The European Parliament elections taking place between 6 and 9 June 2024 will signal the start of the next five-year EU legislative cycle. The results of the vote and the corresponding distribution of the 720 seats amongst political groups will have direct implications for the law-making process in the upcoming legislature. In addition, following the June elections the nomination process for a new College of Commissioners will begin, resulting in the appointment of a new European Commission (Commission) leadership. With the Commission’s competence of legislative initiative, the new College’s objectives for financial services will set the pace and focus for the upcoming legislative cycle.

The financial services legislative agenda in the 2019-2024 mandate was extremely busy, with a number of new and review proposals passing through the Brussels’ legislative machinery. There have been numerous voices, including those from high-ranking European officials, suggesting that the upcoming mandate should focus on implementing the agreed rulebook rather than come up with new initiatives. Whether this will be taken onboard by the new Commission leadership remains to be seen, but even if this were the case, it would be highly unlikely that the European legislative and regulatory machinery would not produce any new legislative measures. Therefore in this note, we set out some of the key developments we expect to see in the area of financial services in the course of the upcoming legislature.

Trading, clearing and settlement

While the recent review of the Markets in Financial Instruments Regulation (MiFIR) was successfully finalised prior to the European Parliament’s election recess, the work is far from complete. For instance, the vast body of secondary legislation is to be developed before the milestone elements of the reform, including the appointment of consolidated tape providers (CTPs), will come into effect. The European Securities and Markets Authority (ESMA) has recently launched consultation processes on technical elements of the revised MiFIR pre- and post-trade transparency requirements, obligations to make data available on reasonable commercial basis and the rules for CTPs.

On the clearing side, while the outgoing legislators managed to approve in the plenary vote the most recent amendments to the European Market Infrastructure Regulation (EMIR 3.0), the file is still pending formal publication in the Official Journal of the European Union (OJEU), which is expected later this year. As with  MiFIR, the focus will then shift to the development of regulatory technical standards (RTS) for the some of the key EMIR 3.0 provisions. Given the tensions that surrounded some of the flagship elements of EMIR 3.0, including the active account requirement, we expect further work on this file.

Finally, on the settlement side the key consideration over the coming months will be whether the EU will follow the United States (US) in its recent move to shorten the settlement cycle for securities from T+2 to T+1. As indicated in the recent summary of the feedback to ESMA’s consultation, the views on the prospective move were mixed. That said, ESMA is expected to continue its work on this topic and to publish a final report in January 2025. Should the report provide a positive response to the question whether the EU should move to T+1 settlement, as the UK and Switzerland are likely to do in the medium term as well, it is up to the new Commission to take a final decision and issue a legislative proposal amending the Central Securities Depositories Regulation (CSDR) to introduce the T+1 settlement requirement.

Crypto-assets

While this year will see the application of the Markets in Crypto-Assets Regulation (MiCA), the first EU-level legislation setting out a comprehensive framework for crypto-assets, the new legislature is likely to deal with some updates to the crypto-assets rulebook given the number of areas left out of the legislation. In an attempt of trying to keep the legislation (relatively) up to speed with technological development, MiCA mandated the Commission to assess new areas of the crypto-asset markets, such as the activity of lending and borrowing of crypto assets, the developments concerning decentralized finance and non-fungible tokens, and prospective regulatory treatment thereof. The assessment report, possibly accompanied by a legislative proposal, is due to be published by the end of the year or the beginning of next year. With that, work on MiCA 2.0 might well be on the books for 2025.

Digital Euro

A legislative proposal paving the way for the establishment of a digital euro was put forward by the Commission in June 2023 and has been slowly progressing via the legislative review. Draft legislation setting out the framework for a retail central bank digital euro has not made any major progress in the outgoing legislature which means that the newly elected chamber will have a fresh go at the proposal. This also means that some of the most controversial elements of the proposal, including value limits of digital euro holdings and privacy concerns, will be back on the agenda in the Economic and Monetary Affairs (ECON) committee. Given that the Council of the EU (Council) is yet to agree its position on this file too and chances for this happening under the current Belgian Presidency being low, we should expect the debate on the digital euro to expand well into 2025 and prospectively beyond.

Payments

Completing the reform of the European payments landscape is another big-ticket legislative file left for the upcoming European Parliament to consider. The aim of the proposed reforms is to further harmonise the regulatory framework for payment services and payment services providers across the EU and to update the rules to reflect recent developments in the payments space, including by providing non-bank payment service providers with access to all EU payment systems and to remove obstacles to open banking services. Whilst the outgoing Members of the European Parliament (MEPs) managed to adopt its position on the June 2023 Commission proposals on a Directive and a Regulation on Payment Services (PSD3 and PSR), the Council has yet to agree on a general approach. Negotiations in the Council are focused on fraud prevention and the liability framework. That said, the fact that the former European Parliament had adopted its position on the file does not mean that the debate amongst MEPs is over. A newly appointed rapporteur will not be bound by the position agreed by his/her predecessor and will be able to re-open the file for further amendments. We should therefore expect some further interesting discussions over the coming months.

Open Finance

Regulating access to financial data – and more broadly, the growing role of BigTech in financial services – is likely to be one of the key areas of policy and legislative debate in the coming legislative cycle. Before the European Parliament went to election recess the co-legislators were unable to finalise the adoption of the June 2023 proposal for a Regulation on a framework for financial data access (FIDA). FIDA has a central role to play in achieving the Commission’s ambition of making the EU a leader in data-based economy. It builds on the open banking regime that was introduced by PSD2, which regulates access to payment accounts data, but seeks to take a regime a step forward by introducing rules on access, sharing and use of customer data, financial information services providers, as well as financial data sharing schemes. The newly appointed rapporteur will have to steer the debate in the European Parliament and agree the legislator’s negotiating position on the file, which may take some time. With the Council heading towards the general approach prospectively still under the Belgian Presidency, we are looking at trilogue discussions progressing well into 2025.

Prudential regulation and Banking Union

The co-legislators managed to complete the EU adoption of the Basel 3 reform before the election recess, by agreeing in trilogue the amendments to the Capital Requirements Regulation and Directive (CRR and CRD), but the regulatory work will continue over the new legislative cycle.

Meanwhile, discussions on the Commission’s April 2023 crisis management and deposit insurance (CMDI) legislative package remain ongoing. The legislative package contains amending proposals to the EU regime for the recovery and resolution of credit institutions. Among other things, the Commission proposed amendments to the early intervention measures framework, as well as an expansion of the public interest assessment, which expands the possibility for resolution authorities to intervene. The CMDI package falls short of reviving the EU-wide deposit insurance scheme (EDIS), which was proposed in 2015 and intended to be the third and final pillar of the Banking Union, but has been stuck in the Council ever since. The European Parliament adopted its negotiating position on the CMDI package in April 2024, and is now waiting for the Council to adopt a negotiating position of its own. Trilogue discussions on a final text are likely to start in autumn 2024, with formal adoption expected sometime in the first half of 2025.

Sustainable finance

The last two legislative cycles saw the adoption of a large number of legislative and regulatory acts within the framework of sustainable finance. The adoption and implementation of the Sustainable Finance Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) has provided the basis of this framework. More recently, the co-legislators adopted heavily debated rules  for sustainability disclosures by corporates, as well as a framework for ESG rating providers. The technical rule-making process under these major legislative acts will continue until after the elections. In terms of legislative works, the new Commission will decide on the review of the SFDR during the next legislative cycle, following on its public consultation on the SFDR framework in the end of 2023. The Commission is expected to publish a full review report with possible proposals for amending the SFDR framework by the end of 2024, so the new European Parliament may be involved in sustainable finance debate.

Retail financial services

The Retail Investment package, which was published by the Commission on 24 May 2023, aims to empower retail investors to take more informed investment decisions that would better correspond to their investment needs and objectives. The Commission proposals amend a number of legal texts in the fields of market conduct, asset management and insurance to amend the investor protection regime with regard to client categorisation, risk warnings for high-risk products, marketing communications. The package also includes a limited ban on inducements. Although the European Parliament adopted its negotiating position in April 2024 (which may need to be re-confirmed by the next European Parliament), the Council remains in discussions on the legislative package, with one of the most contentious issues being the proposed “value for money” benchmarks. With the trilogue negotiations expected to start after summer, a final text may surface in the second half of 2024.

Fostering the CMU agenda

Building a fully functional Capital Markets Union (CMU) remains a long-term objective for the subsequent legislative cycles, and we should expect the upcoming one to continue with this work. In the run up to the European Parliament elections there has been a lot of focus on what the new milestone towards the CMU completion should look like.  The Eurogroup’s March 2024 Statement on the future of the CMU  listed its ambitions for the next legislative cycle. In the area of financial markets architecture, this included focus on improving European securitisation markets and strengthening supervisory convergence. Whilst the final Eurogroup’s statement stopped short of calling for further centralisation of financial services supervision with the European Supervisory Authorities, the issue of centralised supervision is likely to become one of the key topics for the upcoming debates. In its own position paper issued ahead of the elections, ESMA called upon the Commission and co-legislators to evaluate the introduction of a prospective EU-level supervision for certain areas of European capital markets, such as large markets infrastructure and crypto-asset service providers. ESMA also explicitly called for effective forbearance powers, akin to powers of UK and US regulators, as previous attempts to grant them failed. ESMA also backed the Eurogroup’s call for a consultation on the review of the Securitisation Regulation in Q4 2024, prospectively leading to a legislative proposal further down the line.

The above issues are just the tip of the iceberg in the ongoing CMU debate, and it will be interesting to see what the upcoming Commission will select as priority initiatives.

Regulation of NFBI risk

Finally, one of the new areas of focus that is likely to gain more attention in the upcoming legislative cycle is the financial stability risks posed by non-bank financial intermediation (NBFI). Work in this area has been ongoing at the international standard-setters level, including the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), resulting in the publication of numerous recommendations on how to mitigate these risks posed by NBFIs. This has been now picked up by the Commission, which recently launched a public consultation on macro-prudential policies relating to NFBIs. The Commission is looking at developing macro-prudential tools intended to address excessive leverage, methods of identifying interconnections between different NBFIs, and between banks and NBFIs, as well as initiatives to ensure more coordinated and effective macro-prudential supervision of NBFIs and markets. Following a consultation deadline on 22 November 2024, we expect the new Commission to further pursue work on this topic.