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After an intense build-up through February, the “Treaty on Stability, Coordination and Governance of the Economic and Monetary Union” was signed by 25 members of the EU on 2nd March. That should mark a step change in economic governance that will restore sound public finances in due course – with first fruits being visible in the next couple of years. Those states struggling to convince sceptical markets of their intentions should be aided by the proposal from ELEC to issue joint and several guaranteed euro T-Bills with maturities of up to two years. The issuing fund would last for just four years, thus tiding the euro area over this period of intense difficulties. (Full details).
That would leave the European Commission free to devote the second half of its term in office to tackling other matters and the European Council – meeting just after “the 25” had taken the critical economic decisions – laid out its expectations for the balance of 2012: “the proposals relating to bank capital requirements and to markets in financial instruments should be agreed, respectively by June and December 2012, bearing in mind the objective of having a single rule book, and ensuring timely and consistent implementation of Basel III. The amendments to the Regulation on Credit Rating Agencies should be adopted as soon as possible.”
Commissioner Barnier himself had his agenda for the first half of his term handed to him by the G20, and the Commission is now close to completing the huge raft of legislative proposals to fulfil that mandate. So the Commissioner can now turn to setting his own agenda – for a place in the history books. He has already made clear that consumer protection and shadow banking are on his list. In 2012, the EC will present legislative proposals on transparency obligations for retail investment products, revised rules on insurance intermediaries, a reinforced framework for UCITS and occupational pension funds. But there is an even bigger piece in the financial jigsaw – the banks themselves. Hence the appointment of the Liikanen “High-level Expert Group”!
The debate about EU regulation within the City of London often seems to be somewhat detached from the mainland but outgoing FSA chief executive, Hector Sants, gave a remarkable speech: "I cannot stress enough that engaging with the European regulatory process is central to delivering financial regulation in the UK. It needs to be recognised that currently, in respect of prudential regulation, and increasingly over the longer-term in respect of conduct, the rules will be made by Europe and the role of PRA and FCA will primarily be one of supervision and enforcement. Essentially, the UK is moving to become a ‘supervisory arm’ of Europe.” All his peers could give a similar speech in recognition that the economic crisis has created a fundamental power shift within the EU. “The 25” have just signed a manifestation of that shift at the most macro level of economic governance. At the micro level of financial regulation, the political union of the euro area is already in full swing.
The need for the EU to act together is ever more apparent when negotiating with the United States. Ahead of his visit there, Commissioner Barnier wrote to Fed Chairman Bernanke about the draft Volcker rule. As presented, it has an extensive global scope which will have unintended consequences for non-US banks, markets and institutions. This was backed up by the EBF and the US-based Institute of International Bankers (IIB) who focused on the cross-border issues and potential extraterritorial effects of particular interest to internationally-headquartered banks with US banking operations.
Amongst the over-arching issues in the EU, EIOPA published an initial overview of key consumer trends and stressed that future work on consumer trends may include cross-sectoral analysis. The following three key consumer trends were identified by EIOPA Members: consumer protection issues around payment protection insurance; increased focus on unit-linked life insurance products; and increased use of comparison websites by consumers. For such consumers, the welcome news was that both Council and Parliament had agreed the final deadline of 1st February 2014 for the application of SEPA (an EU-wide integrated market for credit transfers and direct debits with no distinction between area national and cross-border payments.) Next step – mobile money!
The European Commission published a roadmap on shadow banking and the main policy objectives for the future are (i) to clarify the definition of shadow banking, (ii) to take stock of the regulatory measures already taken, and (iii) to present the possible options for addressing the shadow banking system in the EU. The Communication is related to a number of regulatory initiatives and links mainly to the Commission proposals on prudential requirements for banks (CRD IV), on investment funds (UCITS and AIFM Directives), and on securities (future Security Law Directive).
The Danish Presidency can chalk up a major achievement, as agreement on EMIR was reached by the European Parliament and the Council, after resolving the dispute about the national supervision and the role of ESMA. In line with G20 commitments, the new rules should be fully in place by the end of 2012. However, ESMA's Maijoor warned about this timetable for EMIR as the deadlines on EMIR are challenging. ESMA launched a consultation on EMIR - focusing first on the clearing obligation, risk mitigation techniques for contracts not cleared by a CCP and exemptions to certain requirements. A second part focused on CCP requirements and thirdly on trade repositories.
Much confusion has been generated by the coincidence of timing in launching a White Paper on pensions simultaneously with a review of the IORP Directive governing pension funds themselves. So Commissioner Barnier talked of a real single market for occupational pensions and clarified that he had never said that pension funds could be subject to exactly the same rules as those set out under Solvency II. Commissioner Andor, (Employment, Social Affairs and Inclusion) said: "Ensuring adequate pensions for the future is possible if we follow through on our commitments to reform. The impact of ageing is upon us - the baby-boomers are retiring… The paper puts forward a range of initiatives to help create the right conditions so that those who are able can continue working - leading to a better balance between time in work and time in retirement …”.
On the extremely vexed issue of applying Solvency II texts to pension funds, IPE magazine interviewed Bernardino, chairman of EIOPA, about revisions to the IORP and the European Commission's White Paper on pensions. “The advice on the revised IORP Directive we sent to the European Commission last week is clear and comprehensive.... Our advice is consistent with Solvency II in a number of areas such as governance, risk management and internal control where we believe due care needs to be taken on proportionality due to the differences arising in the pension fund area.
However, in other areas such as solvency, while a risk-based regime can and should be adopted by the IORPs, it should be done in a different way than Solvency II. This is the reason why we included in our advice the holistic balance sheet (HBS) approach, which is clearly different from the Solvency II balance sheet. We have looked at the risks that pension schemes have.… This explains why, with regards to the HBS approach, we recommend that the sponsor support – a very important element in the structure of many EU pension schemes – should be identified as an asset. This approach differs completely from the Solvency II measures… It is important to understand that the IORP Directive and the White Paper are two completely different work streams. EIOPA was not involved in the redaction of the White Paper.”
Graham Bishop