ESSENTIAL INSIGHTS INTO NEW FINANCIAL REGULATION AND ITS IMPACT ON FINANCIAL PROFESSIONALS

Transcription

1 ESSENTIAL INSIGHTS INTO NEW FINANCIAL REGULATION AND ITS IMPACT ON FINANCIAL PROFESSIONALS Josina Kamerling, Head of Regulatory Outreach, EMEA CFA Institute Amsterdam, 18 April CFA Institute. All rights reserved.

2 MISSION & FACTS 2

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 3

4 CFA INSTITUTE KEY FACTS Not-for-Profit status; More than 148,800 Members; 147 Societies across the world; EU Societies: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovenia, Spain, Sweden, United Kingdom. 4

5 SETTING THE SCENE 5

6 MOST UNDERESTIMATED RISK TO GLOBAL MARKETS FROM THE CFA INSTITUTE GLOBAL MARKET SENTIMENT SURVEY

7 FUTURE GAME CHANGERS CFA Institute study (April 2017) Ageing demographics: economic growth is likely to slow globally due to slowing population growth. For financial services, the consequences range from underfunded pensions to a lower capital stock to slowing consumption, and, therefore, more slowing of economic growth. Technological Megatrends: - financial analysis and investment banking with far few people; - reducing the systemic risk of traditional banks, but increasing the need for effective underwriting before loans are issued; - Investment in technology increases and becomes more specialized; - New levels of specialization of financial products emerge; - Omnipresent risk management and enforcement with real-time financial analysis of the entirety of a business financial performance; - Peer-to-peer trading of securities, like an ebay for financial securities; - Increasing allocations to energy technology in the impact investing category; - Creation of transnational currencies (like bitcoin). 7

8 FUTURE GAME CHANGERS CFA Institute study (April 2017) Economic Imbalances: effects of deleveraging after the peak of the debt supercycle; Low sustained interest rates; growth outlook affected by aging demographics; income inequality (tensions in politics and businesses). Government footprint: increased levels of activity in regulations and actions by politicians that impact the investment industry; predominance of national jurisdictions in finance creates attractions for regulatory arbitrage; geopolitical rifts in the EU and elsewhere have weakened global governance. Resource management: issues of resource management are growing in importance, and thus have direct and indirect effects on the investment industry; the impact of climate change has already been noticed by markets; conflicts over food, water, and other sources of natural capital. Mitigating factors include improvements in renewable energies, energy efficiency, desalination of water, and others. 8

9 THE NEXT GENERATION OF TRUST 44% of retail investors who responded to our survey trust financial services, while 35% are neutral, and 21% are distrusting of the industry. Technology is much more trusted (64%) while there is little trust in governments (30%); Younger investors are more trusting of financial services more than older investors are; Underperformance (57%) and lack of communication or responsiveness (51%) are the reasons they leave a relationship with an adviser; For institutional investors, the two most important attributes when hiring an asset manager are trust to act in the client s best interest and ability to achieve high returns; Strong link between the use of technology by financial advisers and increases in trust (particularly for younger investors). However, technology is not yet trusted to give advice, and, investors are nervous about the vulnerability of their data in case of security breaches. Source: CFA Institute, The next Generation of trust,

10 Source: CFA Institute, The next generation of trust,

11 Source: CFA Institute, The next generation of trust,

12 EU CAPITAL MARKETS UNION (CMU) 12

13 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 13

14 BARRIERS TO THE DEVELOPMENT OF EU CAPITAL MARKETS (CFA INSTITUTE CMU SURVEY2015) 70% 60% 50% 40% 30% 20% 10% 0% 65% 63% Differences in taxation treatment across jurisdictions Differences in legal frameworks surrounding the ownership and transfer of securities % Barrier (Top Two Box 49% 48% 47% 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 27% Lack of investor demand for SMEs Q: To what extent are each of the following a barrier to the development of EU capital 14

15 REVIEWING THE EU SUPERVISORY AUTHORITIES: REINFORCING INTEGRATED SUPERVISION TO STRENGTHEN THE CMU AND FINANCIAL INTEGRATION IN A CHANGING ENVIRONMENT 15

16 EUROPEAN SUPERVISORY MARKETS AUTHORITY New areas proposed for direct supervision Area Legislation European Securities Markets Authority s direct supervisory powers for EU entities Capital market entry Prospectuses Approval of certain categories of prospectuses by EU issuers Capital market actors Capital market infrastructure Capital market data & information Harmonized collective investment funds (EuVECA, EuSEF and ELTIF) Central Counterparties Credit Rating Agencies (CRAs) Trade Repositories (TRs) Data reporting services providers Authorisation and supervision of funds which are regulated at the EU level Supervisory powers in relation to CCPs (Commission proposal of June) Registration and supervision of CRAs (already existing) Registration and supervision of trade repositories (already existing) Registration and supervision of data reporting service providers The European Securities Markets Authority s powers for third country entities Approval of all prospectuses drawn up under EU rules by third country issuers N/a Recognition and supervisory powers for third country CCPs (already existing; reinforced in Commission proposal of June) Endorsement of third country CRAs (already existing) Recognition of third country TRs (already existing) N/a Source: European Commission Benchmarks Supervision of critical benchmarks Endorsement and supervision of third country benchmarks 16

17 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. 17

18 Direct Supervisory Powers: CFA INSTITUTE RESPONSE TO THE PUBLIC CONSULTATION ON THE OPERATIONS OF THE ESAS Consideration could be given to extending ESMA s direct supervision powers in the area of cross-border 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 favour 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. 18

19 GEOPOLITICAL CONSIDERATIONS ON EU SUPERVISION (BREXIT) 19

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21 NUMBER OF FIRMS WITH FINANCIAL SERVICES PASSPORTS TO AND FROM THE UK Legislation Passports Outbound MiFID 2, AIFMD UCITS Passport Inbound The EU is the biggest single market for UK exports of financial services, generating a trade surplus of 22.8 billion in % of the UK s total trade surplus in financial services; According to Sapir. Schoenmaker and Véron, the UK accounts for 90% of European wholesale banking activity. It is the largest jurisdiction for foreign exchange trading (accounting for 37% of global daily foreign exchange turnover and 78% of the foreign exchange turnover in the EU); The market capitalization of the London Stock Exchange (LSE) accounts for 30% of total EU equity market capitalization; Share turnover on the two largest exchange in the UK (LSE and BATS Chi-X-Europe) account for nearly 50% of total turnover on EU equity exchanges; The UK is a leading financial centre in investment management, and has the largest investment management industry in Europe, which is second only to the United States in global terms. 21

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23 BREXIT: ISSUES ABOUT THIRD-COUNTRY REGIME Three caveats on the third-country regime for the UK as regards passporting rights upon Brexit: - Not all EU directives and regulations provide for a third-country regime, and others may provide more limited scope of market access; - The decision to grant regulatory equivalence resides solely with the European Commission and can be revoked at any time; - Political factors are likely to play a significant part in the Brexit negotiations and may affect the outcome of any UK equivalence assessments. Alternatives to third-country regime: - Bilateral trade agreement between the UK and the EU providing a bespoke arrangement and favourable access to each other s markets (however, it may take several years to obtain); - Firms establish subsidiaries inside the EU (in this way firms would be treated as nationals of the member state in which they are domiciled). However, establishing a physical presence and staff in another member state implies high costs; - WTO rules: in this case trading relations between the UK and the EU would default. This would be the hard Brexit scenario, creating a cliff-edge effect and a substantial change in the UK s access to EU markets. 23

24 THE REALITY OF MIFID II 24

25 MIFID II IMPLICATIONS Implementation is very uneven across Member States: this could create uncertainty; Ongoing revision of costs, charges in the KID as a sufficient measure of product costs in the calculation of aggregated costs and charges covering the whole investment service; MiFID II rules have a big impact on the trading of fixed-interest derivatives such as interest rate swaps and ETFs; New rules on price unbundling are negative for some companies as they reduce the volume of their activities as investment principals, and move to an agency-led business model; MiFID II rules is having an impact on the quality of research for smaller companies. Mid-tier firms stopped producing research. On the buy side, firms need to demonstrate value for research being paid for, and are less prepared to explicitly make payments for the analysis. 25

26 MIFIDII S IMPACT ON INVESTMENT RESEARCH (CFA INSTITUTE 2017) Source relatively less research Source same amount of research Source relatively more research Not sure Other third party providers 34% 25% 8% 33% In-house research (buy-side) 5% 43% 44% 8% Independent research providers 37% 33% 20% 10% 2% 4% Investment banks 78% 15% 0% 20% 40% 60% 80% 100% 120% Investment banks are expected to suffer the most with 78% respondents agreeing that they would source less from Investment banks under Mifid II. On the other hand, firms are more likely to rely on inhouse research under Mifid II with 87% respondents noting that they would source more or the same amount using their in-house research channels. Question: For each of the following research providers, select whether you expect to source more, less, or about the same amount of research under MiFID II compared to at present: Base: 364 respondents 26

27 THE FINTECH DISRUPTOR 27

28 FINTECH ACTION PLAN (MARCH 2018) The European Commission presented an Action Plan on how to harness the opportunities presented by financial technologies. The key measures are: - Legislative proposal on crowdfunding to make it easier for online platforms to offer their services EU-wide (platforms will have an EU label based on a single set of rules). Investors will be protected by clear rules on information disclosures, governance and risk management; - Future possible legislative considerations on Initial Coin Offerings (ICOs), and licensing/passporting requirements; - Wait and See approach across Fintech areas (particularly on blockchain, cloud, and crypto-assets). The Commission has already set up an EU Blockchain Observatory and Forum that will report on the challenges and opportunities of crypto-assets; - Future presentation of a blueprint to harmonise EU sandboxing regime, based on ESAs evaluation for supervisory cooperation. The Commission will publish a best practice guide for regulatory sandboxes. 28

29 Source: CFA Institute, The next generation of trust,

30 COMPLEMENTING THE BANKING UNION: ADDRESSING THE RISKS RELATED TO NPL S 30

31 KEY MEASURES OF THE PROPOSAL Ensuring sufficient loss coverage by banks for future NPLs: Proposal for common minimum levels for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing; Introduction of a common definition of non-performing exposures (NPE), in accordance with the one already used for supervisory reporting purposes. Providing more efficient value recovery from secured loans: To have an efficient mechanism for secured creditors to recover the value from loans guaranteed with collateral when the borrower of a loan defaults; To facilitate out-of-court collateral enforcement to allow banks to seize the collateral that underpins a loan in an expedited way (only for loans granted to businesses). Establishing a secondary market for NPLs: To define activities of credit servicers, set common standards for authorisation and supervision and imposes conduct rules across the EU; More consumer protection ensured by legal safeguards and transparency rules so that the transfer of a loan does not affect the rights and interest of the borrower. Providing technical guidance on how to set up national Asset Management Companies (AMCs): A non-binding blueprint clarifying the permissible design and state aid conditions of AMCs receiving public support, and suggesting a number of common principles, on the set-up, governance and operations of AMCs. 31

32 CFA INSTITUTE STUDY ON BANK PERFORMANCE REPORTING (2014) CFA Institute s recommendations: - In addition to amortised cost carrying values, fair value measurement of loans should be recognised on the face of the balance sheet; - Standard setters should require the recognition of both the amortised cost and the fair value of financial assets on the face of financial statements; - The current requirements to provide only disclosures of fair values for loans do not ensure that these disclosed fair values are always prepared with the rigor that would be ordinarily applied for recognised financial statement information; - Bank risk disclosures need continued enhancement: Information risk contributes to investors banking sector risk aversion; - Given that, as has been recommended by numerous stakeholders, risk disclosures need to be enhanced to help investors better understand bank business models and reduce the risk premium that investors assign owing to the limited transparency of bank financial statements. - Explaining the differences between the carrying values and fair values that have been determined on the basis of internal models; - Including a sensitivity analysis for the disclosed fair values; - Disclosure improvements are required to allow greater understanding of the nature of impairments and thereby the sources of the differences in impairment charges and allowance for loan losses among banks; - Securities regulators should continually monitor reporting practices by banks and encourage consistent and comparable reporting. Source: CFA Institute, Financial crisis insights on bank performance reporting,

33 SUSTAINABLE FINANCE 33

34 SUSTAINABLE FINANCE ACTION PLAN (MARCH 2018) The European Commission has recently launched an Action Plan on Sustainable Finance with the objective of: Re-orienting capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth; Managing financial risks stemming from climate change, natural disasters, environmental degradation and social issues; and Fostering transparency and long-termism in financial and economic activity. The actions proposed by the Commission include: - Creating EU labels for green financial products on the basis of an EU classification system (taxonomy). This will allow investors to easily identify investments that comply with green or lowcarbon criteria; - Requiring insurance and investment firms to advise clients on the basis of their preferences on sustainability; - Incorporating sustainability in prudential requirements; - Enhancing transparency in corporate reporting: revision of the guidelines on non-financial information; In May 2018 the Commission will put forward a proposal on the duties of institutional investors and asset managers regarding sustainability in the investment process. 34

35 ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) SURVEY (2017) 73% of our members take ESG issues into account in their investment analysis and decisions (particularly, ESG issues); Demand from clients and/or investors and a proven link between ESG matters and financial performance are the two factors causing our members to take into consideration ESG issues; 65% of respondents consider ESG issues to help manage investment risks, and 45% because clients/investors demand it. The three factors that most limit our member organisations ability to use nonfinancial information in investment decisions are: - Lack of appropriate quantitative ESG information; - Lack of comparability across firms; and - Questionable data quality/ lack of assurance. Source: CFA Institute, 2017 ESG Survey: Global Perceptions of Environmental, Social, and Governance Issues in Investing 35

36 CONCLUSIONS 36

37 CURRENT ISSUES Not enough harmonisation and consistency in supervision and enforcement practices among Member States. This is needed for wellfunctioning and integrated capital markets in the EU; Still existing differences in the implementation and enforcement of EU laws and practices (the EU supervisory agency steps in only in exceptional circumstances, i.e. when the national authority fails to enforce EU law and in the case of an emergency established by the Council); Following the departure of the UK, the biggest EU capital market, i.e. London, is leaving the EU. What are the challenges to build a real Capital Markets Union? Will Brexit lead to a renegotiation at global level on capital markets issues? 37

38 NEXT STEPS May 2018 Fiduciary duty: Commission proposal on duties of institutional investors and asset managers regarding sustainability in the investment process May 2018 Third-country CCPs: Draft report on EMIR-CCPs file to be voted in ECON Committee June 2018 ESAs review: Presentation of ECON draft report in the European Parliament June 2018 European Council summit 24 September 2018 ESAs review Report to be voted in ECON Committee October 2018 European Council summit October 2018 Brexit: Tentative deadline set out by Michel Barnier for the conclusion of the UK/EU withdrawal agreement December 2018 European Council summit Q4 2018/Q Brexit: Political declaration on the future relationship 29 March 2019 Brexit: UK to formally leave the EU June End of EU current legislature 31 December 2020 Brexit: Possible transition period ends 38

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