As usual, the Financial Services Club was delighted to host David Doyle as our starting speaker for 2018, and he presented a fine overview of all the things bubbling as top of the agenda in the European Union’s regulatory plans for 2018.
Led by the Bulgarian presidency, the agenda focuses primarily on pushing forward the Banking Union, the Capital Markets Union, and consolidating the EU Financial Supervisory bodies into a pan-European structure covering banking, securities and pensions.
The Banking Union was created after the financial crisis to ensure that Europe had a single supervisory mechanism (SSM) to cover all future banking exposures, wherever they occur in Europe. That’s good news for the Italians and Greeks, as it means there will be a central insurance scheme to bail out their ailing banks, should they need it. It’s bad news for the Germans, Dutch and Nordics however, who believe that the subsidisation of the southern state banks will be at expense of the northern state banks. Watch this space, as there will be frictions there.
Similarly, there is a strengthening of the single supervisory mechanism by bringing together and strengthening the financial supervisors. The European system of financial supervision (ESFS) was introduced in 2010, and consists of the European Systemic Risk Board (ESRB) and three European supervisory authorities (ESAs), namely:
- the European Banking Authority (EBA)
- the European Securities and Markets Authority (ESMA)
- the European Insurance and Occupational Pensions Authority (EIOPA).
The aim is to ensure that these bodies become the single supervisory bodies for all European states by 2019. As outlined in the press release on the Capital Markets Union in September 2017, a single capital markets supervisor and completing the Financial Union (comprising the Banking Union and the Capital Markets Union) by 2019 is necessary to guarantee the integrity of the euro. All well and good, though much of the evening focused on Brexit rather than the details of these regulations.
David outlined the path we’re following and the fact that now we’ve agreed to the basics around the Irish border, EU citizens’ rights and the cost of leaving. Now we move into transition and the issue is that there is no precedent for what we need to build.
According to David, Michel Barnier is stuck, because there’s no historical legal agreement or structure for a free trade agreement allowing financial services from the UK to continue to deal with Europe. In fact, the only option is an equivalence regime. The BBA wrote a very good Brexit paper last year on what equivalence means:
When assessing the operational rights or treatment of foreign banks in the EU, the EU assesses whether the standards of regulation and supervision in a bank’s home market are ‘equivalent’ to those of the EU.
A determination of equivalence can be beneficial for a foreign bank or for an EU bank dealing with a foreign bank (or foreign stock exchange or central counterparty for clearing securities transactions (‘CCP’)). The benefits are not uniform and can vary considerably depending on the EU legislation under which equivalence is given. Typical advantages could include (i) granting foreign banks limited market access rights inside the EU for certain services, (ii) more favourable treatment for branches of foreign banks located in the EU, or (iii) more favourable treatment for EU banks having exposures to a foreign bank, stock exchange or CCP.
Equivalence is not a substitute for the operational rights created by the EU passporting system for banks. It operates in fewer areas, covers fewer services and is inherently less secure. Some of the more significant equivalence regimes for foreign banks will not come into effect for several more years.
Equivalence is determined in different ways in different areas. It is based not on exact transposition of EU laws, but on a comparison of the intent and outcome of laws. In some cases, the EU will require that another country extend reciprocal recognition as a condition of granting equivalence.
Equivalence is not negotiated, but requested. Assessments are launched at the EU’s discretion. It can also be withdrawn, along with any rights that depend on it, at the EU’s discretion if a country is judged to have diverged from EU standards for any reason.
However, a country granted equivalence is not obliged to mirror changes to EU law if it does not wish to – subject to a potential loss of rights.
Nevertheless, some experts believe that even an equivalence regime will not work. We shall see. In the meantime, I found a very good summary of all things happening in Europe that affects banks, in Lexology. FYI, just in December 2017, here’s what was happening.
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