Rushed post-crisis financial regulation in Europe has resulted in badly executed and non-transparent laws, while bringing Fortress EU ever closer to reality, warns Charlotte Stalin
Before the financial crisis European regulatory reform in the financial services sector was slow and fairly predictable. Most was crafted carefully and implemented through the Financial Services Action Plan (FSAP). It was under the FSAP that the Markets in Financial Instruments Directive (MiFID) was introduced. In most cases there was method, consultation and transparency.
Since Lehman Brothers’ downfall in late 2008, however, the financial services sector has faced an unprecedented number of reform measures, many of which are politically driven, badly executed and not particularly transparent.
The Alternative Investment Fund Managers Directive (AIFMD) is a good example. Pre-crisis, in fact in early 2008, the European Commission was gathering together funds industry representatives to discuss the possibility of introducing a private placement regime for non-Ucits (Undertakings for Collective Investment in Transferable Securities) funds across the EU.
Fast-forward a year and with politicians blaming hedge funds for their involvement in the financial crisis, this same initiative, plus additional EU protectionist measures, were being stuck on the back of a draft directive that was much better suited to Ucits funds with virtually no consultation. This was just the beginning of a range of politically driven measures being introduced, whether to regulate over-the-counter (OTC) derivatives or short-selling, or to boost investor protection under MiFID II.
Another element affecting the legislative process post-crisis has been the pressure resulting from international cooperation, in particular the G20 commitment to introduce changes to the financial services regimes. While it is easy for politicians to agree that reform should take place by a particular date, how it is proposed how this should be done in reality – in particular, when the impact needs to be considered and consensus reached in close to 30 jurisdictions – is a recipe for disaster.
The G20 agreement to regulate OTC derivatives by 2012 is one example of international agreement resulting in legislation being pushed through in a highly complex area without full consideration.
For example, the ability of clients to ’port’, or transfer, their positions and related margins following a clearing member default is a key feature of the European Markets and Infrastructure Regulation (Emir). Myriad issues such as local insolvency laws would need to be examined and amended to truly achieve this, but there is no time.
The financial crisis has also weakened significantly the UK’s ability to influence EU policymaking. This is partly because the Anglo-Saxon model is being blamed for the crisis and partly because individual member states’ powers to set policy have been eroded through reform.
The latter was cemented by the creation of European Supervisory Authorities (Esas) in January. In securities regulation the real power sits with pan-EU supervisor the European Securities and Markets Authority (Esma). In most of the post-crisis measures the ESAs and the Esma have been given extensive powers – so much so that a pan-European regulator is looking likely in the not-too-distant future. Looking back to the early noughties, there were member states that wanted to centralise the supervisory powers in Europe, but the UK was in a position to resist. Not now.
Another trend is the push to raise barriers to the sale of products and the provision of services into the EU by non-EU service providers. This trend has been described by many as the creation of ’Fortress EU’.
In many of the measures being proposed the concepts of ’harmonisation’ and ’third-country access’ are common themes. The idea is simple: achieve greater harmonisation in the EU through legislation, in particular using EU regulations with the assistance of the ESAs. With harmonisation achieved, the next step is to ensure that anyone wanting to provide services into the EU is subject to EU-equivalent standards. Third-country access provisions are included in the AIFMD, MiFID II and the Emir, and are likely to be included in any new proposals where appropriate. This means we can expect the UK to up its barriers to non-EU service providers. As a result of what is being proposed under MiFID II, for example, the UK may lose its overseas person exclusion.
Nobody questions that regulatory reform is required. However, although politicians may think they are acting in the general good, in reality we are looking at a period of uncertainty. Legislation rushed through could result in anything, but will probably result in something bad or ugly.
Charlotte Stalin is a partner at Simmons & Simmons