Current EU Financial Regulation at a glance
At a recent conference held in Brussels, organised by UNI Europa Finance with the collaboration of the Directorate-General Internal Market and Services, top priority issues on the agenda of the European Commission revealed to be the resolution towards EU banking difficulties, shadow banking and new modes of consumer payments. The meeting touched also remuneration practices in the banking sector and the easiness for consumers to switch between bank accounts. Commission proposals have been recently launched while other measures are still being evaluated by analyzing public consultations’ responses from stakeholders within the EU single market.
On 6th June 2012, the European Commission adopted a proposal on EU-wide rules for bank recovery and resolution. Mr Mario Nava, Acting Director of the Financial Institutions Directorate, elaborated on the dedicated work that the European Commission has been doing on the Crisis Management File. During the recent financial crisis, national governments had to intervene and take necessary actions to stabilize banks. In these circumstances, governments of different EU member states acted under their national law and this illustrated that there is no EU framework for managing crises in the banking sector. Such circumstances have also proved that the lack of an EU regime hampers governments’ ability to deal with problems in cross-border banking institutions. Thus, the Commission proposal puts in place prevention measures, early intervention procedures and resolution powers and tools. In a nutshell, it ensures that in the future, national authorities will be fully prepared to intervene decisively in phases of prevention and also in early signs of the banking market disruption due to particular difficulties encountered by banks. Furthermore, the proposal says that if a financial situation of a bank deteriorates beyond repair, the bank’s critical functions can be rescued but the costs of restructuring and resolution would stem from the bank’s owners and creditors and not from taxpayers. The Commission proposal will be discussed in the Council and the European Parliament.
The non-bank credit activity or as it is commonly known, shadow banking, is another issue of key priority on the EU agenda and which has so far attracted the eyes of those in favour of prudential regulation and supervision within the banking sector. Shadow banking, although being a source of funding and acting as an alternative to investors, however it may pose potential threats to the stability of the financial system due to its accumulation of risks that may have spill-over effects to the regular banking sector. During the meeting, it was said that although this type of business may be considered to be regulated under banking regulatory regimes, however by putting shadow banking as such, it should not signify in any way that shadow banking is part and parcel of the normal business of banking. In fact, it may be more appropriate to regulate shadow banking under the banking regulatory regime, only in circumstances where the former type of banking activities interferes with the regular business of banking through shadow banking vehicles. During the meeting, it was revealed that the European Commission is looking at the possibilities of regulating shadow banking from two perspectives, either from a direct way by regulating the entities, or from an indirect way by putting into place regulation on the process of shadow banking activities. Linked to this, there is another issue concerning money market funds (MMFs) that involves repurchase agreements, where these may be prone to systemic risks, i.e. run-type risks. Currently, the European Commission is conducting an analysis where it is focusing on the largest financial entities to assess what level of systemic risk this type of products may expose to the EU financial market and at the same time, it is interested in gathering detailed information about the type of activities that these entities actually do. Although as aforementioned, shadow banking provides a source of funding in the EU, however the European Commission is making it clear that it is not after lessening the provision of credit in the banking system, but it wants to ensure that activities which may influence badly the real economy are well regulated.
The way that consumers are purchasing and paying for their goods and services has changed significantly. This has obliged institutions at EU-level to monitor and regulate new modes of carrying out financial transactions. Electronic payment innovation at an integrated European level drives the digital single market and e-commerce. In this context, the Single Euro Payments Area (SEPA) could create the backbone for further market integration of card, internet and mobile payments. In brief, the SEPA initiative will enable fast and secure transfers between bank accounts anywhere in the euro area and it will make electronic payments within the euro area as easy as it is the current situation with domestic payments in any one EU country. This situation encourages more competition, choice, transparency, innovation, payment security and customer trust. To secure the maintenance of these high standards within the EU financial services sector, the European Commission has conducted a public consultation at the beginning of this year where it analysed the hurdles towards an integrated market in cards, payment and internet services vis-à-vis financial services. It is expected to announce the next steps before end of July 2012, with the possibility of legislative or non-legislative proposals to be adopted in 2013.
Remuneration in the banking sector remains a high priority on the prudential agenda in the coming period. In fact throughout the year, Commissioner Michel Barnier, Directorate-General EU Internal Market and Services indicated that he is ready to take new and stricter regulatory initiatives if banks continue paying excessive bonuses that may have bad repercussions on the financial sector. A debate has been taking place at the European Parliament in the context of Capital Requirement Directive (CRD) IV, focusing on excessive bonuses paid in financial institutions including those that received government support. Related amendments that have been proposed in this regard include better definition of the fixed and variable components of remunerations, additional restrictions of institutions that enjoy long-term European Central Bank (ECB) refinancing operations, and trade union representatives on the remuneration committee. At the same instance, the European Banking Authority (EBA) is currently preparing guidelines to carry out a remuneration data collection exercise and thus be able to benchmark existent trends and practices at national and EU-level. In addition, the EBA is gathering information on high-earners in financial institutions and will publish it on a country-by-country basis. By end of 2013, the EBA is expected to elaborate on binding regulatory standards on remuneration and include specific relevant criteria.
At EU-level, currently there is a public consultation paper on bank accounts which will close by mid-June 2012. Through this consultation, the European Commission is seeking to gather stakeholders’ views on the need for action and on possible policy actions vis-à-vis the issues of transparency and comparability of bank accounts’ fees, bank account switching and access to a basic bank account to citizens of the EU. This initiative at EU-level has been generated by the existent opaque fee structures and the low transparency in bank fees that is making it highly difficult for EU consumers to make comparisons between one bank and another. In addition, from a mystery shopping exercise conducted by the European Commission, it was found that 71% of the banks under consideration do not truly assist the client when it comes to account switching from one bank to another. Furthermore, different and difficult banking terminology hinder the ability of consumers to understand what they actually need and if the product concerned is the most suitable for their situation. This analysis carried out by the European Commission revealed that around 30 million citizens do not have access to a bank account within the EU. This is a situation which goes against the Commission recommendation on access to a basic payment account that was issued on 18th July 2011 where it says that consumers within the EU should be given the right to have access to a bank account irrelevant of their financial situation. In this vein, the European Commission is looking at solutions such as standardised lists of fees, comparison tools such as websites, glossaries of terms, representative examples and cost simulation in difficult calculations to be made available to consumers in facilitating the situation for EU citizens.
On an ending note during the conference, the European Commission indicated its prime focus on the key function of the financial system to stimulate the real economy. High attention at EU-level is being directed to small- and medium-sized enterprises (SMEs) which need financing for investment purposes and job-creation. For this purpose, further initiatives may be launched during this year with the objective to aid the financial sector to keep better on track towards this important goal.