Capital Markets Union – Revisiting Regulation?

Capital Markets Union – Revisiting Regulation?

On 30 September 2015, the European Commission released its Action Plan for a Capital Markets Union (CMU). Published alongside the CMU Action Plan was a separate call for evidence on the EU regulatory framework for financial services – looking at the interactions between rules and the cumulative impact of legislation. This development places the debate on regulation firmly within the jobs and growth agenda.

Head of Public Policy, EMA Regulatory FS Centre of Excellence

KPMG in the UK

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The Commission is clear that it is not backtracking on the regulatory programme introduced since the financial crisis, rather it sees this as a fine-tuning exercise on specific issues where there is clear evidence of detriment to the economy and therefore jobs and growth. The onus is on industry to deliver on evidence, however, there is a risk that contradictory evidence from different parts of the industry will cancel each other out.

Publishing the call for evidence within the context of CMU is significant as it places a debate on regulation firmly within the jobs and growth agenda. KPMG warned that the ‘tipping point’, where the costs of regulation outweigh the benefits, had already been reached in our recommendations to the new Commission published last year (PDF 321 KB).

The outputs of this review will be used to inform where adjustments could be made, on a regulation by regulation basis, when sunset-clauses or review dates are reached over the next 2-3 years.

KPMG in the Netherlands and Belgium have both produced separate reports which look at the regulatory impact on bank balance sheets. During these studies, it was clear that modelling impacts in this way is very complex, and requires taking into account numerous factors and making sensible assumptions with often limited data. Understanding this data and then looking at what the likely outcomes are on the cost and provision of products and services is extremely complex – it requires an understanding of the likely strategic decisions firms will take, given their individual business and operating models.

The challenge for the Commission, and for industry, is that generating robust evidence with sound data is complicated and subject to numerous considerations. For instance, how do you balance the impacts on individual firms against a wider sector view, given the differences in structure and organisation? How do you assess the impacts on one sector against another when there could be competitive advantages being pursued. Also, different countries will have different markets and so the interactions between financial firms and their customers will be different.

Even if robust evidence is found how will the Commission deal with rules which were designed at an international level by global standard setters such as the Basel Committee? Changes here will require the EU to make a strong case alongside other jurisdictions but could also be helpful in negotiations on the agenda still be developed for instance on risk weighting.

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