Sonja Lohse is presently Head of Group Compliance at Nordea Bank and an Editorial Board Member for the Journal of Securities Compliance. After finishing her law studies at the University of Helsinki in 1980, she started her banking career. She has held numerous positions within Nordea Group and was assigned, as head of group compliance, the task of building up Nordea’s compliance function in 2000. Since 2003, Nordea’s corporate social responsibility issues have also been part of her responsibilities. Since 1999, Sonja has been involved in many European working and expert groups appointed by the EU Commission or European financial services authorities (FSAs) and she is currently a member of the Committee of European Securities Regulators (CESR) Markets in Financial Instruments Directive (MiFID) Level 3 Expert Group and chairman of the European Banking Federation (EBF) Financial Markets Committee.
ABSTRACT
Despite the current crises caused by the market turmoil, some common themes will persist in European financial markets in 2008. Greater integration - not only within Europe’s single market, but also across the globe - will be pursued and this will form Europe’s approaches to regulation and supervision in years to come.
Banks within Europe have many challenges ahead of them, ie how to implement and operate under many new legislations such as the Markets in Financial Instruments Directive (MiFID), and how to adapt to the ongoing transformation of Europe’s post-trading businesses through initiatives such as Target2-Securities (T2S) and the pan-European Code of Conduct for Clearing and Settlement. 2008 could also be the year during which to look at the further integration of pan-European supervision in the securities field. There is also a need for regulators and supervisors to assess failures in current legislation, and to address them with proportionate solutions and to take a critical approach to new legislation to ensure a competitive position of Europe in the global context. The objective for industry and the authorities in 2008 must consequently be to set the right agenda for the future.
Keywords: securities, Financial Services Action Plan (FSAP), European banks, single market, level playing field, financial services policy
INTRODUCTION
This paper is written at a time when financial and credit markets are under intense scrutiny from politicians, supervisors, the media and, of course, investors worldwide due to the ongoing market volatility precipitated by the ‘global credit crunch’. It is consequently necessary (as is all too often the case in the legal profession) to set out, at its outset, a number of disclaimers. The first is that, as long as the market situation remains unstable, there will continue to be an appetite for a degree of public policy intervention. Therefore, the second disclaimer is that, although this paper can set out what the author and her colleagues in the European Banking Federation (EBF) believe ought to be on the agenda, there are no guarantees in the current climate that these issues will prevail. The European securities market agenda for 2008 is likely to be written and rewritten as events unfold across the globe.
Despite the current political fog that the market turmoil has created, however, some common themes will persist in European financial markets in 2008. The backdrop to 2008 will continue to be the drive towards greater integration, not only within Europe’s single market, but also across the globe and most notably between Europe and the USA. Globalisation, and the need for Europe to compete and synchronise with the USA and the major Asian markets in equal measure, will inform how Europe approaches regulation and supervision in years to come.
This motivation will inform the choices that banks will have to make in relation to how to implement and operate under key pieces of legislation such as the Markets in Financial Instruments Directive (MiFID), as well as in relation to the ongoing transformation of Europe’s post-trading businesses through initiatives such as Target2-Securities (T2S) and the pan-European Code of Conduct for Clearing and Settlement. 2008 may also be the year during which the ground will be prepared to look at further integration of pan-European supervision in the securities field, responding to the need expressed by the market for effective and proportionate supervision applied across the European Union (EU).
In short, 2008 is the year during which the securities agenda may well be set for further into the future and the EBF, representing - via its members from 31 countries - over 5,000 European banks, will be at the centre of the policy formation process.
SECURING EUROPE’S REGULATORY ADVANTAGE
Europe’s single market is directly supervised by at least 30 securities supervisors - one from every member State of the European Economic Area (EEA) not taking into account the role of the central bank in some member States. The challenge therefore is how to ensure that there is a concerted approach to supervision, based around common objectives and a common regulatory method and toolkit. Supervision is generally thought of as a tool to ensure stability in markets in the interest of investors and the economy as a whole. But, as debates focusing on the competitiveness of financial centres around the globe continue, a consensus view about how to secure a regulatory advantage for Europe is emerging. This centres on setting up a supervisory regime that is proportionate, risk-based and sensitive both to the needs of the consumer in terms of protection and education, and to fostering a climate of innovation and dynamism. With 30 voices around the table, coming from 30, at times different, supervisory traditions, this is inevitably a challenge.
The Committee of European Securities Regulators (CESR) is responsible for, among other things, coordinating national approaches to European regulatory and supervisory initiatives. CESR, since its inception in 2001, has strived to operate in a transparent manner in dialogue with stakeholders such as industry and consumers. Part of the mandate that CESR has been given by the European Commission, the European institution from which the Committee derives its existence, is the development of pan-European guidance to implementing European financial markets legislation such as MiFID. This is known as ‘Level 3 advice’, referring to its position in the four-level Lamfalussy process that represents a more streamlined approach to financial services legislation and supervision.
Because banks will only begin to operate under the new regimes, set out by the swathe of legislation established by the EU’s Financial Services Action Plan (FSAP), for the first time in 2008, this will be a period of valuable experience-gathering by the market. With the benefit of this experience, it will then be possible to recommend improvements in the future, either in refining the Lamfalussy process per se or, in a more extreme case, in rethinking supervisory structures within Europe. Questions will continue to surround the legal nature and force of the guidance that CESR creates, and a judgment will have to be made on whether or not the current non-binding approach will be sufficient to coax Europe’s 30 securities supervisors to a similar supervisory approach.
Financial markets supervision: The key policy challenges for banks in 2008
- To gather experience from the implementation of financial markets legislation.
- To foster a culture of greater transparency and explanation of supervisors’ divergence from the European norm.
- To take a view on where the strengths and weaknesses of the current supervisory network, coordinated by CESR, lie.
- Based on that assessment, to make recommendations to improve the supervisory environment for crossborder banking groups and smaller, regionally focused, banks alike.
- To consider how to secure Europe’s regulatory advantage in the world by achieving a balance between sound and secure markets, and the ability for firms to expand and innovate.
Firms caught by the scope of MiFID (banks, trading platforms, etc) were obliged to be compliant with this market-transforming legislation by 1st November, 2007. Given that the vast majority of EU member States transposed the legislation onto their national statute books after the 31st January, 2007 deadline had passed, however, firms have faced enormous pressure to design and build systems, as well as to train staff to operate under the conditions set out by MiFID, in time. In the case of the Netherlands, for example, banks officially had one day in which to implement MiFID, the legislation being only officially transposed on 31st October, 2007.
Late transposition has therefore been challenging for the MiFID implementation work in most member States and, perhaps due to the stressed time schedule, the national legislation will not be as harmonised as one would have hoped. In a bank operating with the same financial products and services and common processes throughout its whole home market, divergent implementation of MiFID and differing interpretations of the provisions will mean higher operating costs in terms of, for example, compliance routines and information technology (IT).
For some, the approach and concepts that MiFID introduces - ‘principles based’, ‘best execution’ and ‘suitability and appropriateness’, to name but a few - are relatively familiar. For others, however, MiFID introduces new concepts and, with them, uncertainty and a degree of trepidation about how to equate local practices and legal traditions with this hugely important European initiative.
Therefore, experience of the MiFID regime as implemented in November 2007 will develop throughout 2008 and, as a result, modifications to the regime will most likely be called for to iron out the possible wrinkles that have arisen from the rush to implement during 2007.
Furthermore, member States and the European Parliament have requested a number of reports under MiFID, which could still radically alter the scope of the Directive in the future. One such report is on the possible extension of MiFID transparency requirements to non-equity instruments, which are currently excluded from the Directive. Should the report recommend mandatory pre- and posttrade transparency requirements for nonequity instruments, this has the potential to transform the market and, according to some commentators, to drive nonequities business away from Europe and towards jurisdictions with more favourable regulatory regimes.
The MiFID regime: The key policy challenges for banks in 2008
- Complete MiFID implementation.
- The resolution of obstacles to smooth implementation and/or operation under MiFID, including seeking to bring about a pragmatic approach towards transaction reporting and the supervision of branches.
- Ensuring the stability of the fledgling MiFID regime by not seeking to disturb it through radical recommendations arising from the reports required by MiFID.
On the top of the agenda for 2008 will be the continuing reform of Europe’s posttrading business as initiatives to better integrate clearing and settlement systems in Europe reach critical points.
In the first half of 2008, the verdict on the pan-European Code of Conduct for Clearing and Settlement - an industry initiative sponsored by the European Commission, and designed to foster greater competition and integration in post-trading services - will be delivered. Users, such as banks, together with the European Commission and supervisors, will take a view on how far market infrastructures have completed the three major objectives of the Code:
- to improve price transparency;
- to provide for access and interoperability between market infrastructures;
- to separate and unbundle accounts.
The CESR-ECB Standards for Securities Clearing and Settlement are also expected to be applied to market infrastructures to ensure the safety and soundness of post-trading operations.
Finally, a renewed effort by the member States will continue to be called for in relation to, in particular, the legal and tax barriers to the integration of clearing and settlement in Europe or the socalled ‘Giovannini Barriers’. The efforts by public authorities will be complemented by industry’s continuing work on removing the market obstacles to greater post-trading integration.
Clearing and settlement: The key policy challenges for banks in 2008
- Evidenced implementation of the Code of Conduct, in letter and in spirit, by the market infrastructures.
- A favourable decision from the ECB on the T2S Project, based on the results of the user requirements consultation.
- Implementation by the market infrastructures of the CESR-ECB Standards for Securities Clearing and Settlement.
- The continuation of work on the removal of the market, legal and fiscal obstacles to the integration of Europe’s post-trading industry.
The market for funds in Europe is still too fragmented in both the retail and the wholesale areas and, as a result, lacks in efficiency in different aspects.
The existing EU legislation for retail funds - the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive - is currently being reviewed in a number of areas. The European Commission has decided to adopt a two-step approach, which should allow the most urgent changes to the Directive to be made in a first step in the course of 2008. This concerns, notably, changes to make the management company passport work in practice, to streamline the notification procedure in host member States for funds that have already been authorised by the home member State, a reform of the simplified prospectus, and the elimination of barriers to the pooling of assets and to mergers of funds. All of these changes are very urgent and the Commission should make a formal proposal for them in early 2008. If all goes well, it should then be possible to find an agreement on the package in the Council and the European Parliament in the course of 2008.
In parallel to this work, progress will have to be made in 2008 on some further-going questions related to retail funds. In particular, there are well-functioning retail markets in some member States for open-ended real estate funds and for funds of hedge funds. In a single market, we should swiftly decide on a common approach towards the marketing of these types of fund to individual investors.
In the wholesale area, products can, in all EU member States, be sold as private placements without the restrictions that apply for retail markets - but, so far, the private placement regimes still operate nationally in separation from each other and it is high time to introduce some streamlining measures that will allow potential buyers and sellers to look across the border to their European neighbours.
Finally, much debate has been going on in the last months around the merits and possible dangers of alternative investment products, such as hedge funds and private equity. Legislation does exist for most of the concerns raised, but there might be value to look, in the coming months, at market-driven possibilities to increase the transparency of these instruments.
Investment funds: The key policy challenges for banks in 2008
- Swift amendments to the UCITS Directive in the areas of management company passport, notification procedure, simplified prospectus, fund mergers and asset pooling.
- To take guiding decisions on the further integration of the retail fund markets, in particular regarding open-ended real estate funds and funds of hedge funds.
- To agree on the cornerstones of a private placement regime.
- To analyse the possibilities of enhancing transparency in the non-regulated markets, without undermining their business models.
The EU’s FSAP might be near completion from the regulators’ and supervisors’ point of view, but, within the financial industry, much still needs to be done.
All post-MiFID processes and routines need to be finalised including, for example, compliance controls of a huge amount of details, the interaction between MiFID and, for example, the UCITS Directive needs to be mapped and understood, and the streamlining of clearing and settlement processes has to continue. The industry consequently has its hands very full for the next one or two years with all of these issues, as well as with making the European market the most successful financial market in the world.
To contribute to the success of the single market in the EU, regulators and supervisors will need to assess failures in current legislation and address them with appropriate and proportionate solutions, to take a critical approach to the need for new legislation in current turmoil and to be mindful of the competitive position of Europe in the global context. Industry will also step up to present its own solutions to issues in relation to which there is merit in seeking self-regulatory solutions. The objective for industry and the authorities in 2008 must therefore be to set the right agenda for the future.
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Sonja Lohse is presently Head of Group Compliance at Nordea Bank and an Editorial Board Member for the Journal of Securities Compliance. After finishing her law studies at the University of Helsinki in 1980, she started her banking career. She has held numerous positions within Nordea Group and was assigned, as head of group compliance, the task of building up Nordea’s compliance function in 2000. Since 2003, Nordea’s corporate social responsibility issues have also been part of her responsibilities. Since 1999, Sonja has been involved in many European working and expert groups appointed by the EU Commission or European financial services authorities (FSAs) and she is currently a member of the Committee of European Securities Regulators (CESR) Markets in Financial Instruments Directive (MiFID) Level 3 Expert Group and chairman of the European Banking Federation (EBF) Financial Markets Committee.
ABSTRACT
Despite the current crises caused by the market turmoil, some common themes will persist in European financial markets in 2008. Greater integration - not only within Europe’s single market, but also across the globe - will be pursued and this will form Europe’s approaches to regulation and supervision in years to come.
Banks within Europe have many challenges ahead of them, ie how to implement and operate under many new legislations such as the Markets in Financial Instruments Directive (MiFID), and how to adapt to the ongoing transformation of Europe’s post-trading businesses through initiatives such as Target2-Securities (T2S) and the pan-European Code of Conduct for Clearing and Settlement. 2008 could also be the year during which to look at the further integration of pan-European supervision in the securities field. There is also a need for regulators and supervisors to assess failures in current legislation, and to address them with proportionate solutions and to take a critical approach to new legislation to ensure a competitive position of Europe in the global context. The objective for industry and the authorities in 2008 must consequently be to set the right agenda for the future.
Keywords: securities, Financial Services Action Plan (FSAP), European banks, single market, level playing field, financial services policy
INTRODUCTION
This paper is written at a time when financial and credit markets are under intense scrutiny from politicians, supervisors, the media and, of course, investors worldwide due to the ongoing market volatility precipitated by the ‘global credit crunch’. It is consequently necessary (as is all too often the case in the legal profession) to set out, at its outset, a number of disclaimers. The first is that, as long as the market situation remains unstable, there will continue to be an appetite for a degree of public policy intervention. Therefore, the second disclaimer is that, although this paper can set out what the author and her colleagues in the European Banking Federation (EBF) believe ought to be on the agenda, there are no guarantees in the current climate that these issues will prevail. The European securities market agenda for 2008 is likely to be written and rewritten as events unfold across the globe.
Despite the current political fog that the market turmoil has created, however, some common themes will persist in European financial markets in 2008. The backdrop to 2008 will continue to be the drive towards greater integration, not only within Europe’s single market, but also across the globe and most notably between Europe and the USA. Globalisation, and the need for Europe to compete and synchronise with the USA and the major Asian markets in equal measure, will inform how Europe approaches regulation and supervision in years to come.
This motivation will inform the choices that banks will have to make in relation to how to implement and operate under key pieces of legislation such as the Markets in Financial Instruments Directive (MiFID), as well as in relation to the ongoing transformation of Europe’s post-trading businesses through initiatives such as Target2-Securities (T2S) and the pan-European Code of Conduct for Clearing and Settlement. 2008 may also be the year during which the ground will be prepared to look at further integration of pan-European supervision in the securities field, responding to the need expressed by the market for effective and proportionate supervision applied across the European Union (EU).
In short, 2008 is the year during which the securities agenda may well be set for further into the future and the EBF, representing - via its members from 31 countries - over 5,000 European banks, will be at the centre of the policy formation process.
SECURING EUROPE’S REGULATORY ADVANTAGE
Europe’s single market is directly supervised by at least 30 securities supervisors - one from every member State of the European Economic Area (EEA) not taking into account the role of the central bank in some member States. The challenge therefore is how to ensure that there is a concerted approach to supervision, based around common objectives and a common regulatory method and toolkit. Supervision is generally thought of as a tool to ensure stability in markets in the interest of investors and the economy as a whole. But, as debates focusing on the competitiveness of financial centres around the globe continue, a consensus view about how to secure a regulatory advantage for Europe is emerging. This centres on setting up a supervisory regime that is proportionate, risk-based and sensitive both to the needs of the consumer in terms of protection and education, and to fostering a climate of innovation and dynamism. With 30 voices around the table, coming from 30, at times different, supervisory traditions, this is inevitably a challenge.
The Committee of European Securities Regulators (CESR) is responsible for, among other things, coordinating national approaches to European regulatory and supervisory initiatives. CESR, since its inception in 2001, has strived to operate in a transparent manner in dialogue with stakeholders such as industry and consumers. Part of the mandate that CESR has been given by the European Commission, the European institution from which the Committee derives its existence, is the development of pan-European guidance to implementing European financial markets legislation such as MiFID. This is known as ‘Level 3 advice’, referring to its position in the four-level Lamfalussy process that represents a more streamlined approach to financial services legislation and supervision.
Because banks will only begin to operate under the new regimes, set out by the swathe of legislation established by the EU’s Financial Services Action Plan (FSAP), for the first time in 2008, this will be a period of valuable experience-gathering by the market. With the benefit of this experience, it will then be possible to recommend improvements in the future, either in refining the Lamfalussy process per se or, in a more extreme case, in rethinking supervisory structures within Europe. Questions will continue to surround the legal nature and force of the guidance that CESR creates, and a judgment will have to be made on whether or not the current non-binding approach will be sufficient to coax Europe’s 30 securities supervisors to a similar supervisory approach.
Financial markets supervision: The key policy challenges for banks in 2008
- To gather experience from the implementation of financial markets legislation.
- To foster a culture of greater transparency and explanation of supervisors’ divergence from the European norm.
- To take a view on where the strengths and weaknesses of the current supervisory network, coordinated by CESR, lie.
- Based on that assessment, to make recommendations to improve the supervisory environment for crossborder banking groups and smaller, regionally focused, banks alike.
- To consider how to secure Europe’s regulatory advantage in the world by achieving a balance between sound and secure markets, and the ability for firms to expand and innovate.
Firms caught by the scope of MiFID (banks, trading platforms, etc) were obliged to be compliant with this market-transforming legislation by 1st November, 2007. Given that the vast majority of EU member States transposed the legislation onto their national statute books after the 31st January, 2007 deadline had passed, however, firms have faced enormous pressure to design and build systems, as well as to train staff to operate under the conditions set out by MiFID, in time. In the case of the Netherlands, for example, banks officially had one day in which to implement MiFID, the legislation being only officially transposed on 31st October, 2007.
Late transposition has therefore been challenging for the MiFID implementation work in most member States and, perhaps due to the stressed time schedule, the national legislation will not be as harmonised as one would have hoped. In a bank operating with the same financial products and services and common processes throughout its whole home market, divergent implementation of MiFID and differing interpretations of the provisions will mean higher operating costs in terms of, for example, compliance routines and information technology (IT).
For some, the approach and concepts that MiFID introduces - ‘principles based’, ‘best execution’ and ‘suitability and appropriateness’, to name but a few - are relatively familiar. For others, however, MiFID introduces new concepts and, with them, uncertainty and a degree of trepidation about how to equate local practices and legal traditions with this hugely important European initiative.
Therefore, experience of the MiFID regime as implemented in November 2007 will develop throughout 2008 and, as a result, modifications to the regime will most likely be called for to iron out the possible wrinkles that have arisen from the rush to implement during 2007.
Furthermore, member States and the European Parliament have requested a number of reports under MiFID, which could still radically alter the scope of the Directive in the future. One such report is on the possible extension of MiFID transparency requirements to non-equity instruments, which are currently excluded from the Directive. Should the report recommend mandatory pre- and posttrade transparency requirements for nonequity instruments, this has the potential to transform the market and, according to some commentators, to drive nonequities business away from Europe and towards jurisdictions with more favourable regulatory regimes.
The MiFID regime: The key policy challenges for banks in 2008
- Complete MiFID implementation.
- The resolution of obstacles to smooth implementation and/or operation under MiFID, including seeking to bring about a pragmatic approach towards transaction reporting and the supervision of branches.
- Ensuring the stability of the fledgling MiFID regime by not seeking to disturb it through radical recommendations arising from the reports required by MiFID.
On the top of the agenda for 2008 will be the continuing reform of Europe’s posttrading business as initiatives to better integrate clearing and settlement systems in Europe reach critical points.
In the first half of 2008, the verdict on the pan-European Code of Conduct for Clearing and Settlement - an industry initiative sponsored by the European Commission, and designed to foster greater competition and integration in post-trading services - will be delivered. Users, such as banks, together with the European Commission and supervisors, will take a view on how far market infrastructures have completed the three major objectives of the Code:
- to improve price transparency;
- to provide for access and interoperability between market infrastructures;
- to separate and unbundle accounts.
The CESR-ECB Standards for Securities Clearing and Settlement are also expected to be applied to market infrastructures to ensure the safety and soundness of post-trading operations.
Finally, a renewed effort by the member States will continue to be called for in relation to, in particular, the legal and tax barriers to the integration of clearing and settlement in Europe or the socalled ‘Giovannini Barriers’. The efforts by public authorities will be complemented by industry’s continuing work on removing the market obstacles to greater post-trading integration.
Clearing and settlement: The key policy challenges for banks in 2008
- Evidenced implementation of the Code of Conduct, in letter and in spirit, by the market infrastructures.
- A favourable decision from the ECB on the T2S Project, based on the results of the user requirements consultation.
- Implementation by the market infrastructures of the CESR-ECB Standards for Securities Clearing and Settlement.
- The continuation of work on the removal of the market, legal and fiscal obstacles to the integration of Europe’s post-trading industry.
The market for funds in Europe is still too fragmented in both the retail and the wholesale areas and, as a result, lacks in efficiency in different aspects.
The existing EU legislation for retail funds - the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive - is currently being reviewed in a number of areas. The European Commission has decided to adopt a two-step approach, which should allow the most urgent changes to the Directive to be made in a first step in the course of 2008. This concerns, notably, changes to make the management company passport work in practice, to streamline the notification procedure in host member States for funds that have already been authorised by the home member State, a reform of the simplified prospectus, and the elimination of barriers to the pooling of assets and to mergers of funds. All of these changes are very urgent and the Commission should make a formal proposal for them in early 2008. If all goes well, it should then be possible to find an agreement on the package in the Council and the European Parliament in the course of 2008.
In parallel to this work, progress will have to be made in 2008 on some further-going questions related to retail funds. In particular, there are well-functioning retail markets in some member States for open-ended real estate funds and for funds of hedge funds. In a single market, we should swiftly decide on a common approach towards the marketing of these types of fund to individual investors.
In the wholesale area, products can, in all EU member States, be sold as private placements without the restrictions that apply for retail markets - but, so far, the private placement regimes still operate nationally in separation from each other and it is high time to introduce some streamlining measures that will allow potential buyers and sellers to look across the border to their European neighbours.
Finally, much debate has been going on in the last months around the merits and possible dangers of alternative investment products, such as hedge funds and private equity. Legislation does exist for most of the concerns raised, but there might be value to look, in the coming months, at market-driven possibilities to increase the transparency of these instruments.
Investment funds: The key policy challenges for banks in 2008
- Swift amendments to the UCITS Directive in the areas of management company passport, notification procedure, simplified prospectus, fund mergers and asset pooling.
- To take guiding decisions on the further integration of the retail fund markets, in particular regarding open-ended real estate funds and funds of hedge funds.
- To agree on the cornerstones of a private placement regime.
- To analyse the possibilities of enhancing transparency in the non-regulated markets, without undermining their business models.
The EU’s FSAP might be near completion from the regulators’ and supervisors’ point of view, but, within the financial industry, much still needs to be done.
All post-MiFID processes and routines need to be finalised including, for example, compliance controls of a huge amount of details, the interaction between MiFID and, for example, the UCITS Directive needs to be mapped and understood, and the streamlining of clearing and settlement processes has to continue. The industry consequently has its hands very full for the next one or two years with all of these issues, as well as with making the European market the most successful financial market in the world.
To contribute to the success of the single market in the EU, regulators and supervisors will need to assess failures in current legislation and address them with appropriate and proportionate solutions, to take a critical approach to the need for new legislation in current turmoil and to be mindful of the competitive position of Europe in the global context. Industry will also step up to present its own solutions to issues in relation to which there is merit in seeking self-regulatory solutions. The objective for industry and the authorities in 2008 must therefore be to set the right agenda for the future.
