EU Financial Services regulation A new agenda demands a new approach October 2019 kpmg.com/regulatorychallenges 2 EU Financial Services regulation © 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. EU Financial Services regulation 3 Contents 01 Introduction 4 02 Changing faces 6 03 Resetting the agenda 8 04 Legislating for the future 12 05 Managing the inheritance 14 06 Converging supervisory practices 16 07 Acting on the global stage 18 08 Abbreviations 22 09 Further insights 23 © 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 4 EU Financial Services regulation 01 Introduction Against a challenging economic and geo- A challenging context political backdrop, the incoming Commission There is a majority of new faces involved in the President has set a full regulatory agenda that regulation and supervision of financial services, across will directly and indirectly impact the financial the leadership of the EU institutions and within the services industry. Climate change, the digital European Parliament. New faces bring fresh ideas, but society and capital markets union feature they also indicate a depletion of institutional knowledge prominently, along with the perennials of about unfinished legislative proposals and the detailed background to post-crisis regulation. financial stability and consumer protection. In addition to the new full agenda, legislative proposals The Commission agenda includes an outstanding from the previous parliament will need emphasis on the EU’s place on the to be completed or binned. The Commission will have international policy stage. How will the to resolve implementation issues with current rules, absence of the UK impact the EU’s global manage the wave of reviews of post-crisis regulation positioning in regulatory debates? Will EU and complete work on the on-boarding of agreed global standards into EU rules. financial markets be open and international, or closed and domestic? Against a backdrop of heightened trade disputes and other geo-political tensions, the importance of open Greater use of the European Supervisory capital markets, to the EU real economy and to all Authorities’ (ESAs’) enhanced supervisor financial market players and beneficiaries, is recognised convergence powers is already being signalled in comments by senior policy-makers. There can be and the national regulators also have a key role tensions in achieving this in practice, however, as evidenced by the “equivalence” debate. to play. How will these supervisory actions pan out and what impact will they have on Meanwhile, the global regulatory agenda is evolving authorised firms? and there are different approaches to the review of post-crisis rules. Key messages The adoption over 18 years ago of the “Lamfalussy” process for EU legislation, with its four distinct levels, is the cornerstone that is meant to underpin the EU’s approach to financial services regulation. In practice, however, the application of the process has fallen short of its original clarity. Technical provisions have been included in Level 1 legislation and there has been a tendency to address issues of national divergence via more and more detailed regulations. Consequently, Level 1 legislation often cannot adapt quickly to market developments and new technologies. Legislation could be developed in a way that suits the nature of European financial services today and incentivises innovation, stimulates competition and improves customer choice, with no sacrifice of regulation and protection. A process developed almost 20 years ago remains fit for purpose, but only if all institutions are disciplined in how they apply it. © 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. EU Financial Services regulation 5 The impending wave of reviews of post-crisis regulation raises questions about the capacity of the EU institutions and of the industry to inform and undertake A process developed almost these reviews. There is also a concern that, given each 20 years ago remains fit piece of legislation has a different review date set in law, the EU institutions may be hampered from for purpose, but only if all looking at issues in the round, across different institutions are disciplined in pieces of legislation. how they apply it The ESAs’ use of their enhanced powers and the increased expectations on collaboration and information-sharing between national competent authorities (NCAs) will likely result in tightened supervisory procedures and additional information requests for authorised firms. Most immediately, firms should review any dependencies on presumed equivalence decisions in their Brexit risk assessments and contingency plans. They should continue to factor in a range of outcomes, including no deal, and therefore the sudden loss of passports and other critical measures, such as those relating to group capital requirements. It is generally presumed that the UK and EU regulatory regimes will continue to be aligned in the short term, but that in the medium term they will tend to move apart, as the EU reduces its dependence on what will become a third-country financial centre and the UK looks to serve other financial markets, while operating under its own rules. This divergence will feed through to the EU and UK positions in global debates. Together with the evolving global regulatory agenda, and potentially divergent approaches between the EU and the US in particular, this points to an increasingly fragmented rule book for global players – counter to repeated industry demands for open markets and a level playing field at global level. It could also mean even greater pressure on supervisors to avoid extra- territorial impacts and to accept the supervision in other jurisdictions. The EU will need to understand and balance the desire to promote the international role of the Euro with calls for third-country firms to be required to comply with EU rules and to submit to EU supervision, and for the EU to exert extra- territorial reach. © 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 6 EU Financial Services regulation 02 Changing faces Across the leadership of the EU institutions It handles most financial services legislation and that have a direct say in the regulation and sustainable finance matters, and conducts the questioning supervision of financial services, there is a of the European Central Bank (ECB) president and the ESA chairs. predominance of new faces, with changes in key Commission staff positions also expected. Italian socialist MEP, Roberto Gualtieri was set to be 60 percent of the members of the European committee chair for the second term in a row. Following Parliament (MEPs) are new to the role and the his appointment as Italy’s finance minister, ECON will now be chaired by his national and political colleague, balance between political groupings has seen Irene Tinagli. a significant shift. New faces bring fresh ideas, but they also European Parliament indicate a depletion of institutional knowledge about unfinished legislative proposals and the 2019-2024 detailed background to post-crisis reforms. The European Parliament 108 182 74 Italian socialist MEP, David Maria Sassoli – a former TV journalist and a late candidate in the electoral process 62 – is the new President of the European Parliament. He 154 leads a Parliament that has a different political balance 73 to its predecessor and contains many new faces. 60 751 percent of the 751 MEPs are new to the role. 41 57 The two largest political groupings – EPP1 and S&D2 – lost 16 percent of their seats, with significant gains for Renew Europe3 (up 61 percent), the Greens4 (up 48 percent) and Eurosceptics (up 13 percent). In total, 2014-2019 Eurosceptic MEPs now hold more seats than the EPP group, but they do not comprise one political grouping. 73 seats are held by UK MEPs, 29 of which are members of the UK’s Brexit Party, which is not attached 67 to any of the EU political groupings, but which has a 50 221 strong political affinity with the two main Eurosceptic groups, ECR5 and ID.6 After the UK leaves the EU, 27 of the 73 seats will be allocated to other member states. 191 70 In particular, France and Spain will gain five seats each and the Netherlands will gain three. 751 48 More women have been elected to the European 52 52 parliament than ever before, but men still account for 60 percent of MEPs. Of the 22 parliamentary committees, ECON, the Committee on Economic and Monetary Affairs is of GUE/NGL S&D Greens/EFA Renew Europe ALDE (now Renew Europe) paramount importance for the financial services industry.