By Roger Davies, Principal Consultant at EA Change Group
In Europe, 2015 may look a relatively quiet year for new mandatory regulation – but do not be fooled. It is the quiet before the storm. It is vital that all in the financial services use this time wisely as a swathe of new directives will come into force in 2016 and 2017 with yet more still in the pipeline. The drive to deliver a single market for the EU, governed by a single rule book, is undiminished.Although the original goal of increasing consumer protection is now being matched by a desire to minimise systemic risk. Globally, the ‘too big to fail issue’ continues to torment banking supervisors.
On the European agenda, Jean-Claude Juncker is promising deeper economic and monetary union. For banking reform, this will undoubtedly lead to a two tier Europe split between the Eurozone and the rest. 2015, for the financial services in general, must be seen as a year of preparation whilst 2016 will be a bumper year for new directives kicking off with Solvency-II effective from 1st January. Solvency-II is effectively ‘Basel for insurers’ and much is indeed similar to Basel II. The directive will harmonize insurance regulation and focuses on the capital that insurance companies must hold to reduce the risk of insolvency. In the banking sector, the Mortgage Credit Directive (MCD) must be implemented by 21st March 2016. This directive applies to secured credit, first and second charge loans, and home loans. Its goal is to create an EU-wide mortgage credit market combined with a high level of consumer protection. Although a minimum harmonisation directive, it does insist on the mandatory adoption of a new European Standard Information Sheet (ESIS) and revised APRs. In the UK, the FCA hopes to publish the new MCD compliant rules by the end of Q1 2015 giving lenders some 12 months to comply.
The MCD will be joined by a new Payments Accounts Directive (PAD) effective from 18th September 2016. PAD is focused on three core but interrelated areas. Access to payment accounts for all EU consumers, comparability of payment account fees and current account switching. PAD seeks to ensure that every EU citizen including economic migrants, irrespective of their credit record, has the right of access to basic payment account services. To promote fee transparency, PAD will also introduce new ‘fee information’ and ‘statement of fees’ documents in a standard format with the former to be accompanied by a glossary using terminology being developed by the EBA. The new directive will require the extensive revision of existing T&Cs, customer agreements and marketing materials. In many ways, PAD builds on the UK’s existing current account switching service (CASS) and rules governing basic bank account and packaged accounts. In so doing, it will also bring a degree of harmonisation across all Member States.
The Regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs) must be implemented by 31st December 2016. Under the PRIIPs regime, the sales process for retail investors in all non-UCITS funds, structured products, insurance-based investment products and derivative instruments must include a standard pre-sale document known as the KID (Key Information Document). Alas, there is as yet no evidence to support the notion that consumers will benefit from document standardisation across the EU! Many Member States may well feel that their existing disclosure material, such as the UK’s ‘Key Facts Document’, is superior.
Another massive change programme is also already underway. MiFID-II and MiFIR will become effective on 3rd January 2017, after an extended 30 month transposition, with a strong focus on financial stability. This new legislation is an attempt to close the loopholes in MiFID-I where trading, using valid waivers, has often passed into ‘dark pools’ beyond the regulators grasp. Whereas the original directive was concerned solely with equities, MiFID-II looks at all asset classes and introduces the new concept of ‘organised trading facilities’. It is hoped that MiFID-II will enable regulators to catch up with market innovations (eg HFT) although it will be difficult to keep pace with developments often driven by IT wizardy. MiFID-II’s extensive scope includes the authorisation of investment firms and trading venues, defines how investment services are provided, and states the requirements for trading in most financial instruments across the EU. There is a patchwork of modifications to existing regulations and, sadly, the precise impact of new conduct of business rules will not be established until the Level 2 and 3 measures are confirmed. We should not forget that Market Abuse Directive-II becomes effective from July 2016 whilst IMD-II and PSD-II are also in the pipeline together with plans for a Capital Markets Union!
Many Member States are, of course, conducting market reviews and creating bespoke regulation for their own national jurisdiction. In the UK, major new pension reforms and a Payment Systems Regulator will be introduced in April 2015 although few initially appreciated the importance of the new Senior Managers and Certification regime (SM &CR. SM&CR aims to strengthen the accountability of bank senior management and to raise standards of individual conduct in the banking sector. From 7th March 2016, Senior Managers will become personally accountable for every aspect of a firm’s regulated activity.
‘Ring-fencing’ for retail banking activities is seen as a means to protect the taxpayer from the ‘too big to fail’ issue. Although ‘ring-fenced bodies’ will not be introduced in the UK until 2019 all the big banks had to submit fairly comprehensive plans to the regulators in January 2015. Whilst we await final details from the EU of their proposals for ring-fencing, following the earlier Liikanen review, clearly the structure of banking in Europe is changing fast.
In many ways, new financial services regulation should be seen as a battle for information. Transparency is seen as vital for consumer protection but information is also crucial for bank governance and risk management. Extensive transaction reporting under MiFID-II and EMIR will keep supervisors very busy detecting market abuse and systemic risk. If 2015 is a year of preparation, future years promise nothing but unrelenting mandatory change.