Regulatory Relations

A decade on from the sweeping regulatory reforms, which were launched in response to the financial crisis, the next waves of reform are appearing on the horizon. By Joe McHale, head of European Government and Regulatory Affairs at Bloomberg LLP

For policy-makers and market participants alike, the 2020s will be all about responding to the global pandemic and the climate emergency. In Europe, regulators will also have to tackle “life after Brexit”, and deal with the digital and technological innovations that are transforming markets.

Green finance tops agenda 

When the pandemic broke out, some feared that the focus on sustainable finance would be reduced. Instead, the consensus clearly seems to be that the massive investment, and regulatory measures required to rebuild our economies post-pandemic, should support the transition to a net zero carbon economy. 

To support this objective, the EU is expected to release its revamped sustainable finance action plan in early 2021. This will chart out the next wave of measures, including proposals for a green bond standard and an overhaul of the Non-Financial Reporting Directive, which sets climate disclosure standards for large companies. 

Meanwhile, the Sustainable Finance Disclosure Regulation, which was agreed last year and imposes mandatory environmental social governance (ESG) disclosure obligations for asset managers, will start being phased-in from March 10. While the detailed implementing rules will not be in place in time, the European Commission recently told market participants they will still need to comply with the regulation’s high-level, principle-based requirements. The EU Taxonomy will also continue to be fleshed out with implementing rules so it can start to apply initially from January 1, 2022. 

Another try at CMU

In September 2020, the EU Commission revived its plans to create a Capital Markets Union (CMU) with 16 legislative and non-legislative actions which will be taken forward in 2021. These range from setting up an EU-wide platform that provides investors with access to company information, to greater harmonisation of certain insolvency rules. 

The markets in financial instruments directive (MiFID) will also be front and centre of the regulatory agenda once again after its implementation in 2018. This year the EU started adjusting MiFID II as part of its securities markets recovery package. Along with changes to prospectus and securitisation rules, the so-called “MIFID quick fix” is meant to support the recovery by reducing burdens, while making limited changes to disclosure, best execution reporting and research unbundling requirements. This is a warm-up for a more fundamental overhaul of MiFID II, currently scheduled for the fourth quartet of 2021. The European Securities and Markets Authority (ESMA) has conducted several consultations already and among other changes, it seems likely the transparency regime will be made simpler and more effective. A proposal for the creation of a consolidated tape of prices and volumes of traded securities in the EU looks certain to be included. 

In addition to CMU, the EU is scheduled to make changes to anti money-laundering rules (Q1), review the Central Securities Depository Regulation (Q2) and update the Solvency II regime for insurers (Q3). A review of the hedge funds directive (The Alternative Investment Fund Managers Directive or AIFMD) is also underway, with a proposal expected later in 2021. 

Financial stability 

At the outbreak of the pandemic, regulators moved quickly to give banks some breathing space. Among the various relief measures, the final implementation of Basel III was delayed by one year, until January 2023. The next 12 months will likely see a return to business as usual if circumstances allow. As the EU's regulatory proposals to fully implement the Fundamental Review of the Trading Book (FRTB) among other items (capital requirements directive and regulation or CRD6/CRR3), were not published in June 2020, presumably they will be out in 2021. 

The delayed phase-in of margin requirements for non-cleared derivatives will recommence in September, with the next wave of counterparties in scope. The transition to risk free rates has not been delayed however, and regulators are still making it clear that market participants should be planning for the end of Libor. 

Technology and innovation

Responding to opportunities and risks that may arise from technological innovation will continue to be high up on the agenda. Under its Digital Finance package, EU policy-makers will aim to finalise draft legislation on crypto assets (Markets in Crypto-assets or MiCA) and operational resilience (Digital operational resilience or DORA) in 2021. 

UK-EU divergence

The UK announced the limited areas where it will immediately diverge from EU requirements under “onshored” EU law in a ministerial statement in mid-2020. Recently, the chancellor also set out his ambition for the future of UK financial services, with the development of a UK green taxonomy and mandatory TCFD-aligned disclosures. In addition, the government is establishing a taskforce that will propose reforms to the UK listings regime, and is undertaking a series of reviews of the UK overseas and funds regimes.

Perhaps unsurprisingly, the end of the Brexit transition period on 31 December, 2020 doesn’t spell the end of uncertainty, which seems bound to be part of UK-EU relations, as the UK establishes a regulatory regime to suit its own needs and the EU carries on with its ambitious regulatory agenda. For all these reasons, 2021 is shaping up to be a busy year for financial regulation, particularly in Europe. 

A Speaker’s Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London 

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