THE 2017 REVIEW OF THE EUROPEAN SUPERVISORY AUTHORITIES Josina Kamerling, Head of Regulatory Outreach for EMEA, CFA Institute Lisbon, 1 June, 2017
TABLE OF CONTENTS 01 Mission & Facts 04 Supervisory challenges re FinTech 02 Capital Markets Union 05 Future of EU Supervision 03 Challenges for the investment management profession 2
MISSION & FACTS 3
CFA INSTITUTE MISSION To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. Educated, ethical investment professionals Financial markets that reflect CFA Institute beliefs Global financial markets that serve the public interest 4
CFA INSTITUTE KEY FACTS Non-for-Profit status 141,541 Members 135,692 CFA Charterholders 147 Societies across the world European societies: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovenia Spain, Sweden, Switzerland, Ukraine, United Kingdom. 5
EU CAPITAL MARKETS UNION (CMU) 6
MOST UNDERESTIMATED RISK TO GLOBAL MARKETS FROM THE CFA INSTITUTE GLOBAL MARKET SENTIMENT SURVEY 2015 6
WHY A CAPITAL MARKETS UNION? Capital markets have expanded in the EU over recent decades: 1. 8.4 trillion total stock capitalization (around 65% of GDP) by end 2013 versus 1.3 trillion in 1992 (22% of GDP). 2. Total value of outstanding debt securities exceeded 22.3 trillion (171% of GDP) in 2013, compared to 4.7 trillion (74% of GDP) in 1992. Stock market capitalization (2013)* Nonetheless, European market remain underdeveloped in comparison with other jurisdictions *as % of GDP Source: http://ec.europa.eu/finance/capital-markets-union/index_en.htm 8
HOUSEHOLDS FINANCIAL ASSETS IN THE EU & US (%TOTAL ASSETS; AVERAGE 2007 14) 9
REGULATORY AVALANCHE EU Regulatory Landscape Source: Fleishman Hilliard 10
CAPITAL MARKETS UNION S THREE PILLARS 1. Developing more efficient and liquid markets for issuance of financial instruments Capital Markets Union 2. Harnessing long-term savings to promote investments 3. Promoting open, integrated capital markets infrastructure 11
BARRIERS TO THE DEVELOPMENT OF EU CAPITAL MARKETS (CFA CMU SURVEY2015) % Barrier (Top Two Box 4 + 5) 70% 65% 63% 60% 50% 49% 48% 47% 40% 30% 27% 20% 10% 0% Differences in taxation treatment across jurisdictions Differences in legal frameworks surrounding the ownership and transfer of securities Protectionist policies inhibiting crossborder mergers and acquisitions Administrative burdens associated with the issuance of securities (including prospectus and filing requirements) Insufficient secondary market liquidity in corporate debt markets Lack of investor demand for SMEs Q: To what extent are each of the following a barrier to the development of EU capital markets? Scale: Please rate each on a 1 to 5 scale, where 1 means it is not a barrier at all and 5 means it is a huge barrier. 12
CHALLENGES FOR THE INVESTMENT MANAGEMENT PROFESSION 13
TRUST IN THE FINANCIAL INDUSTRY (EDELMAN 2016) 14
TRUST IN THE FINANCIAL INDUSTRY (EDELMAN 2016) 15
TRUST IN THE FINANCIAL INDUSTRY (EDELMAN 2016) 16
TRUST IN THE FINANCIAL INDUSTRY (EDELMAN 2016) 17
SUPERVISORY CHALLENGES RE FINTECH 18
CFA INSTITUTE FINTECH SURVEY (2016) 19
CFA INSTITUTE FINTECH SURVEY (2016) 20
CFA INSTITUTE FINTECH SURVEY (2016) 21
CFA INSTITUTE FINTECH SURVEY (2016) 22
FUTURE OF EU SUPERVISION 23
CAUSES OF THE FINANCIAL CRISIS (DE LAROSIERE HIGH-LEVEL GROUP REPORT 2009) Failures in risk assessments by both financial firms and those who regulated/supervised them. Dramatic failures in the ratings of structured products & major conflicts of interests by the CRAs. Regulators and supervisors focused on the micro-prudential supervision of individual institutions rather than on macro-systemic risks (Lack of information exchange & collective decision making). Weak shareholders and management of firms along with remuneration schemes providing the wrong incentives. 24
SUPERVISORY & SANCTIONING POWERS (DE LAROSIERE HIGH-LEVEL GROUP REPORT 2009) Member States Competent Authorities must have sufficient supervisory powers, including sanctions to ensure compliance with the applicable rules. Member States Competent Authorities should also be equipped with strong, equivalent and deterrent sanction regimes to counter all types of financial crime. Member States sanctioning regimes are weak and heterogenous*. This can lead to the inducement of regulatory arbitrate in a single markets. Where needed, more resources should be deployed for the detection of financial crimes. 25
LESSON FROM THE CRISIS: WHAT WENT WRONG? (DE LAROSIERE HIGH-LEVEL GROUP REPORT 2009) In terms of macro-prudential risks, there was no mechanism to ensure that risk assessment was translated into action. Failures in the supervision, by national regulators, of particular institutions (i.e. Northern Rock). Failure to challenges supervisory practices on a cross border basis. Lack of frankness and cooperation between national supervisors (Lack of information flow among supervisors). Lack of consistent supervisory powers across Member States (Lack of reaction). Lack of resources in the level 3 committees. No means for supervisors to take common decision due to lack of legal powers. 26
MICRO-SUPERVISION: MOVING TOWARD A ESFS (DE LAROSIERE HIGH-LEVEL GROUP REPORT 2009) Existing national supervisors would continue to carry out day-to-day supervision. The new European Authorities would be set up, replacing the previous 3 committees, with the role to coordinate the application of supervisory standards and guarantee strong cooperation between the national supervisors. Colleges of supervisors would be set up for all major cross border institutions. The ESFS will need to be independent of the political authorities, but be accountable to them. It should rely on a common set of core harmonized rules and have access to high quality information. 27
SUPERVISORY REPAIR (DE LAROSIERE HIGH- LEVEL GROUP REPORT 2009) A decentralized European System of Financial Supervisors should be set up. National Supervisory Authorities should be strengthened with a view to upgrading the quality of supervision in the EU. EU should develop a more harmonized set of financial regulation, supervisory powers and sanctioning regimes. EU should establish an integrated European System of Financial Supervision. 28
EUROPEAN PARLIAMENT S PRIORITIES IN FINANCIAL SERVICES (ECON-MAY 2017) Capital Markets Union: o Support for European Commission proposal on insolvency. o Acknowledges ongoing European Commission High-Level Expert Group (HLEQ) work on sustainable finance as a priority. o Call for a broader approach to SME financing including peer to peer lending and private placements. Supervisory Convergence: o Proposal to streamline EU approach to third-country regimes across the regulatory framework. o Proposal on strengthening the ESAs, with a particular focus on ESMA for the supervision of the CMU. o Call for the European Commission to assess and where necessary to adjust the EU regulatory framework in light of Brexit (Including EMIR, AIFMD & MiFID II as a minimum). 29
COMMENTS BY JACQUES DE LAROSIÈRE THE FATHER OF THE ESA S AT AN EP HEARING (MAY 2017) Twin-peaks model is not a silver bullet. Banking & Insurance particularities require distinct supervision. EU needs to beef up supervisory capacity in light of Brexit and CMU ambitions. ESAs Boards governance needs to be reformed. It needs to be independent from national agendas Sanctioning powers for ESMA are important to ensuring consistent implementation. Brexit: Observer status for FCA in ESMA and vice versa? 30
ESMA RESPONSE TO THE COMMISSION CONSULTATION ON CAPITAL MARKET UNION MID- TERM REVIEW 2017 One of ESMA s core objectives is to bring more convergent approaches to supervision exercised by NCAs. To ensure that ESMA s powers can be better used to improve outcomes in practice, it would be helpful to clarify and adapt certain aspects of the existing ESMA Regulation. Firstly, it would be useful to clarify NCAs obligations to respond to requests for information made by ESMA pursuant to Article 35 of the ESMA Regulation*. ESMA may use its powers under Article 17 of the ESMA Regulation to determine whether an NCA has breached Union law**.
ESMA RESPONSE TO THE COMMISSION CONSULTATION ON CAPITAL MARKET UNION MID- TERM REVIEW 2017 The ESAs and NCAs could benefit from having the possibility to suspend temporarily the application of a particular rule if its application could lead to unintended consequences or requires guidance or technical specifications that are not yet available. To ensure investor protection in the context of cross-border provision of services, ESMA is facilitating supervisory cooperation of authorities in their home-host relationship. ESMA continues fostering exchanges of supervisory experiences amongst NCAs to develop a common understanding around key issues concerning the supervision of speculative products In terms of asset management, ESMA is building common approaches for delegation functions under the UCITS Directive and AIFMD and, in the context of investment services, work on the application of outsourcing requirements under MiFID II will be undertaken. ESMA is also about to start work to increase knowledge-sharing in relation to enforcement models and approaches.
ESAS AREAS FOR IMPROVEMENT IDENTIFIED BY THE EUROPEAN COMMISSION ESAs work in promoting a common supervisory culture and fostering supervisory convergence. Tasks and powers relating to consumer and investor protection provided for in the ESA Regulations & the role played by the ESAs and their Joint Committee. Tasks and powers of the ESAs in order to facilitate their actions as regards breach of Union law by individual entities. ESAs powers to access information & to monitor regulatory, supervisory and market developments in third countries. Improvements to the current organization and operation of the various bodies to enhance enforcement and supervisory convergence in the financial reporting area. 33
ESAS AREAS FOR IMPROVEMENT IDENTIFIED BY THE EUROPEAN COMMISSION To give EIOPA powers to approve and monitor internal models of cross-border groups. Requirement to take the EBA s concerns into account. Extension of ESMA s direct supervisory powers to be considered in order to reap the full benefits of a CMU. Current governance set-up in terms of composition of the Board of Supervisors and the Management Board, and the role of the Chairperson to allow the ESAs to effectively fulfil their mandates. Introduction of permanent members to the ESAs Boards further improve the work of the Boards Maximizing synergies between the EBA and EIOPA while possibly consolidating certain consumer protection powers within ESMA Do the current ESAs funding arrangement needs to be fully/partly funded by the industry? 34
CFA INSTITUTE RESPONSE TO THE EU CONSULTATION ON THE OPERATIONS OF THE ESAS Supervisory Convergence: ESMA has functioned well in its regulatory work to achieve a common rule book through the development of technical standards and other implementing measures. More emphasis could be given to reporting of best practices by the ESAs, including benchmarking of national competent authorities against best practices. The Joint Committee of the European Supervisory Authorities plays an important role in delivering a joined-up approach to horizontal investor protection issues. Support to establish ESMA as the single supervisory authority for capital markets in the EU. It would be appropriate for the ESAs to conduct periodic monitoring of third country developments and consider whether there have been any material changes to third country circumstances that would warrant a reappraisal of the equivalence decision. 35
CFA INSTITUTE RESPONSE TO THE PUBLIC CONSULTATION ON THE OPERATIONS OF THE ESAS Direct Supervisory Powers: Consideration could be given to extending ESMA s direct supervision powers in the area of crossborder investment funds. Improvements could be made to improve the efficiency and accountability of decision-making among the ESAs. Current model of having three separate ESAs for banking, insurance and securities markets has been effective and efficient. Funding: Not in favor of changing the funding model of the ESAs to one which is fully funded by industry. Higher levels of resources for the ESAs to better equip them to deliver on their mandates, including where they make take on enhanced powers and accountabilities. This implies higher contributions from the EU budget may be needed. 36