The call for evidence request from the European Commission comes at a key inflection point for Europe with most of the post financial crisis regulatory reforms now reaching the implementation phase. The design of individual pieces of legislation were well intentioned, but practical experience has shown that when taken in aggregate the cumulative effect of multiple interconnections and duplications is limiting the role that the financial industry can play in supporting economic recovery. The European Commission’s approach to take a step back and identify necessary adjustments is the right thing to do to make sure we have a balance between measures to achieve financial stability / safety and those that support jobs and growth.
In our response we offer observations from our experience in financial services across Europe and globally. We also highlight some specific practical audit legislation implementation issues that were unanticipated in the design phase of the new rules.
In KPMG's response last year to the European Commission’s Green Paper Building a Capital Markets Union we proposed a series of policy tests that should be applied to support more effective European capital markets. One of these tests was “make regulation clearer and more consistent” so we welcome the strong signal that the European Commission is sending through this call for evidence. Within our observations we reflect on both finalised and in progress legislation given their significance on the capital markets.
Markets are rightly highly regulated to i) protect consumers and investors and ii) give confidence to market participants, but regulation also adds cost and complexity. The global KPMG Audit Committee Survey (2015) showed 47 percent of respondents viewed regulation as one of the greatest challenges for their business. Regulation has a cost, and the private sector – shareholders, employees and customers – must bear this. This call for evidence recognises the need for regulators to ensure effective and proportionate rules without overlaps.
We welcome the European Commission’s intention to form a clearer overview of the post financial crisis regulatory framework and to then use the review clauses in the individual pieces of legislation to make adjustments. You have created this opportunity to deliver a holistic view of the required changes. Our experience is that, after several years of intensive legislation, the financial industry is struggling to calibrate the multiple new rules across the capital markets. At a time when we want growth and development of Europe’s capital markets this degree of management focus on regulation is inhibiting strategic thinking and innovation in our view. Anecdotally we have observed that the management teams of banks in Asia Pacific have been more focused on transformative strategies including the digital agenda than the banks in Europe, perhaps because they were focusing less senior management time on delivering regulatory change.
Success of the capital markets in Europe depends on a stable and adaptable financial regulatory framework that fosters and encourages investors and allows intermediaries including the banks to have viable businesses. Global monetary policies are beginning to change and the current "new normal" of near-zero percent interest rates will come to an end. Europe needs to be in a strong position to fund its growth through capital markets.
With significant external economic factors including global fiscal policies it is important for Europe to focus on what can be done to strengthen its capital markets.
We want Europe to be seen as an attractive investment opportunity for global investors and so need a longer term plan for the financial system – the Capital Markets Union (CMU) initiative is an essential pre-requisite for this. As with other sectors that underpin Europe’s economy a comprehensive long term strategy with clear outcomes that citizens, participants and stakeholders can understand is important – we are also supportive of the Digital Single Market and European Energy Market strategies. The Commission is in a unique position to bring together all the necessary stakeholders to discuss a strategy covering policy objectives, mechanisms to deliver and outcomes. The risk is that otherwise we will continually tweak and change the rules creating uncertainty and lack of predictability, which will inhibit growth of our capital markets.
In our 2014 report New Commission New Parliament we made a number of recommendations, including calling a halt to some legislation and providing greater certainty over what is still to come. Businesses need to plan ahead to make the changes required to their systems, processes and organisational structures. Our 2015 Evolving Banking Regulation – from design to implementation report includes a "road-map" highlighting where areas of uncertainty remain, we have produced similar pieces of analysis for the Investment Management and Insurance sectors.
We recommend that the Commission takes the opportunity from the results of the call for evidence to produce a complete roadmap of regulations including those still being discussed by international bodies such as the FSB, Basel Committee, IOSCO and IAIS. This could then be used to identify where the key interactions are and where future adjustments could be made to make the framework more appropriate within the context of growing and effective capital markets. It would flush out the unanticipated con sequences and allow balanced recalibration between financial stability and innovation.
Read KPMG's response (PDF 178 KB) to the questions raised in the call for evidence.