The regulations we need to watch over the next year, and their impact on financial services. Story by Chris Skinner.

We had a fun session of the Financial Services Club this week, in light of the lack of clarity on Brexit from the UK government. The discussion was our regular New Year kick-off meeting with special guest David Doyle, sage of all EU regulations affecting financial services. David provided us with great insight into the key banking and insurance changes ahead, but I wondered throughout whether we could be bothered.

The reason being that we’re leaving. However, even if the UK exits, it will probably be in our own interests to implement all EU regs in financial services. Why? Well, Switzerland does for this very reason: it makes it easy to be a trading partner. In fact, it wouldn’t surprise me if we do end up retaining passporting, but only for as long as we continue to lead the implementation of EU regs. That’s what the UK has tried to do for the past 20 years, and if we continue we may well maintain our role as the financial hub of Europe. Just a thought.

Anyways, in terms of the regulations we need to watch, here’s my interpretation of David’s speech. We have entered the six-month presidency of the EU under Malta from 1 January 2017. Previous presidencies, with the most recent being the Netherlands and Slovakia, have different priorities, and the Maltese priorities are driven by the objective to restore trust in the EU, with a need for a dialogue and reflection on the EU’s future as well as the pertinent issues relating to migration, security and economy. As a result, during the next six months, the presidency will focus on six key areas:

  1. migration
  2. single market
  3. security
  4. social inclusion
  5. Europe’s neighbourhood
  6. the maritime sector.

This translates into some generic things that will impact financial services, including:

The Single Market Strategy covering a range of activities, including copyright in the digital space, geo-blocking regulation and a review of consumer protection cooperation rules.

General Data Protection Regulation (GDPR) is applicable from 25 May 2018, and likely to have many onerous measures such as a requirement for data protection officers, data protection processors, accountability by design and default, consumer rights to reject and be forgotten, and more.

Money-laundering or terrorism financing updates.

The specific financial services directives and regulations of import during the next year are:

The Banking Union Directives, including:

  • The European Deposit Insurance Scheme (EDIS), which creates a common European pool of funding for mutualised risk-sharing, which isn’t popular with the banks and some of the member states. The focus is on ‘risk reduction’ and ‘collateralised commitments’ in lieu of cash.
  • Securitisation Regulation, which has two key parts:
    – Capital charges for credit institutions and investment firms originating, sponsoring or investing in securitisation instruments.
    – Common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation.
  • The Revised Prospectus Directive, which means that small firms raising up to €1m of investment do not need to issue a prospectus.
  • The new Capital Requirements Directive V (CRD) that extends the requirements of Basel IV into European financial markets and includes a raft of measures, from safety leverage ratios, the Net Stable Funding Ratio (NSFR), trading/bank books, Total Loss Absorbing Capacity (TLAC) measures, proportionality rules. This in fact has created tensions between the EU interpretation of the Basel rules and the Basel Committee itself, which will be interesting to watch.

Oh, and then there’s Brexit, with the likelihood that Britain will trigger Article 50 before the end of March, which will kickstart the lengthy road of EU/UK exit negotiations. There is then a raft of other stuff that’s continuing from previous presidencies through the rest of this year …

  • Introduction of recovery and resolution measures for Central Counterparties (CCPs).
  • The mid-term review with concrete proposals on how to take the Capital Markets Union forward.
  • Bolder approaches to promoting sustainable finance, embracing green funds and measuring the risks associated with climate change.
  • Developing a genuine single market for retail financial services in an era of digitisation and lacking in cross-border appeal.
  • A review of the EU passporting regime and its possible replacement, with a revised equivalency regime for non-EU/non-EEA jurisdictions.
  • Provision of further information on certain technical standards, and clarity over implementation assumptions linked to MiFID II.
  • Continuing development of an EU-wide business insolvency regime.
  • The revamping of EU insurers’ valuation rules for their long-term liabilities.
  • Introduction of initial margin collateral requirements for EU derivative traders involved in non-cleared transactions.
  • Development of a recovery and resolution regime for insurers, to potentially include ‘bailing-in’ creditors and policyholders.

All this against a backdrop of continuing low-interest rates, continuing challenges of non-performing loans (especially in Italy and Greece) and the unclear landscape of President Trump’s position on dismantling the Dodd-Frank Regimes, which he implied during the election campaign, especially removing proprietary trading ban and abolishing the CFPB.

David presented for over an hour and said a lot, lot more. There were key insights into Brexit, the Capital Markets Union, the Payment Services Directive and the Markets in Financial Instruments Directive. I would share them here, but you need to be a member of the Financial Services Club to get the full insight … so join!

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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here.

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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