Commissioner Jonathan Hill at the public hearing (“Call for Evidence” review of the EU regulatory framework for financial services, Brussels, 17 May 2016) underlined that such a rational approach shall apply to financial services too: as a response to the financial crisis, Commission had passed a whole range of legislation to make the EU financial system stronger with due protection for consumers. He added: “in supporting investment and growth, it's time to check whether the same regulatory objectives can be achieved in a more growth-friendly way”.

Besides, it shall have the self-confidence to check that existing legislation is working as intended; and to be prepared to change it if it is not.

Commission’s “Call for Evidence” is supported by the European Parliament and EU member states’ governments; besides, the procedure fits into the international regulatory agenda. The G20, the Financial Stability Board (FSB) and the Basel Committee, are all looking at the coherence of the reforms that have been undertaken in recent years. For example, Mark Carney, chairman of the FSB, agrees that "monitoring implementation of agreed reforms, analysing the effects of the measures, and making adjustments to address any identified material unintended consequences, represents good regulatory practice".

The Commission is in the lead in undertaking such a comprehensive exercise, which gives the EU an opportunity both to shape the global approach to regulation and serve as a model for similar reviews in other areas of EU legislation.

“Call for Evidence”: received feedback

As to the banking sector, it is seen that smaller banks are not satisfied with the EU banking legislation: it does not do enough to take their size properly into account.

Commission is already looking at these issues in its review of the Capital Requirements Regulation, CRR, and the sister directive CRD4 with an attempt to extend measures already built into the system to make it more proportionate.

For instance, some smaller banks and credit unions are exempt from the CRR. Up until now these exemptions have been decided on a case by case basis. Commission wants to keep the exemptions that have already been granted, but it also wants to speed up the process for applications, and set some objective criteria on which future exemptions can be decided. There must be a more efficient way of doing this than amending primary legislation every time.

Commission also wants to see more proportionate reporting and disclosure requirements for the banking sector in order to simplify complex reporting and disclosure templates. Disclosures must be made more understandable and more meaningful.

From banks of all sizes, there was a general acceptance of the fundamental architecture of the EU’s financial framework, and for the reforms that have shaped it. But they have also identified a number of areas where they believe the cumulative impact of legislation could be hampering their ability to finance the wider economy.  

Other feedbacks…

Commission has already taken action to define simple, transparent and standardised securitisations and proposed lower capital requirements for banks that hold them; Commission will keep the supporting factor for lending to SMEs. In addition, Commission wants at opportunities for raising the threshold for loans that qualify: as part of the CRR review, Commission will consider EU rules for making it harder for banks to play their role as market makers, reducing liquidity in some securities markets.

In the future, Commission will be careful before implementing anything that could make the situation more difficult. That's why the Commission asks ESMA for a more cautious approach on MiFID II liquidity calibrations.

Commission asked the European Banking Authority, EBA to advise on how to apply Basel measures (such as the Net Stable Funding Ratio liquidity rules and the leverage ratio) in way that works for European businesses. As well as assessing the impact that the Fundamental Review of the Trading Book would have on the European banking sector.

There is a lot of concern about how these Basel measures will be implemented; Commission intends soon launching targeted consultations on the NSFR and the Trading Book Review. 

Investment firms also call for more proportionate approach thinking about the needs to distinguish between the capital requirements imposed on large (bank-like) investment firms and those imposed on smaller ones.

The EBA made a similar point recently advising Commission to apply a prudential regime for smaller investment firms that pose no systemic threat; recommendations expected in 2016.

Asset managers, among others, said they're being asked to report the same data in different forms to comply with separate pieces of legislation; Commission would see whether their reporting burden could be lowered without affecting the quality of what's reported. They shared the concern that constraints on banks' balance sheets are reducing liquidity, and stressed the importance of regulatory stability as AIFMD and the recent amendments to the UCITS framework continue to bed down.

Commission takes a targeted approach: e.g. in Capital Market Union, CMU it will take steps to support the asset management sector to play its role in channeling finance to Europe's economy and businesses.

Commission intends to improve the EU “passporting” system for asset managers as it isn't working as well as it should: smaller fund managers still struggle to offer their products in different countries. “Gold plating” by national supervisors, additional fees, and different requirements for marketing material too often get in the way.

Existing barriers shall be knocked down: Commission will launch consultation to identify the main barriers to funds operating in other countries in order to improve passporting and build a system where investors have more choice and enjoy lower charges, and where investment funds can genuinely compete across borders.  

Commission is also working on ideas to strengthen venture capital markets: in 2016 it will be amending existing legislation governing venture capital funds to build up scale, diversity and choice while look at better use of public money to attract private investment with a pan-European venture capital funds.

In insurance sector the insurers are operating in a difficult environment too: a great deal of regulatory change has come on top of the challenge of low interest rates. Provided evidences will help to sharpen the focus of future reviews of legislation including Solvency II. The idea is that EU rules do not distinguish sufficiently between long-term and short-term investments, and the different levels of risk associated with them to prevent long term investments disproportionately expensive.

For investments by insurers in infrastructure projects, evidence provided by EIOPA confirms that's true. To support infrastructure investment by insurers, the Commission (as part of the work to build a Capital Markets Union Action Plan) amended Solvency II to define infrastructure as an asset class and reduce by a third associated capital requirements for this type of investment and that of the European Long-Term Investment Funds (the change that has been in force since April 2016 as a first CMU action). French financial markets authority has just authorised the creation of two ELTIFs that did the same. The positive result is clear: about € 1.2 billion in equity could be invested in infrastructure across the EU.

Legislative interaction

Financial services companies, pension funds and corporate entities call for more proportionality in the European Market Infrastructure Regulation (EMIR) while pointing to the way it interacts with bank capital rules. They emphasise EMIR’s broad scope, and argue that the risk management benefits of central clearing can still be achieved with a more proportionate approach. In a way which lessens the burdens on smaller financial firms, corporations and pension funds; takes business size and business models more into account; and doesn’t discourage central clearing services being provided.

It’s vital that Commission continues making financial institutions absorb losses across the financial sector (however, being clear about who and what is systemic and check that EU requirements are being set accordingly). At the same time, cumulative impact of bank capital rules such as the leverage ratio and EMIR are not being overly burdensome, that they don't weigh too heavily on those that provide clearing services and don’t undermine sensible business planning and risk management.

It should be possible to make EMIR more proportionate and continue to mitigate systemic risk in the EU derivative markets: it should be possible to lower administrative reporting burdens.

The responses the Commission’s received show that overall there is a lot of support for the reforms that have been put into place, but that across the whole of the financial sector there are concerns that legislation is not always proportionate: in some areas it may be limiting the amount of financing available to the wider economy; there's too high compliance burden, particularly on smaller businesses.

Commission will complete analysis by the summer, by the time it should be clearer what further actions are needed: e.g. EMIR and CRR were two areas mentioned frequently.

Future “revision work” shall be more proportionate in the way legislation's applied, more cautious before doing anything that might reduce liquidity, and more ambitious about reducing reporting and disclosure requirements where it's appropriate.

Financial stability among EU-28 states is a prerequisite for growth. But at the moment the biggest threat to stability is the lack of growth itself. It's from a financial stability point of view that the member states need to look at the combined effort of EU’s regulations and ask to strike the right balance between micro and macro prudential considerations.

Working with businesses, EU states and the European Parliament, the Commission regards it vitally important to have a framework that supports competition, jobs and growth in Europe, and deliver rules that command respect.

Reference: Speech by Commissioner Jonathan Hill at the public hearing on the 'Call for Evidence' – a review of the EU regulatory framework for financial services, in:

http://europa.eu/rapid/press-release_SPEECH-16-1788_en.htm?locale=en