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There has been a rising chorus of complaints about the unintended consequences of the tsunami of legislation since the Great Crash. The Commission produced a review of the “reformed Financial Sector” in 2014 but the analysis could not unravel the complex interactions that financial institutions are experiencing in practice or fear are imminent. Europe cannot possibly wait until there is a long enough run of data to prove that things went wrong several years earlier! This would defeat the Commission’s (and the whole of the EU’s) fundamental economic policy of promoting growth and jobs.
So the Commission asked for empirical evidence and concrete feedback. The remit was clear that simply trying to fight again old battles that had been lost when the legislation was enacted would be dismissed. Instead, they sought explicit examples in several fields (together with references to the exact Article):
· “Rules affecting the ability of the economy to finance itself and growth;
· Unnecessary regulatory burdens;
· Interactions, inconsistencies and gaps;
· Rules giving rise to unintended consequences.”
The response was massive - 287 replies from a wide variety of stakeholders. Many of them supplied 50 or more specific examples. The Commission hopes to have reviewed this mass of evidence by mid-year and produce some initial findings. However, even the most cursory reading of the enormous breadth of the financial services industry’s detailed responses suggests that the Commission will have much to do in sifting these comments into buckets of easy amendments, more substantial changes and a final category of `very difficult’. But perhaps the categorisation should really be into what will really benefit the economy – no matter the legislative complexity. Surely that must be the first focus of attention – however difficult.
The European Parliament’s ECON Committee voted through its report on “stocktaking and challenges of the EU Financial Services Regulation” in December and set a different tone to the review debate as it argued for a much more comprehensive and continuous review process, rather than a one-off. ECON “Calls on the Commission and ESAs to conduct regular (at least annual) coherence and consistency checks, including on a cross-sectoral basis…”.
This would be a major task as the mass of RTS and ITS move through and come into operation as it is only then that many of the inconsistencies will come into precise focus. The ECB’s response was also that “continuous assessments will be necessary to ensure that markets are able to fully play their role in the financing of the economy... where unintended impacts are identified and unjustified barriers are hampering the proper functioning of markets …. corrective measures should be envisaged while maintaining the aim of financial stability.”
Looking through the submissions by the trade associations to the Call for Evidence, some clear trends emerge:
Banking: The European Banking Federation focused on 55 issues which should “bring concrete and proactive solutions that would help to serve the real economy”. The British Bankers Association (BBA) gave a detailed 80-page response across four different themes and proposed over 50 suggested remedies.
Securities: AFME focussed on the need to avoid further restrictions on market liquidity by amending the Central Securities Depositories Regulation and re-evaluating the case for Bank Structural Reform (BSR). It also requested that the Commission carefully reflect before imposing any new regulatory burdens from Basel. ICMA’s response was principally on the issue of market liquidity due rules affecting the ability of the economy to finance itself.
Insurance: The response from Insurance Europe included concerns that emerged from Solvency II; PRIIPS; insurance distribution directive (IDD); EMIR and the Financial Conglomerates Directive (FiCOD). Their specific concerns included: Solvency II valuations leading to artificial volatility by ignoring the link between insurers’ investments and the liabilities they back thus dis-incentivising investment in long–term assets; an extremely tight implementation period for PRIIPs; unnecessarily high cash needs created by the clearing obligation in EMIR. They also highlighted the risk that the International Association of Insurance Supervisors (IAIS) plans might diverge from Solvency and endanger 15 years of efforts.
Asset management: EFAMA provided over 40 examples that are wide-ranging and included the regulatory and policy trends from the European Supervisory Authorities. It mentioned specifically the need for realistic implementation timeframes. The UK’s IMA commended the high standards BUT…expressed concern that existing conflicts of interest and inducement rules are not driving a better consumer outcome and that regulation of banks and markets is impairing the efficient functioning of financial markets. However, the alternative fund managers (AIMA) believes that existing regulation is not achieving its intended policy objectives and pointed to the need to consider carefully the reform of market infrastructure to support liquidity as agreed standards are implemented.
Accounting: FEE’s response flagged the profession’s concerns and views on the impact of legislative requirements in the fields of auditing, accounting, financial reporting, and tax.
