Six years after the great reregulation, which spawned thousands of pages of new rules, the attitude of EU policymakers has shifted noticeably. No longer is their focus purely on creating rules to restrict activities. Instead, policymakers have begun talking about growth and how to revive the European economy. This change in attitude was well articulated recently by Jonathan Hill, who is in charge of financial services for the European Commission.
“As a Commission, we are committed to legislating less – 80% less this year compared to the last Commission – and legislating better. We want to work with businesses, supervisors and consumers to develop rules that are evidence-based. And we should have the self-confidence to check that our existing legislation is working as intended – and to be prepared to change it if it is not.”
Perhaps no regulatory project better exemplifies this shift in mood than the Capital Markets Union (CMU). Through a number of separate initiatives, this umbrella project seeks to create a single capital market across the EU and boost long-term investment in the European economy. The European Commission has published an action plan for the CMU, which identifies the following key elements that are targeted to be in place by 2019:
- Create New Sources of Funding: Provide more funding choices for Europe’s businesses and Small to Medium sized Enterprises to help them grow their businesses
- Improve Infrastructure Financing: Ensure an appropriate regulatory environment for long-term and sustainable investment and financing of Europe’s infrastructure
- Link Savings with Growth: Increase investment choices for retail and institutional investors and enhance the capacity of banks to lend
- Remove Barriers: Bring down cross-border barriers and develop capital markets across all EU Member States
While there are a number of strands to the CMU, one of the key elements is the ongoing review of the EU regulatory framework. Over the last few years, many have come to believe that the regulatory pendulum has swung too far and has unintentionally restricted growth of the European economy. In addition, there is a feeling that many of the new regulations overlap and conflict, creating confusion and duplicative work. To address these concerns, the European Commission launched a consultation to review the cumulative impact and coherence of the financial legislation adopted in response to the financial crisis, with an eye to produce future recommendations on how to streamline the regulatory framework. Since the consultation closed on 6 January 2016, the European Commission has been sifting through almost 300 responses it received and recently published a summary of the responses. The European Commission highlighted the respondents’ top five concerns as:
- Regulation has unduly discouraged long-term growth in the EU.
- EU rules are not adequately suited for Small and Medium sized financial institutions.
- The new rules have led to excessive compliance costs and unnecessary complexity.
- There are duplicative or inconsistent reporting and disclosure requirements across pieces of legislation that some are difficult or impossible to meet.
- There are several overlaps, duplications, and inconsistencies across the range of new regulation.
For asset management, reporting has been one of the biggest challenges posed by the new regulatory regime. Policymakers identified a lack of information as a key weakness of the pre-crisis regulatory framework. As a result, almost every regulation since 2008 includes new reporting requirements. The trouble is these reporting requirements are not always coordinated. This leads to situations where firms need to report the same information multiple times, in multiple formats, to multiple regulators. For example, different transaction cost disclosures appear in UCITS, MiFID 2, and PRIIPs. Another challenge with the conflicting EU reporting rules is that, in principle, it is not possible to comply with all the rules at the same time.
There is a sense the adversarial relationship between policymakers and the industry is ending. There is reason to be cautiously optimistic that the review process will help reduce some of the conflicting EU rules. However, the approach to modifying the regulatory framework will be important. The last thing anyone wants is to go through another punishing round of wholesale changes. The very idea of having to deal with the likes of MiFID 3, AIFMD 2, UCITS 6, and EMIR 2 is enough to make one’s blood run cold. The trick will be for EU policymakers and technocrats to make the necessary changes to the regulatory framework in a tactical way. Otherwise, it might be another six years before we see any relief and I don’t think anyone has the stomach for that.
Note: A version of this post originally appeared in the 2016 BBH Regulatory Field Guide