1. Ref: 1125852 EU Financial Services – Developments and Implications Dr. David P. Doyle EU Financial Services Policy Adviser Board member, The Kangaroo Group (European Parliament) Board member, The Genesis Initiative (Westminster) 1 EU Financial Services Policy proposal

2. Ref: 1125852 The EU legislative response to the financial crisis ► All that is of systemic importance should be regulated and supervised. ► Need for better capitalised finance industry, with less leverage. ► Perverse incentives in the financial sector should be tackled. ► Supervision should have the right tools to grasp complex, inter-connected and globalised financial nature of activities. ► Restore trust, investors and consumers should benefit from clearer, more coherent and effective safeguards.

3. Ref: 1125852 Heavy ongoing EU agenda in Financial Services legislation 3 Regulating capital markets and market actors The Commission adopting 'safety first’ approach' to regulating capital markets and market actors Filling-in the gaps where European or national regulation is insufficient or incomplete Preferred reliance on Pan-EU centralised oversight and supervision Less directives and more regulations – assures faster implementation Stronger powers of the EU Parliament Capital requirements Directive III and IV Remuneration and bonuses Pan-EU supervisory mechanisms Hedge Funds and Private Equity OTC Derivatives, short-selling Solvency II – insurance Responsible lending and borrowing Packaged retail investment products UCITs IV Credit rating agencies MiFID and market abuse updated rules Financial Transactions Tax (FTT) EU Mortgage Credit Directive/responsible lending & borrowing Pensions Corporate governance reform within financial institutions EU Financial Services Policy proposal

4. Ref: 1125852 ► European Systematic Risk Council ► Analyse. ► Warn. ► Facilitate information sharing. ► Key role for the ECB. ► European financial supervision system: ► European Securities and Markets Authority (ESMA). ► European Banking Authority (EBA). ► European Insurance and Occupational Pensions Authority (EIOPA). ► Timeframe: 2011-2012. ► Focus to developing a 'common rule book' for all sectors of the FS industry. ► Late transposition of directives. ► Unnecessary ‘gold-plating’. ► Divergent interpretation of directives. ► Vested with certain centralized powers of direct authorisation and supervision, i.e., CRA’s, AIFMD. Over-arching regulation and supervision of EU financial services 4 EU Financial Services Policy proposal

5. Ref: 1125852 September 2010 – BCBS agree on the new capital requirements November 2010 – endorsed by G20 leaders' summit in Seoul ► Quality of capital. The minimum capital ratio for common equity (as the core element of Tier 1 capital) will be raised from the current level of 2% to 4.5%. The overall ratio for Tier 1 capital will increase from 4% to 6%. ► Capital conservation buffer. The capital conservation buffer above the regulatory minimum requirement will be set at 2.5%. It can be met with common equity, after the application of deductions. Its purpose is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. ► Countercyclical buffer. A countercyclical buffer with a range of 0 to 2.5% of common equity or other fully loss-absorbing capital will be implemented according to national circumstances. It will be implemented in any particular country when there is excess credit growth resulting in a system-wide build up of risk in that country. ► Leverage ratio. A leverage ratio will also be introduced, which will supplement the risk-based measures. (In July 2010, the Group of Central Bank Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3% and, based on test results, adjust this proposed ratio, if necessary, in the first half of 2017). ► EC to launch a short consultation on CRD IV in mid-January 2011, open for a 'few weeks', aimed at integrating CRD IV proposal to internal Commission consultation by the end of March. ► EU Parliament expected to vote on final package in JUne 2011. ► Timeframe: phased in from 1 January 2013 to 1 January 2019. ► Rapporteur: Othmar Karas MEP (Austria, Conservative) Capital requirements Directive IV 5 EU Financial Services Policy proposal

6. Ref: 1125852 Rules covering: passports enabling AIFMs to offer their management services and market their AIFs throughout the EU. (3rd country funds) disclosure and reporting requirements to investors, employees, regulators, anti-asset stripping measures detailed remuneration policy. SCOPE: ALL EUROPEAN AIFM MANAGING AIFS MARKETERS IN EU, REGARDLESS OF AIF'S JURISDICTION, WITH: AIFs being all non-UCITS funds AIFM BEING ANY LEGAL OR NATURAL PERSON MANAGING OR ADMINISTERING AN AIF Timeframe agreed upon by EU institutions ► January 2013: AIFMD implementation at national level – could slip… ► 2013 to 2015: transition period allowing existing private placement schemes to operate in the EU vis-à-vis non-EU AIFs and managers. ► 2015: introduction of EU passport. ► 2015/2016: EC undertake review of AIFMD: functioning of EU passporting mechanism, adequacy and challenges of information exchange, progress on alignment of regulatory systems in non-EU jurisdictions, market disruption, etc. ► 2018: further transition period: co-existing of private placement schemes and EU passport. ► 2018: private placement schemes become redundant in the EU, replaced with EU passport. CESR has invited European Securities and Markets Authority (ESMA) to provide evidence for Implementing rules on: ► Which categories of investment manager and investment fund will fall within the scope of the AIFM Directive in different jurisdictions? ► Which of the topics that will be covered by the implementing measures would be most appropriately adopted in the form of regulations or directives? ► Any useful sources of data and statistical evidence from which CESR could benefit in the preparation of its advice? Hedge Funds and Private Equity 6 EU Financial Services Policy proposal

7. Ref: 1125852 ► To foster cooperation and coordination among relevant (national) regulatory authorities, to equip them with a consistent set of tools, and to introduce ex-ante bank resolution funds. ► Applicable to all credit institutions (banks) and larger investment firms, but EC to examine measures also for other financial firms, i.e., insurance companies, investment funds and central counterparties. Latest development – EC public consultation (January 2011): ► Early intervention powers allowing FSA’s to force firms to take remedial action. ► Preventative measures/living wills allowing firms to fail/close down with minimum market disruption. ► Resolution tools giving 'statutory powers' to 'either write-off subordinated debt or convert it into an equity claim' and ability to enforce losses on 'senior debt' by 'discretionary amount', and wipe out holders of banks junior debt and preference shareholders. ► EC considering measures to restrict or the development or sale of new business lines or products. ► Measures no applicable to bonds issued before 2013. ► ECOFIN conclusions (7 December): the future regulatory framework should ensure that all classes of institutions are resolvable irrespective of their size or interconnectedness. ► EC issues draft legislation in June 2011 (most likely end 2011). ► EC report to G20 in October 2011. Legislative initiative on a framework for bank crisis management and resolution 7 EU Financial Services Policy proposal

8. Ref: 1125852 Objectives: ► Greater transparency. ► Reducing counterparty risks. ► Reducing operational risks. Measures: ► Compulsory clearing. ► 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. ► MEPs disagree on exemptions for SMEs, real estate firms/fund, pension funds from central clearing obligation ► Unlikely that US and EU reaches alignment on regulation and timetables ► ECON agreed to ban certain trades in sovereign bonds, and will require that traders to settle their uncovered positions by the end of each trading day. ► Possible ban "naked" short selling, MEPs set a very tight deadline for converting a naked short sale into a short sale. Still outstanding: ► Regulators given extra powers over CDS’s, including the right to question traders motives and verifying underlying risk, unified reporting system for traders, emergency restrictions on short-sales. ► OTC derivatives clearing policy, role and functioning of central counterparty clearers (CCPs) and trade repositories, corporate exemptions from mandatory central clearing, key role of ESMA in determining which contracts must be cleared. ► Requirement for CCPs to have access to central bank liquidity OTC derivatives – the EC proposal 8 EU Financial Services Policy proposal

9. Ref: 1125852 ► How to improve the functioning and the composition of boards of financial institutions in order to enhance their supervision of senior management. ► How to establish a risk culture at all levels of a financial institution in order to ensure that long-term interests of the business are taken into account. ► How to enhance the involvement of shareholders, financial supervisors and external auditors in corporate governance matters. ► How to change remuneration policies in companies in order to discourage excessive risk taking. ► Legally-binding, stakeholder coverage and combination of legislative or non-legislative measures. MEPs response to EC green paper (16 March) ► Compromise reached on the response between the conservatives and Liberal MEPs sitting on ECON seeking to introduce a combined targeted series of rules-binding measures and retain certain aspects of the "comply or explain" model. ► ECON “Calls for the establishment of mandatory risk committees or equivalent arrangements at board level for all economically significant financial institutions and at parent company board level for all economically significant financial groups; EU supervisors in consultation with the relevant national authorities should establish fit and proper persons criteria and process for senior officers and all material risk takers to be implemented by the financial institution, national authorities should ensure compliance with this criteria” EC Green Paper on corporate governance in financial institutions 9 EU Financial Services Policy proposal

10. Ref: 1125852 Agenda in the retail investment space Markets in Financial Instruments Directive (MiFID) Insurance Mediation Directive (IMD) Packaged Retail Investment Products (PRIPS) Reform of the EU Pensions Regime Reform of corporate governance policies within financial institutions “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)

11. Ref: 1125852 ► Greater clarification and harmonisation over the form and content of key investor disclosures and associated marketing materials provided to investors ahead of investment decision (pre-contractual disclosure) ► Strengthened selling rules embracing the conduct of business of product distributors and intermediaries and the avoidance, management and disclosure of conflicts of interest in the sales, inducements and advice process. Product Scope –structured term deposits –possibly “third pillar pensions” that compete directly with PRIPs –Retail Investment (or mutual) funds –Closed and open-ended funds –Investments packaged as life insurance policies –Retail structured security products –Unit-linked insurance contracts –Derivative products Latest developments EC issues public consultation (November), which proposes: ► Creating rules applying to all products where investor in exposed to 'fluctuations in the market ', comes with a 'packaging' and 'indirectness' element. ► Covering products with capital guarantees, closed and open-ended funds, structured products, unit-linked insurance contracts and derivative products. ► Potentially not introducing a 'wholly new PRIPs sales regime, but integrated it into MiFID or IMD. ► Imposing the responsibility for disclosure on the product provider rather than the distributor. ► EC conducting two impact studies (banks, insurers and intermediaries): costs of possible changes to sales rules for industry. ► Factors hindering retail investors’ decision-making and the effect of simplifying and standardising product information. ► EC public consultation open until 31st January 2011. Packaged retail Investment products 11 EU Financial Services Policy proposal

12. Ref: 1125852 Markets in Financial Instruments Directive (MiFID) – review and update 12 Focus on setting new or adjusting existing regulatory requirements – common rule book – for: ► Broker crossing networks. ► Pre-trade transparency waivers. ► Fragmentation/consolidation of trading data: removal of obstacles. ► Post-trade transparency and extension to non-equities. ► Best execution: policies and arrangements. Commission also examining regulatory measures, including: ► Requirements relating to the recording of orders received or transmitted by telephone conversations and electronic communications. ► Execution quality data. ► MiFID complex vs. non-complex financial instruments for the purposes of the Directive’s appropriateness requirements. ► Definition of personal recommendation. ► Supervision of tied agents and related issues. ► MiFID options and discretions. ► Non-equity markets transparency. ► Client Categorisation. EU Financial Services Policy proposal

13. Ref: 1125852 EC publishes (December) consultation paper on the review of MiFID, proposing: ► Create a new regulatory framework for all trading taking place outside regulated markets (RMs), multilateral trading facilities (MTFs), systematic internalisers (SIs) to embrace other forms of organised trading, i.e., inter-dealer broker systems using voice or hybrid voice/electronic execution. New definition of 'organised trading facilities' to be drafted. ► Over a certain threshold (based on assets) an organised trading facility required to become a MTF. ► Over a certain quantitative threshold, High Frequency traders required to seek authorisation as investment firms – subject to them meeting certain organisational and capital requirements in addition to system and risk management obligations. ► All bonds and structured products with a prospectus, or admitted to trading either on a RM or MTF and all derivatives eligible for central clearing, subject to pre-trade and post-trade transparency requirements. ► Introduction of a consolidated tape. ► Commodity derivative markets and reporting requirements might be needed and consideration of position limits. ► Clarifications and extensions to the transaction reporting regime to be set out. ► Tighter definition of 'non-complex products' in the execution only system. ► In providing investment advice, firms required to inform clients of 'underlying reasons' of advice and to keep clients informed of ongoing suitability of the instruments provided throughout the investment period. MiFID review – latest developments 13 EU Financial Services Policy proposal

14. Ref: 1125852 Conclusions EC displays a strong preference for introducing a new directive on pre-contractual product disclosure covering all retail investment products, irrespective of whether they are issued by banks and insurance companies. Tighter definition of 'non-complex products' EC may abolish the execution-only regime, covering fund supermarkets and private client stockbrokers; ensure clients pass an “appropriateness test”, before trading in even the most basic securities The EC intends to adapt the Undertakings for Collective Investment in Transferable Securities (UCITs) investor-friendly product information format as a benchmark, based on Key Investor Information (KII) document - standardized, streamlined and focused on key information. The EC testing how effective standard disclosures - risk, cost and performance - will prove from a customer perspective to determine “what works best and what doesn’t”. EC to vest the responsibility for disclosure with the product provider rather than the distributor.

15. Ref: 1125852 ► Extending the scope to include 'organised markets', i.e., multilateral trading facilities (MTFs), Systematic Internalisers, dealer-brokers crossing networks – and other venues such as OTC trading. ► Extending the scope to a greater variety of financial instruments, including financial, energy and commodity derivatives. ► 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. ► Moving towards a single rulebook by clarifying certain provisions, reducing options and discretions where appropriate and reducing administrative burdens, especially on SMEs. ► EC public consultation open until 19 February 2011. Market abuse directive 15 EU Financial Services Policy proposal

16. Ref: 1125852 Aim: simplify/clarify the complex regulatory patchwork so as to create more consistent and clearer EU insurance conduct of business rules. EC consultation ► Scope of the directive, particularly as regards secondary intermediaries and insurance intermediaries operating in a non-EU third country. Consideration given to the boundaries as well as differences between investments packaged as life insurance policies and the remaining categories of insurance products. ► Fit and proper requirements for sub-agents: extent to which a revised directive could further harmonize the requirements on knowledge and ability of insurance intermediaries and/or all actors involved in the selling of insurance products. ► Ways to improve the notification process for insurance intermediaries wishing to exercise passporting rights. ► Transparency in the way insurance brokers are typically remunerated. ► Potential conflicts of interest and how those conflicts should be managed. Possible outcome:- to include rules for insurance firms employees and intermediaries selling insurance - cover direct sales by insurers for the first time - Regulate investments packaged as life insurance policies - Introduce fit and proper requirements for sub-agents: harmonize requirements on training and ability of insurance intermediaries and/or all actors involved in the selling of insurance products - Clarity on transparency in the way insurance brokers are typically remunerated - More comprehensive and legally-binding definition of "advice" provided by insurance intermediaries - reinsurance intermediaries to remain within the IMD scope or be exempt? - continued exemptions to apply large commercial risks from some consumer protection IMD provisions? Expand the Scope of IMD: - Brokers, agents, tied-agents (ie, Germany) - direct sales/writers of insurance products by insurance undertakings and their employees (client-facing) - secondary intermediaries - insurance intermediaries operating in a non-EU third country. Insurance Mediation Directive (IMD) 16

17. Ref: 1125852 EC Green Paper on pensions 17 Green paper examines the following issues: ► Ensuring adequate incomes in retirement and making sure pension systems are sustainable in the long term. ► Achieving the right balance between work and retirement and facilitating a longer active life. ► Removing obstacles to people who work in different EU countries and to the internal market for retirement products. ► Making pensions safer in the wake of the recent economic crisis, both now and in the longer term. ► Making sure pensions are more transparent so that people can take informed decisions about their own retirement income. Areas of legislative action EC to focus on: ► The internal market for pensions. ► Mobility of pensions across the EU. ► Gaps in EU regulation. ► Future solvency regime for pension funds. ► Risk of employer insolvency. ► Informed decision-making. ► Governance measures at EU level. EU Financial Services Policy proposal

18. Ref: 1125852 ► Directive on responsible lending and borrowing Legislative. ► Legislative proposal on access to basic banking services. ► Green Paper on a framework initiative on corporate governance. ► Regulation on Central Securities Depositories (CSD's). ► Securities Law Directive. ► Amendment of the UCITS Directive depositaries and remuneration policies. ► Review of Directive concerning Institutions for Occupational Retirement Provision (IORP). ► Special Committee on the Financial, Economic and Social Crisis (CRIS). ► EU Mortgage Credit Directive Other legislative initiatives – first half of 2011 18 EU Financial Services Policy proposal

19. Ref: 1125852 ► Influence of the G20 deliberations – will everyone adopt the measures or go further? ► New Pan-EU regulatory and oversight model for Europe covering all actors and markets – will it work on a cross-border basis? ► Reform of corporate governance in the financial sector – rules-binding or retention of 'comply or explain'? ► EU/US Regulatory alignment: different timetable and divergent political agendas. ► Reinforced role of EU Parliament under the Lisbon Treaty. Prognosis 19 EU Financial Services Policy proposal

20. Ref: 1125852 dpdoyle@free.fr Mobile: +33 268 69 40 40 Contact details 20 EU Financial Services Policy proposal