Financial services legislation in the EU is shaped by initiatives that were created in response to the 2008 global financial crisis. The main initiatives include: the Markets in Financial Instruments Directive II, the Bank Recovery and Resolution Directive (“BRRD”), Capital Requirements Directive IV (“CRD IV”), the Capital Requirements Regulation (“CRR”) and the Mortgage Credit Directive.
The examples below highlight the key EU regulatory developments currently affecting EU banks, financial services providers and consumers,. Further, an attempt at covering possible developments in 2017 is made.
Markets in Financial Instruments Directive II
In 2010, the European Commission (the “Commission”) announced a review of MiFID which subsequently led to the publication of a package proposal: MiFID II and a new regulation (the Markets in Financial Instruments Regulation (“MiFIR”)). It took the EU institutions time to agree the texts of both measures which were eventually finalised and published in the Official Journal of the EU on 12 June 2014.
The reason why agreement on MiFID II and MiFIR took so long was that they take MiFID into new areas: non-equity market transparency; regulatory product intervention powers; third country provisions; and high frequency trading controls being some of the more important.
MiFID II and MiFIR were to enter into force in all Member States on 3 January 2017. However, given the technical challenges concerning implementation in February 2016 the Commission issued legislative proposals delaying MiFID II and MiFIR by a year. The regime is to transpose into national law by 3 July 2017 and apply from 3 January 2018. This is largely welcomed by banks in Bulgaria, as preparation time is extended.
Firms and banks are to be ready and prepared by the end of 2017. Draft implementation legislations are being prepared currently in Bulgaria, however no significant news has been disclosed by the national competent authority on terms and discretions.
Some key points of MiFID II and MiFIR include:
- the provision for new market infrastructures, such as organised trading facilities;
- the introduction of new consumer protection rules;
- amendments in the regulated products and regulators’ product supervision;
- new conduct of business requirements on how firms are set up, structured and governed, for example by introducing board diversity measures; and
- access of non-EU firms to EU markets. Harmonised requirements regarding the ability of non-EU firms to access EU markets.
MiFID II and MiFIR empower the European Securities and Markets Authority (“ESMA”) to develop numerous draft regulatory technical standards (“RTS”) and draft implementing technical standards (“ITS”). These add the necessary detail to the rules as they are directly binding on member states (due to the regulation status). No further transposition on those is expected in member states, however it is possible some regulatory ordinance be created. During the course of 2015, ESMA delivered drafts of the RTS and ITS to the Commission and at the time of writing their adoption is awaited. In addition, ESMA has provided technical advice to the Commission on the possible content of the delegated acts required by several provisions of MiFID II and MiFIR. All of these would be applicable from 3 January 2018 (as extended from the 3 January 2017).
Bank Recovery and Resolution Directive (“BBRD”)
At an EU level, a major focus of the regulatory response to the financial crisis of 2008 was the design and implementation of tools to prevent EU banks from failing and using public funds for their bail out. Key amongst these was the BRRD. Member States were required to implement the BRRD by 1 January 2015.
During 2016, a number of delegated regulations relating to key issues in the BRRD that enhance supervisory convergence were adopted by the Commission. Such delegated regulations included those that specify the content of bank recovery plans, resolution plans and group resolution plans.
Each institution (at entity and group level) had to prepare a full recovery plan that sets out the measures it will take in different scenarios where it is at risk.
The resolution authority (the central bank in many cases) then had to prepare a resolution plan for an institution (at an entity and group level) setting out options for resolving every bank in different scenarios. The resolution includes details of how to apply the resolution tools and how to make sure the institution continues to provide critical functions. If the resolution authorities identify a significant impediment to a resolution, they have the power to request the institution to address or remove this impediment.
One aspect of the BRRD which has been a hot topic in 2016, and will be in 2017, concerns the “bail-in” tool. A key part of the BRRD is that it sets out various measures that are aimed at providing EU resolution authorities with a minimum toolkit for resolving a failed bank. Amongst the new tools is the “bail-in” tool which provides that an EU resolution authority may exercise powers to rescue a troubled bank by writing down debt or converting debt into equity.
Article 55 of the BRRD provides that EEA banks must include contractual terms in any agreements governed by the laws of non-EEA Member States, which create certain payment and other liabilities specifying that they may be subject to bail-in by resolution authorities under the BRRD. Obviously this applies to a very broad spectrum of payment and potentially other contractual and non-contractual liabilities and bail-in recognition provisions have had to be included in various loan agreements and financial documentation, guarantees, letters of credit, bonds documentation (prospectuses), etc.
EU banking union
The EU banking union has three pillars, being: the single supervisory mechanism (“SSM”); the single resolution mechanism (“SRM”); and the European deposit insurance scheme (“EDIS”). The SSM empowers the European Central Bank to carry out key supervisory tasks for banks in those Member States that are participating in the EU banking union. The SRM is a single resolution process that applies to all banks established in those Member States participating in the SSM. The SRM is co-ordinated by the Single Resolution Board.
A resent asset quality review (“AQR”) and stress test exercise, based on the ECB AQR exercises that have been conducted in the EU 2014 – 2015 has opened talks of the possibility of the ECB to take on supervisory powers as part of the SSM in at least some of the bigger banks in Bulgaria. Any serious steps in that direction are expected to be seen in resent years (maybe in the 2020 timeframe). It is expected a ECB supervisory AQR to take place for the country’s banking system before any steps towards the SSM are taken. Such steps should be part of a Euro currency acceptance as well, which is another matter as a whole.
Capital Markets Union
Capital Markets Union (“CMU”) is the current flagship initiative of the Commission and has three objectives, which are to:
- broaden the sources of financing in Europe towards non-bank financing by giving a stronger role to capital markets;
- deepen the single market for financial services; and
- promote growth and financial stability.
The Action Plan on Building a Capital Markets Union sets out a programme of actions and related measures, which aim to establish the building blocks of an integrated capital market in the European Union by 2019.
Bank structural reform legislation
In January 2014, the Commission published a draft regulation on structural measures improving the resilience of EU banks. The legislative proposal followed a report on structural bank a reform that was put together by an expert group led by Erkki Liikanen, the Governor of the Bank of Finland. The draft regulation as originally proposed prohibits EU banks within scope to conduct proprietary trading. It also permits EU banks within scope to engage in trading and investment banking activities, other than proprietary trading, at the discretion of their national authority.
CRD V reform
A reform package for the existing banking regulations is on its way. The reform includes Regulation (EU) No 575/2013 (the Capital Requirements Regulation or CRR) and Directive 2013/36/EU (the Capital Requirements Directive or CRD), on prudential requirements for and supervision of institutions, the BRRD, as well as the mentioned SRM directives.
These are looking to address identified weaknesses in the existing prudential requirements. The proposed new amendments to existing CRD IV /CRR legislation include the European implementation of Leverage Ratio requirements, as well as Net Stable Funding Ratio the implementation of some of the ‘Basel 4’ accord.
Developments are expected in 2017 as the texts of the proposals are to be discussed and implemented on a national level.
The summary of the legislative initiatives above is not by any means exhaustive and has a purely informative nature.
Dahterova & Partners – Attorneys at Law