2013 has been one of the busiest years for the financial services industry with regulatory reform being the key feature on both the European and UK agendas. A number of the reforms that were designed to deal with the 2008 financial crisis have been finalised although there are some notable exceptions.
At the European level a notable achievement was that the CRD IV, the EU implementation of the Basel III reforms, was agreed and then published in the Official Journal of the EU in June. From 1 January 2014 firms subject to the CRD IV need to comply with the Capital Requirements Regulation, supplemented by numerous technical standards and guidelines from the EBA (many of which are yet to be agreed), and the PRA and FCA Handbook rules which transpose the CRD IV Directive. However, there still is some unfinished business with these reforms. For example, in September the UK launched a legal challenge in the ECJ concerning the CRD IV bonus cap.
The long journey on over-the-counter derivatives reform that began at the G20 summit in September 2008 has covered a great deal of distance in the EU this year. The delegated regulations under EMIR entered into force in March. The significant task of reporting over-the-counter derivative transactions will soon become a reality. On 12 November, ESMA authorised four trade repositories which means that on 12 February 2014 the reporting obligations under EMIR will commence. Also in November, those in the market seeking a postponement of reporting exchange-traded derivatives were given no reprieve by the European Commission which refused ESMA’s request to extend the reporting dates for these products.
In June the FCA published its Policy Statement concerning the implementation of the AIFMD. The following month, on 22 July, the transitional period for the Directive began. Such period will end on 22 July 2014 by which time UK AIFMs we need to have obtained the necessary variation of permission, authorisation or registration from the FCA. The exact timing of full scope applications has been the subject of a number of queries from firms prompting the FCA to issue a short statement on its website. The gist of this statement is that firms have a legal right to have their complete full-scope AIFM application determined by the FCA within 3 months (or exceptionally 6 months). Where the firm’s desired authorisation date is more than three months (for example 21 July 2014) then it needs to request a deferral of determination beyond the three month limit. It is important that the firm makes it clear on the application that a deferral is sought and reasons are provided.
Over two years ago the Commission issued its legislative proposal amending MiFID. However, it seems that the negotiations between the European Parliament and the Council have been quite tortuous as agreement has so far not been reached. It appears that one of the key stumbling blocks between the two institutions relates to the treatment of third country firms. The European Parliament’s plenary session is scheduled for 11 December and it will be interesting to see if a political compromise can be reached. If agreement is reached then all eyes will be on the detailed draft level 2 measures which will be published next year. However, if agreement is not reached will next year’s European Parliament elections scupper MiFID II completely?
Notwithstanding the above, perhaps the key EU regulatory initiative this year has been banking union. This initiative has not been universally welcomed by all member states with the UK indicating that it does not intend to participate. Under this initiative the ECB will be given supervisory tasks in respect of banks and certain other deposit takers under a single supervisory mechanism (known as the SSM). There will also be a single resolution mechanism (known as the SRM) that will apply to all banks in member states participating in the SSM. Another component of banking union was the single deposit guarantee scheme but the Commission indicated in a press release in June that it did not intend to press ahead with this.
The Regulation setting up the SSM and the Regulation amending the EBA’s founding Regulation were published in the Official Journal of the EU in October. The current intention is for the ECB to take on its supervisory role in November next year but before it does that it needs to produce the detailed rules of its supervisory model. The ECB launched an assessment of its supervisory role in October.
It is intended that the Regulation establishing the SRM will be adopted before the end of the current European Parliament term (by May 2014) and then come into effect from 1 January 2015. One of the key issues concerning the SRM is the new bail-in tool and it appears that support is gathering to implement it well before its scheduled date of 2018.
Closer to home the UK regulatory horizon changed on 1 April with the FSA being replaced by the FCA (and the PRA). Thematic reviews, self-attestation, market studies and the increased use of judgment are regulatory features that are here to stay. The FCA has been given a new competition objective which, perhaps, is the most significant change in its objectives as a regulator. This is because of the approach that it drives requiring it to spend more time and effort looking at markets as a whole and whether they function well for consumers. It also means that the FCA cannot wait for problems to emerge before it tries to promote competition.
Firms are also subject to a new FCA supervisory model which has at its core an approach that is focused not just on compliance with the rules but which seeks to encourage firms to do the right thing in respect of their customers and the markets they operate in. This is a significant philosophical change in the sense that firms should now be asking themselves the question ‘should it’ carry out an activity as well as ‘could it’ do an activity.
There are a number of issues on the FCA’s horizon which are too numerous to mention here. Perhaps a couple of the more interesting ones are: wholesale market regulation, client assets, the use of dealing commission, consumer credit regulation and crowdfunding.
The UK Government is also moving forward with significant regulatory change in the banking sector through the Banking Reform Bill. This Bill is designed to implement a number of recommendations made in the final report of the Independent Commission on Banking that was published in September 2011. It will also take into account the recommendations of the Parliamentary Commission on Banking Standards (PCBS) whose final report was published in June.
As most of us are aware the headline in the Bill is the ring fencing proposal whereby the deposit taking business is placed into a separate legal entity. However, this requirement was modified this year by the Government accepting the PCBS recommendation that the ring-fence should be electrified whereby the regulator would have the power to enforce full separation between retail and wholesale banking in a group structure. Another PCBS recommendation which the Government accepted which is exercising minds is the introduction of a senior persons’ regime for senior bankers and criminal sanctions for managerial misconduct. The Bill is scheduled for its third reading in the House of Lords on 9 December and it appears to be on course to receive Royal Assent by February next year.
Before leaving you it also worth mentioning that cyber security is appearing more and more on the regulatory agenda. In March 2014 the European Parliament is expected to vote on the proposed Cyber-Security Directive. Also sometime in Q1 2014 there should be a report concerning the lessons learned from the exercise to test the resilience of the financial services industry from cyber attacks (this exercise was named Operation Waking Shark 2).
Simon Lovegrove is a lawyer with the financial services team at Norton Rose Fulbright LLP