EU financial services lawmakers face a staggering autumn workload with twenty nine legal texts currently being negotiated or expected to be tabled by the European Commission (EC) in the near future. To make any progress, legislators will need to prioritise but agreeing these priorities may not be straightforward in all areas. If some dossiers fail to make the priority list, we could end up with in incomplete regulatory regimes, and possibly market distortion, for years to come.
Which dossiers will make the priority list? Does being on the list ensure the legislation is adopted in time? Those that do not pass the crucial ‘first reading’ milestone before the European Parliament (EP) elections next year face a very uncertain future. The looming EP elections are putting extreme pressure on all the EU legislators over the coming eight months, but most particularly the Lithuanian Presidency.
For starters: Banking Union
There is no doubt - and no debate – that creating the Eurozone Banking Union legislation and its EU-wide underpinning tops the list. The Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) will be built on the foundations provided by the Capital Requirements Directive/Capital Requirements Regulation (CRD IV/CRR) and the Bank Recovery and Resolution Directive, respectively, both creating the ‘single rule book’ applicable across the EU. The fate and timing of the deposit guarantee scheme, the third pillar to theBanking Union, remains in some ways an open question.
- SSM and CRD IV/CRR: The Irish Presidency made significant progress on setting up the SSM, in which the European Central Bank (ECB) will take a central role in the prudential supervision of Eurozone banks. A last minute hurdle relating to democratic accountability of the ECB was overcome by an Inter-Institutional Agreement just in time for the European Parliament to adopt the legislation in plenary on 12 September. The text now has just to pass legal/linguistic scrutiny and formal Council adoption before publication in the Official Journal (OJ). However, once the text becomes law, the real work begins to resource the new supervisor and to finalise the rule book establishing its modus operandi with national supervisors. The ECB also has to gear up quickly for the asset quality review of those Eurozone banks it will supervise directly to be launched before the end of the year.
- The publication of the CRD IV/CRR package in the OJ on 27 June 2013 sealed the deal for a 1 January 2014 launch date. CRD IV/CRR provides a definitive yardstick against which the ECB will assess banks’ assets and the EBA will conduct a further round of stress tests early next year. But adoption of CRD IV/CRR legal texts is not the end of the story: some Member States voiced concerns during the final negotiations that about their ability to transpose CRD IV within the allotted 6 months - clearly some will not. The EBA is working intensively to put in place all the necessary implementing measures and guidelines. But the volume of measures and speed with which they need to be finalised raises questions about the quality of stakeholder consultation and the impact on the resulting rules. In reality, the new regime will remain a ‘work-in-progress’ for some years because of the transition periods foreseen by the Basel Committee and due to the number of national discretions retained in CRD/CRR, which are likely to impede the immediate, or even near-term, creation of a real ‘single rule book’.
- SRM and the Banking Recovery & Resolution Directive (BRRD): The EC tabled its proposal for a SRM on 10 July this year, giving little time to EU legislators to progress the file before the summer recess. However, the EP has now set a timetable for its work and the ECOFIN Council held an initial exchange of views on the file during its informal meeting in Vilnius on 13 September. Michel Barnier, Internal Market and Services Commissioner, later described these discussions as ‘challenging’ but said that there was clear commitment to find a viable solution. But creating the SRM relies to a great extent on the adoption of the earlier proposal on bank recovery and resolution which is currently in trilogue negotiations. Any slippage here could jeopardise the chances of getting SRM agreed before the 2014 EP elections.
- Deposit Guarantee Scheme(s) (DGS): We don’t currently have a firm proposal for a single Eurozone DGS - even though many commentators see a single scheme as an essential complement to the Banking Union. However, the 2010 proposal amending the Directive has still to be adopted by the Council and negotiated by the co-legislators. The Lithuanian Presidency has identified this as a priority, and has tentatively included it on the agenda for the ECOFIN meeting on 10 December, but we are getting mixed signals on it. Michel Barnier and others have called the DGS as a ‘medium-term priority’. However, this text is intrinsically linked to the BRRD. Also, as with the DGS, the BRRD foresees the creation of the ex-ante funded resolution fund. Ultimately, we found out from the first Cyprus bailout proposal that insured deposits remain sacrosanct. But we need progress on convergence on current disparate regimes if a single DGS is ever to become a reality.
The main course: market reforms
The Council agreed the Lithuanian Presidency’s priorities in July 2013. In addition to those mentioned above, their priorities include:
- MiFID II/MiFIR: The EC made these proposals almost two years ago and the EP plenary finalised its general approach on 26 October 2012. Council took until June 2013 to agree its general approach. Trilogue negotiations started in July just before the EP summer recess and have resumed in earnest in September. The time Council has taken to reach agreement indicates how hard won the agreement was, and how difficult reaching an agreement with the EP may prove.
- MAD II/ MAR: Although not mentioned in the Council’s list, the revision of the Market Abuse Directive is a second priority as it is closely linked to the new MiFID II/MiFIR regime. The EP adopted the text of MAR on 10 September: however, work is still required to reach agreement on the Directive (which introduces criminal sanctions for both insider trading and market manipulation) and both the Regulation and Directive then need to be aligned with the final MiFID II/MiFIR text.
- Central Securities Depositories Regulation (CSD): The EC tabled the original proposal on 7 March 2012. Trilogue negotiations should start shortly: the EP indicates the plenary vote in December. However, in a state of play document dated 20 June 2013, the Irish Presidency identified five political areas where the CSD needed further work: i) settlement discipline, ii) third country regimes, iii) authorisation and definition of CSD links, iv) authorisation of banking CSDs, and v) conflict of laws. So work is still required for Council to agree its general approach.
- AML4: The EC tabled proposals on 5 February 2013, including replace the existing AML legislation (AML3), but progress has been quite slow. The Lithuanian Presidency has tentatively included confirmation of the Council’s general approach at the ECOFIN meeting on 15 October. There are questions as to which Parliamentary committee should take the lead on this file.
- Omnibus II: The Solvency II regime, launched with much fanfare, has been dogged with roadblocks. The EC tabled its proposal to revise Directive 2009/138/EC on 19 January 2011. The Council adopted its general approach on 21 September 2011, but the ECON Committee did not adopt its report until 21 March 2012. Trilogue negotiations commenced shortly thereafter but stalled at end 2012 pending the outcome of EIOPA’s assessment of the treatment of long-term guarantees. EIOPA submitted its report in June 2013, followed by a separate report from the EC supporting EIOPA’s findings. Now the trilogue negotiations have been re-launched with a view to reaching political agreement by the end of the year at the latest. The Lithuanian Presidency has included a slot for Solvency II in the ECOFIN meeting of 15 October and the EP has pencilled in 11 March as the date for the plenary vote but this may be brought forward if trilogue negotiations progress well.
The Lithuanian Presidency’s prioritisation has raised some eyebrows. For instance, why isn’t UCITS V on this list? AIFMD’s implementation last July may lead to a potential market distortion if similar measures are not introduced into the UCITS regime.
There are also questions about what priority should be given to other EC proposals – like the Commission’s retail package as a whole and recent or pending proposals such as that on money market funds issued on 4 September, that on financial benchmarks (due 18 September) and on bank structure (expected in November).
Any room for dessert?
Looking beyond the Council’s priority list we still have fifteen further legislative initiatives to worry about:
- Investor Compensation Schemes Directive (ICSD): negotiations stuck since 2011 - very unlikely to be adopted before the EP elections.
- Residential Mortgage Credit Directive (MCD): the EP adopted the text at first reading on 10 September, however, the final vote was postponed pending agreement with the Council on issues relating to transposition. However, we should see it adopted by end Q1 2014 or Q2 2014 and entry into force two years later.
- Transparency Directive (TD): could be finalised by the end of the year with little effort from politicians, and will apply 2 years after entry into force, so we estimate Q1 2016 for it to come into effect.
- Packaged Retail Investment Products (PRIPs): Council reached agreement on its General Approach in June 2013, a EP plenary vote is scheduled for 18 November.
- Insurance Mediation Directive II (IMD2): ECON is scheduled to vote on 24 September 2013, but the Council hasn’t made significant progress. A key element of this revision is the treatment of insurance wrappers, i.e. life insurance products which are essentially investment products. The EP is arguing that these should be included within the scope of MiFID II, as even if IMD2 is adopted, the protections would come in later than MiFID II and may not be equivalent as IMD2 is a ‘minimum harmonisation’ directive.
- UCITS V: may still be adopted before Q2 2014.
- Financial Transaction Tax (FTT): after the ECOFIN Council rejected the ‘full’ EC proposal issued last year, 11 Member States decided to proceed with this initiative under the ‘enhanced cooperation agreement’, but reaching agreement could be tough due to conflicting objectives. The EP sees the tax as a means by which to restrict high-frequency trading which they believe has a negative impact on the markets. The EC sees it as a potential source of direct revenue and participating Member States as a means to shore up national budgets damaged as a result of the financial crisis. However, a leaked document recently reported in the press indicated that the Council’s legal service has raised concerns about the legality of the proposal. The outcome of a case brought before the European Court of Justice by the UK is also pending. Whether this is enough to deter further consideration of this proposal will probably become clearer after the German elections later this month.
- Basic bank accounts: the EC tabled its proposal on 8 May 2013, with the ECON Committee vote scheduled for 30 September 2013 and EP plenary vote for 9 December 2013. No compromise positions have been posted by the Council to date so it is not clear what, if any, progress they are making.
- Long-term investment funds (ELTIFs): EC tabled its proposal on 26 June 2013, but we don’t yet know the likely timetables for the EP or the Council.
- Payment Services Directive II (PSD II) and Interchange Fees Directive: the EC tabled proposals to recast the PSD adopt a new directive on interchange fees on 24 July 2013.Although the EP hasn’t set a timetable for this yet it may get a first reading before the 2014 EP elections.
Hungry for more?
As indicated above, we’re also expecting several more key proposals in the coming weeks.
The EC published a proposal on money market funds on 4 September. This is the only piece of legislation to be proposed by the EC so far that specifically addresses ‘shadow banking’, so it is likely to want this to be ‘fast-tracked’. The EC has proposed a relatively hard line on this issue which a number of Member States will not be willing to support. Negotiating this dossier may not be straightforward - it may not reach a ‘place of safety’ before the Parliamentary elections.
We’re expecting the EC’s proposal on financial benchmarks on 18 September. This proposal could put the Commission in conflict both the UK and the US, so it also may be challenging to progress significantly.
The EC’s proposal dealing with the recommendations set out in the Liikanen report are due out in November. The EC may not adopt all of the Liikanen recommendations but even so this proposal is expected to be relatively controversial (and therefore difficult to negotiate).
In May 2013, Commissioner Michel Barnier indicated that the EC had decided to exclude ‘pillar 1’ considerations from the upcoming IORP proposal, given the unsatisfactory outcomes of the quantitative impact study undertaken by EIOPA. The proposal will therefore focus on governance and transparency issues which should be less controversial. The new proposal is expected in October.
Securities law legislation remains something of an enigma. The EC has been working on this text for some time. Essentially, it will aim to fill in the remaining legislative gaps remaining with regards to clearing and settlement that are key for the effective operation of EMIR and other legislation. The EC has not indicated whether this will be a Directive or a Regulation and we don’t have a clear indication of the timetable, but it may be released in Q4 2013.