disputes and customer privacy. EBF responded to the EBA draft recommendations on outsourcing to cloud service providers.

Corporate Governance/Accounting

The ICAEW released a Briefing paper for analysts and other market participants on IFRS 9 that described how the new accounting standard will require banks to show their losses earlier than in the past.  It also reported on the difficulties met when collecting data on several topics investigated in order to study international differences in IFRS practice. The Global Public Policy Committee (GPPC) published a paper on the auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9.

The European Banking Federation responded to the consultation of the Financial Stability Board on “Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices.” The IAESB extended the deadline to comment on its ED on Continuing Professional Development.

The UK government issued its White paper on corporate governance reform. The proposals were hailed by the FRC, whilst the Pensions and Lifetime Savings Association (PLSA) highlighted that 86% of pension funds believe that executive pay in listed companies is too high.

Anti-Money Laundering/Market Abuse

ACCA responded to the UK Treasury’s current review of anti-money laundering (AML) supervision, which has called for a new Office for Professional Body AML Supervision (OPBAS) to oversee the AML supervision exercised by the professional bodies in the legal and accountancy sectors. ALFI responded to the ESAs’ consultation on a draft joint RTS on measures to take to mitigate AML/CFT risks where a third country’s law does not permit the application of group-wide policies and procedures.  

ESMA updated its Questions & Answer document regarding the implementation of the Market Abuse Regulation.