1 EU Financial Services Legislative agenda – An Update Financial Services Club 15 January 2013 Dr. David P. Doyle Policy Adviser – EU Financial Services

2 Heavy ongoing EU Agenda in Financial Services Legislation n Regulating capital markets and market actors n The Commission adopting 'safety first’ approach' to regulating capital markets and market actors. n Filling-in the gaps where European or national regulation is insufficient or incomplete n More focus on Pan-EU centralised authorisation and supervision n Less directives and more regulations – assures faster implementation F Capital requirements Directive IV F Remuneration and bonuses F Pan-EU supervisory authorities F Hedge Funds and Private Equity F EMIR: OTC derivatives, CCPs, trade repositories, short-selling F Deposit Guarantee Scheme F Solvency II – insurance F Packaged Retail Investment Products F UCITs IV F Credit rating agencies F Investor Compensation Scheme F Bank Resolution Framework Regulation F Shadow Banking & Systematically Important Institutions (SIIs) F MiFID F Market Abuse Directive F EU Mortgage Credit Directive F Pensions F Corporate governance reform within financial institutions F Insurance Mediation Directive

3 The EU response to the Financial Crisis n All that is of systemic importance should be regulated and supervised n Need for better capitalised finance industry, with less leverage n Perverse incentives in the financial sector should be tackled n Supervision should have the right tools to grasp complex, inter- connected and globalised financial nature of activities n Restore trust, investors and consumers should benefit from clearer, more coherent and effective safeguards

4 The European Central Bank – the new sheriff in town The Single Supervisory Mechanism – what powers will it have? u Monitors capital, liquidity and leverage requirements u Authorises and revokes ban licence u Enforces recovery plans u Conducts stress tests u Approves bank mergers & acquisitions (domestic and cross-border) u Supervises early intervention in case of breaches of prudential rules (recovery plans, intra-group financial support arrangements, etc.) u Empowered to request information directly from banks, conduct office visits, investigate

5 Irish EU presidency – focused timetable going forward u Key legislative texts to be ratified before the end of 2013 … Reaching consensus between EU Parliament and Council on CRD IV – Banking Union package (especially the EBA and ECB Regulations) Bank Resolution Directive EU-wide Deposit Guarantee Scheme Other “priority files”… Progress on Markets in Financial Instruments Directive (MiFID/MiFIR) EU mortgage credit directive.

6 Liikanen Report (2 October 2012) Strengthen capital levels, especially model for measuring risks in trading book assets and real estate related loans. ■Separation of activities based on an assessment of a firm’s recovery & resolution plans or a mandatory separation of proprietary trading and other high risk activities. Scope ■ All bank’s with assets held for trading and available for sale exceeding : (i) a relative examination threshold of 15-25% of the bank’s total assets or (ii) an absolute examination threshold of EUR 100bn (US$ 129bn, £80.7bn). ►Supervisors would determine the need for separation based on the share of assets to which the separation requirement would apply The trading entity - cannot engage activities mandated to the deposit bank - banned from holding any deposits - cannot fund itself with insured deposits - not allowed to supply retail payment services. - Deposits, and the explicit and implicit guarantees they benefit from, would no longer support trading activities. ■ Legally-separate deposit bank and trading entity can operate within a bank holding company structure, but must be capitalised and funded on a stand-alone basis. ■ Bail-in: powers to write down claims of unsecured creditors or convert debt claims to equity ■ Remuneration: move to long term incentives via bonuses paid in bail-in type bonds.

7 The EU Capital Requirements Directive/Regulation IV u Council vs. Parliament divergences u Flexibility for national regulators to raise capital charges: > 3 - linked to extra capital buffers for large banks (SIIIs) - MEPs want more prescriptive rules Bankers’ remuneration: 1:1 ratio; no shareholder involvement, majority MEPs favour caps. 76% risk weightings for SME financing above €1m or €2m? Liquidity coverage ratio – observation period before LCR requirement in 2015 Incorporating the proposed Single Supervisory Mechanism: role of ECB vis-à-vis home/host supervisors, and EBA?

8 Agenda in the retail investment space F Insurance Mediation Directive (IMD) F Packaged Retail Investment Products (PRIPS) F Reform of the EU Pensions Regime F Markets in Financial Instruments Directive (MiFID) F “ European consumers deserve better. They need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based “ (Commissioner Barnier, 2010)

9 European Markets Infrastructure Regulation (EMIR) u Summary of measures agreed: Compulsory central clearing Standardised contracts eligible for clearing Counterparties subject to the clearing obligation Risk management/margin requirements for non-cleared contracts Reporting Requirements Requirements for CCPs and Trade Repositories. Scope All eligible OTC derivatives trades are subject to central clearing and reporting to trade repositories. Exemptions to central clearing and margin requirements granted to: –Intra-group transactions subject to the opinion that such transactions are not capable of significantly increasing systemic risk –Pensions (for 6 years) but subject to the reporting and bilateral collateralisation requirements during that time –Corporates (up to a transaction ceiling to be determined by ESMA and ratified by the EC) –Covered bonds issued by a non-bank special purpose vehicle may be exempt, within certain parameters –Central banks

10 Markets in Financial Instruments Directive (MiFID) – review and update What has changed? u ►Escalation of Scope of MiFID I to include fixed income, OTC derivatives and commodities u ► Introduction of maximum harmonisation’ framework with little or no scope for derogations, gaps, re-interpretations, or Member State gold- plating. u ► Investor Protection is taken to a new level of authorisation, supervision and enforcement under MiFID II. Key characteristics ■ Scope: all banks, investment firms, certain non-financial institutions, intermediaries, tied-agents, independent financial advisers, etc ■ Conduct of business obligations ■ Investment advice ■ Informing clients on complex products ■ Client classification: - eligible counterparty - professional client - retail client n ■ Execution quality & best execution n ■ Fit and proper criteria n EC abolishing national options and discretions in MiFID I: A “Single Rule Book” applicable to all market players.

11 MiFID review – and outcome…”less betting, more investment” u Latest developments The retention of OTFs for non-equity trades (bonds and derivatives) only and limited to professional investors. This will affect broker crossing networks. HFTs: checks, reporting and filters on orders introduced; ‘Minimum resting periods’ are being proposed to prevent traders from ‘flashing bids’. Commodity derivatives - position limitations except where there is a proven economic interest in the underlying asset. Removed the ban on commissions – replace with explicit upfront disclosures: –3rd party payments prior to investment advice is given if there are –If advice is given on the basis of a limited number of instruments. –Commitments on frequency of assessment on suitability of investments. New obligation: when designing new products, specify a target group within retail or professional category with offerings meeting their needs and ‘marketed to clients within the target group’. Investment firms to obtain information about ‘the clients’ risk tolerance’.

12 Packaged Retail Investment Products (PRIPS) n Pre-contractual product disclosure n Sales practices KID Key Information Document: must provide: n What is this investment? n What is it for? n Could I lose money? n What are the risks and what might I get back? n What are the costs? n How has it done in the past? n What might I get when I retire? SCOPE n :Structured term deposits n Retail Investment (or mutual) funds n Closed and open-ended funds n Investments packaged as life insurance policies n Retail structured security products n Unit-linked insurance contracts … …and the EU Parliament wants to add: n Shares n Bonds n Sovereign bonds n Bank products, i.e., term deposits, euro-denominated life insurance, not limited to unit-linked products. n Other savings products n Investment products with yield linked to interest rates

13 Market Abuse Directive ► Extending the scope to include ‘organised markets’ (i.e., multilateral trading facilities or ‘MTFs’, systematic internalisers, dealer-brokers crossing networks and other venues such as OTC trading) ► Extending scope to a greater variety of financial instruments, including financial, energy and commodity derivatives plus spot commodity contracts, CDSs, and emission allowances ► Introduction of prohibition on manipulation of benchmarks and market indices (reaction to LIBOR) rate fixing scandal) Transforming MAD into a Regulation – less risk of divergent interpretation, gold plating and late transposition Combating market manipulation through algorithmic and high frequency trading (HFT) Sanctioning cases where there is a failed insider dealing attempt to manipulate the market Informing regulators of delay in the disclosure of inside information Eliminating national differences to enable regulators to obtain Insiders’ Lists from issuers Strengthening the effectiveness of the enforcement powers of the national competent authorities, and introducing a more robust sanctions regime to be applied to market abuse across the EU. EC noted financial institutions tempted to engage in regulatory arbitrage when deciding place of business/location of branches. Reporting manager’s transactions Protection and incentives of whistleblowers

14 Thank you! n n Mobile: n Published material: - Cost Control - A Strategic Guide ( CIMA/Elsevier: London, 1994/2002) - EU chapter to The Future of Finance after SEPA (Wiley: London, 2008) - EU chapter to A Practical Guide to Corporate Governance (Sweet & Maxwell: London, 2010).