Capital Markets Union – reviewing financial regulation

Capital Markets Union – reviewing financial regulation

The European Commission’s final report from the ‘Call for evidence’ review of financial regulation makes some important commitments to reduce regulatory burdens.

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Although not the ‘bonfire of regulation’ that some had hoped for, the European Commission’s final report from the ‘Call for evidence’ review of financial regulation makes some important commitments to reduce regulatory burdens. As a key part of the flagship Capital Markets Union (CMU) initiative, the proposed changes are likely to be welcomed by the industry. However, with many key rules still being implemented, the benefits of any adjustments may not be felt for some time.

KPMG member firms made a broad contribution to the review, drawing upon our knowledge across financial regulation, and experience of the implementation of EU audit reform. Many of our recommendations are reflected in the Commission’s thinking. However, something still absent is a longer term capital markets regulatory roadmap, which would help firms plan ahead and increase Europe’s attractiveness to investors.

The timeline for the Commission’s action plan is rather vague, with a commitment to review progress during 2017. Brexit may be a factor as, depending on the direction of the negotiations, CMU might take different forms from that first envisaged by the Commission. Key areas of action from the review include:

Reducing regulatory constraints

  • Announced alongside the Commission’s ‘Basel 4’ package (see KPMG alert), adjustments to the leverage ratio and net stable funding ratio to soften their impact on European banks.
  • Extending incentives for insurers’ investment in infrastructure projects to their private equity and privately-placed debt investments. Also, matching the infrastructure investment incentives to banks.
  • Extending the lower capital charge to all SME lending, and assessing the impact on SMEs of both the MIFID II investment research unbundling requirement and the Market Abuse rules.

Enhancing proportionality of rules

  • Differentiated disclosure requirements on smaller and less complex banks.
  • Review of clearing and margin requirements on non-financial firms, pension funds and smaller financial institutions.
  • Simplified methods, assumptions and calculations in the standard formula of Solvency II.

Reducing regulatory burdens

  • Reduced reporting for smaller and less complex banks. Financial data standardization project to identify where reporting can be reduced, consolidated or streamlined.
  • Assess cross-border impact of national options for rotation and prohibited services in audit rules. Mapping of national ‘gold-plating’ of 17 legislative directives.
  • Review of nationally imposed restrictions on free-movement of capital, including assessing the need for simplification of authorizations for cross-border fund management.

Consistency

  • Adjusting leverage ratio to help banks to continue to provide client clearing services.
  • Phasing in the regulatory implications of IFRS 9.
  • Assessing the markets for retail investment products.

Within the context of CMU, the ‘Call for evidence’ signaled a turning point from the ‘regulate everything’ approach that followed the financial crisis. The changes might be seen as not much more than tweaks, but taken as a whole, they add up to a significant adaptation of the EU regulatory approach. Perhaps most significant is the Commission’s commitment to assess any new regulation through a different lens, an approach already in evidence with the new capital rules for banks where the EU is taking a more cautious approach than it might have done in the past.

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