Developments on the EU Financial Services Legislative agenda

Developments on the EU Financial Services Legislative agenda London, 12 January 2015 Dr. David P. Doyle Policy Adviser EU Financial Services Legislation 1

Regardless of costs, regulatory reform is here to stay All that is of systemic importance should be regulated and supervised To restore trust, investors and consumers should encounter clearer, more coherent and more effective safeguards Supervisory bodies should have the right tools to grasp the complex, interconnected and globalised financial nature of activities There is a need for a better capitalised finance industry with less leverage Perverse incentives in the financial sector should be tackled and reduced EU Financial Services Agenda - David P. Doyle

The Latvian EU Presidency a competitive, digital and engaged Europe. KEY Agenda items 2015 Banking Union: SRM and Fund, Delegated acts and ITCs/RTS for MiFID/MiFIR Money market funds IMD Bank interchange fees Directive Restructuring of EU banks Encouraging shareholder engagement (asset management) reach an agreement on the savings taxation directive during the Latvian presidency. We have to ensure that the automatic exchange of information fast-track at council on European Fund for Strategic Investments (EFSI) Latvia- Luxembourg EU Presidency for 2015 New EU Parliamentary composition New EC Commissioner for financial services and ongoing Resolution & Recovery plans for non-banks Revised IORP Directive (disclosure & governance) EU Financial Services Agenda - David P. Doyle

Towards a Capital Markets Union financing more of the EU economy using markets rather than banks Key legislative agenda items: Banking Union: ECB supervisory powers, Bank Recovery and Resolution Directive (BRRD), Deposit Guarantee Scheme Encouraging shareholder engagement asset managers in the frame European Market Infrastructure Regulation (EMIR): Rolling-out over-the-counter (OTC) derivatives clearing and margin rules Insurance Mediation Directive (IMD) Solvency II agreeing on draft Implementing Technical Standards Packaged Retail Investment Products (PRIPs) Regulation UCITs V Shadow Banking - regulating money market funds (MMF) and securities lending Structural Reform of EU Banks MiFID II Market Abuse Directive (MAD) EU Mortgage Credit Directive (MCD) Revised Pensions legislation Bank interchange fees EU Financial Services Agenda Page 4

EU Bank Resolution and Recovery Directive (BRRD) no longer relying on taxpayers to bail-out failing banks Bank Resolution and Recovery Directive (BRRD) tools include: Sale of the business or part of Establishment of a bridge institution temporary transfer of good bank assets to a publicly controlled entity Asset separation transfer of impaired assets to an asset management vehicle Single Resolution Mechanism Regulation (SRM) only covers Eurozone States Deposits less than 100,000 exempted Cascade of loss-absorbing bank liabilities the bail-in hit list: Shareholders Junior creditors Senior creditors, large corporate deposits above 100,000 Uninsured deposits above 100,000 owned by individuals & SMEs to.. benefit from preferential treatment ensuring that they are do not suffer any loss before all other secured creditors' claims are absorbed National deposit-guaranteed funds but under what conditions? If additional resources are needed, these will be taken from the national, prefunded resolution fund BRRD applicable: 1 January 2015 SRM and Bail-in system applicable:1 January 2016 EU Financial Services Agenda - David P. Doyle

The European Central Bank the new sheriff in town The Single Supervisory Mechanism what powers will it have? Monitors capital, liquidity and leverage requirements Authorises and revokes ban licence Enforces recovery plans Conducts stress tests Approves bank mergers & acquisitions (domestic and cross-border) Supervises early intervention in case of breaches of prudential rules (recovery plans, intra-group financial support arrangements, etc.) Empowered to request information directly from banks, conduct office visits, investigate. Impose restrictions on bank lending ECB has sole responsibility for determining whether a bank is failing, or likely to fail EU Financial Services Agenda - David P. Doyle

Fine-tuning the ECB Rules Coordination between supervisors is vital but the crisis has shown that mere coordination is not enough (Council Regulation, May 2013) B Banks with assets in excess of 30bn ( 28bn) assets in excess of 30bn ( 28bn) Banks receiving support under the European Stability Mechanism (ESM) bail-out fund and employing state-aid Banks whose total assets exceed 20% of its country s GDP Exemptions for small banks with assets less than 5bn ( 4bn) national supervision At ECB initiative, intervene with bank of significant relevance where it has banking subsidiaries in more than one participating EU State and its cross-border assets or liabilities represent a significant part of its total assets or liabilities Non-participating Member States: MOU relating to ECB decisions impacting on subsidiaries or branches in these States, whose parent undertaking is established in a participating Member State (Council Regulation, May 2013 Supervision at the consolidated level, of financial holding companies and supervision of mixed financial holding companies, excluding insurance undertakings EU Financial Services Agenda - David P. Doyle

Too big to fail, too big to save and too complex to supervise EC proposals for EU banking structural reform (Feb 2014) Key characteristics: Potential legal separation of certain trading activities from deposit-taking entities Criteria and metrics set by the EC on EBA proposals but implementation by national supervisors Prohibits proprietary trading by EU-based banks of financial instruments, physical commodities (few exemptions) Institutional Scope: All G-SIFIs Total assets over 30bn ( 23.8bn) Total trading assets & liabilities over 70bn ( 55.6bn) Prohibits banks investing in hedge funds from owning, sponsoring, or having exposures to hedge funds Wide territorial scope: all banks, parents, subsidiaries, branches and third country structures - foreign branches operating in the EU also covered Cooperatives, mutuals, savings banks in the net Shadow banking activities to be robustly regulated to avoid circumventing separation and proprietary trading bans: Mandatory disclosures of all securities financing transactions (SFTs) - repos and securities lending activities - regular mandatory disclosure EU Financial Services Agenda Page 8

The Consumer Protection Agenda convergent approaches emerging European consumers deserve better. They need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based Commissioner Barnier, 2010 Scope: Expanded scope covering all retail investment products, all disclosures and all sales channels and actors. Major divergences on how tough consumer protection should be: Disclosure/restriction on commissions and fees Due diligence/suitability Key investor information Third country access The EU consumer package IMD PRIPS Reform of the EU Pensions Regime MiFID EU Mortgage Credit Directive EU Financial Services Agenda - David P. Doyle

Insurance Mediation Directive aligning rules on business conduct with MiFID II for investment-based insurance products (IBIP) Pre-contractual information for non-insurance PRIPS/insurance products: Compulsory disclosure of costs and fees applicable to the product for life insurance offerings and subject to a five year transition Non-compulsory disclosure upon request for non-life offerings Member State may ban fees or commissions paid to insurance distributors by third parties: Product information document (PID) covering: type, contractual obligations, risks insured and excluded, means of payments and premiums etc. Responsibility of the manufacturer, not brokers and intermediaries to complete Advice - specified personalised recommendation provision Cross-selling: acceptable subject to offering option to buy separately, with separate risk and cost disclosures Product governance: internal approval of each insurance product and how it matches the target market Amendments regarding scope include: Insurers and reinsurers selling directly to customers Insurance and reinsurance distributors and brokers Ancillary insurance intermediaries, i.e., car-hire and travel agencies in excess of annual premium of 300 Persons assisting, whether on behalf of the customer or insurance firm Excluded: claims managers, loss adjusters and expert appraisal of claims Aggregator or price comparison websites EU Financial Services Agenda Page 10

MiFID II all financial instruments, all markets and all actors covered High Frequency Trading (HFT): Market Structure Organised trading facility (OTF) reserved for nonequities only, i.e. bonds, derivatives, fixed-income, emissions allowances and structured products. But NOT equities OTF operators to face restrictions on the use of own capital. Including matched principal trading, except for illiquid sovereign bonds Limitation on trading away from regulated markets i.e., dark pools HFTs traders to be regulated. Must prove the existence of effective internal systems, controls and reporting. Need to impose circuit breakers in the event of price volatility Commodity derivatives imposition of position thresholds by category of trader set by ESMA, but enforced by National regulatory authorities Exemptions: Non-financial firms using derivatives for hedging Electricity and gas supply if physically settled and traded on OTFs Oil and coal for four years with possible three year extension Access Harmonised EU regime for non-discriminatory access to trading venues and CCPs but five year transition period Access requirements for small derivative exchanges exempt for 30 months with possible 30 month extension if transactions are below a certain threshold CCPs clearing derivatives, securities and MMFs exempted for 30 months EU Financial Services Agenda Page 11

MiFID II implementation date: Early 2017 Dark trading - pre-trade transparency rules Retention of pre-transparency disclosure exemptions for large-in-scale, price reference, order management and negotiated trade waivers for equities Exemptions for trading platforms to publish pre-trade quotes: a double volume cap mechanism set at 4% on the amount of trading that can be done per stock/per venue using the reference price waiver (RPW); and 8% global cap applied per stock on an EU-wide basis ESMA to conduct annual reviews of how national regulators implement these restrictions and whether these limits conform to ESMAs calculation methodology EC and ESMA to set parameters for these limits National regulators cannot exceed these thresholds, apart from in exceptional cases Commodity Derivatives: Harmonised position thresholds for commodity derivatives National Competent Authorities (NCAs) will impose limits on traders positions in accordance with a methodology set by ESMA. This also introduces a position reporting requirement by category of trader EU Financial Services Agenda Page 12

MiFID II focus on defining independent financial advisers Customer Protection: Strengthened conduct rules, i.e., appropriateness tests Reinforced and regular information to retail clients via Statement of Suitability and periodic assessment by firm of suitability, containing updated statements of how the investment meets the clients preferences, objectives and other characteristics of the retail client Firm to assess a sufficient range of financial instruments available on the market which should be sufficiently diverse with regard to the type and issuers, or product providers, to ensure that the clients investment objectives can be suitably met Products should not be limited to products issued or provided by the investment firm itself or by entities having close links with the investment firm.or other entities...with close legal/economic relationships Ban on commissions (inducements) paid to independent financial advisors and portfolio managers by third parties ESMA to prohibit or restrict the marketing and distribution of certain financial products, in well defined circumstances, with similar powers for the EBA in the case of structured statements Third Country Access: Professional investors and eligible counterparties: Harmonised regime based on equivalence assessment of third country jurisdictions by the EC. If equivalence rejected, national regimes to continue Retail investors: National regimes remain in place. Member States can impose local branch structure, subject to EU minimum requirements regime EU Financial Services Agenda Page 13

PRIPs a focus on pre-contractual product disclosure The scope: Key Information Document (KID) mandatory for all products, excluding: Life insurance contracts where benefits are payable only on death, incapacity (sickness, injury, infirmity) Deposits other than structured products/securities Corporate bonds Shares Occupational pension schemes Pension products employer required by law to contribute/employee has no choice concerning provider Other pension products recognised or certified under national law as providing retirement income KID: Three-page document Manufacturers must provide more in-depth details about the PRIPs including: What is this investment? What is it for? Could I lose money? What are the risks and what might I get back? What are the costs? How has it done in the past? What might I get when I retire? And in addition, MEPs introduced: Tax implications review Non-financial disclosures (ethical, environmental) ESMA to devise fund calculator for charges Comprehension alert label, warning that you are about to purchase a product that is not simple and may be difficult to understand EU Financial Services Agenda Page 14

European Markets Infrastructure Regulation (EMIR) Scope: OTC derivatives, credit, interest rate, foreign exchange, equities and commodities Developments EU/US clearing house differences: Extension of Deadline by 15 December 2014 to apply substituted supervision and higher RW capital charge Exemptions for: Non-financial counterparties or entities (excludes hedging of commercial activity and treasury financing from clearing threshold calculation) Intra-group transactions Pensions (3 years+2+1) Covered bonds Central banks Derivatives margining for swaps not cleared via CCPs: National regulators proceed at different speeds to December 2015 deadline. EU concerns about haircuts on margins related to currency mismatch on cross-border transaction FX trading and clearing still to be determined, likely to be introduced end of 2016/early 2017 respectively Trading ID tags awaiting regulators to mandate its use Trade repository and trade reporting rules ready by end 2014 (SEC) ESMA proposals for interest rate swaps: phase-in periods for Institutional investors + AIFMs: 1 year Heavy users: 6 months Low-level ie, 8bn: 18 months Page 15 EU Financial Services Agenda

Dr David P. Doyle Independent EU Policy Adviser Email: dpdoyle@orange.fr Mobile: +33 628 69 40 40 Published material Cost Control - A Strategic Guide (CIMA/Elsevier: London, 1994/2002) - EU chapter to The Future of Finance after SEPA (Wiley: London, 2008) - EU chapter to A Practical Guide to Corporate Governance (Sweet & Maxwell: London, 2010, 2014). EU Financial Services Agenda - David P. Doyle