Kirsten Lapham, Associate, Financial Regulation team, Withers LLP
With the increased level of financial regulation sweeping across the EU, local regulators are left to struggle with the challenge of implementing the inundation of rules at the national level. Recent press reports have highlighted the FCA’s recent decision to reject formal European guidance on financial regulation by adopting alternative rules which are more lenient toward bankers and brokers in the last three months, which raises the question: can we expect to see the FCA acting as a stronger regulator and pushing back on rules it deems too stringent from the European Commission?
The FCA announced on 15 August that it was adopting a different interpretation to the European Commission’s interpretation of Article 6(4) of the AIFMD, which provided that fund managers cannot offer both Alternative Investment Fund Managers Directive (AIFMD) services and brokerage services under the EU’s Markets in Financial Instruments Directive (MiFID) on a cross-border basis. The FCA disagreed with this interpretation, stating its position that an AIFM authorised to provide MiFID services should be able to exercise its single market rights by passporting those services to other EEA States.
Earlier this year the FCA again rejected the rules concerning the strict shortselling regulations (SSR) that were issued by the European Securities and Markets Authority (ESMA). The FCA’s interpretation allowed banks that buy and sell over-the-counter derivatives to seek a market-maker exemption, stating that the guidelines go beyond the SSR, and this requirement could pose a barrier to market makers in OTC derivatives that need to hedge their position by trading in the underlying stock. The FCA was not the only regulator to reject this part of the shortselling guidelines: France, Germany, Denmark, and Sweden also rejected part of the short selling guidelines, with the French explicitly announcing they were not complying in order to avoid competition distortion caused by more relaxed rules elsewhere. This view echoes the FCA’s reasons for dissenting from EU level rules: to meet its objectives of protecting London as a strong and independent financial centre.
On a particularly controversial development, the FCA again expressed strong views against the EU proposals to cap bankers’ bonuses of 100 per cent of their salary, or 200 per cent with significant shareholder approval. The new laws were voted through by a qualified majority of EU member states, with only the UK dissenting. The UK warned that a cap on bonuses would result in an increase in base pay across firms and could potentially force banks to consider moving their operations out of Europe, but despite this strong dissent, the rules look set to come into force in January 2014.
While these developments suggest that the UK has a new regulator who is prepared to stand up to rules that impinge on the UK’s attractiveness as a financial centre, the FCA has downplayed its decision not to implement certain rules on the basis that member states have the flexibility to implement directives at national level in a way that is suitable to that member state. With this in mind, it remains to be seen whether the FCA will have the mandate to continue to stray from EC interpretation going forward, given that there is a clear trend coming from the EU to legislate through regulation rather than Directive. This appears to be an effort to further the Commission’s aim to ensure a harmonised framework across Europe, with limited scope for national discretions, derogations or divergent interpretations.
For example, the new proposals to reform MiFID to MiFID II now comes in the form of a regulation backed by a directive, as does the reforms to the Market Abuse regime (MAD II) which are also legislated by both directive and regulation. On the 19th of December last year the EC released the final level 2 measures to implement the AIFMD, surprising many in that it was released in the form of a regulation that would be directly applicable in member states, and with key aspects of those measures diverging significantly from ESMA’s final advice.
While the FCA has indicated it will take advantage of the flexibility allowed by the implementation of directives, particularly in the face of particularly controversial legislation, the EC’s move toward legislation by regulation looks set to continue. This will leave little room for the regulator, no matter how strong its back bone, to implement rules in a way that are inconsistent with the EC’s interpretation.