The European Association of Co-operative Banks (EACB) welcomes the opportunity to participate in the EC Public consultation on the Capital Markets Union mid-term review 2017. We appreciate that the EC wishes to perform a stock taking exercise of the implementation of the CMU action plan with an aim to reframe it and complement it where necessary. To a large extend the targeted identification of a need for improvement of specific actions seems hardly possible at this point in time, as many of these initiatives have not yet been implemented and actual effects in the market cannot yet been fully assessed. However, an evaluation of the existing regulation of the capital market as part of the introduction of future rules and regulations would be advisable. We strongly support doing such assessment, which takes a holistic approach. It is necessary to avoid double regulation and inconsistencies and consider the cross- dependencies of financial market regulation (for example disclosure regime for issuers, cost transparency etc.). In doing so, it is important to strike the right balance between stability, investor protection, and performance of the financial markets.
We have already set forth examples and considerations on the EU Commission Green paper on Capital Markets Union, as well as to the EC Call for Evidence: EU regulatory framework for financial services which remain valid.
We fear that MiFID II and the revised CRR provisions will limit the possibility of banks to engage in securities markets and thus reduce liquidity in these asset classes substantially. Indeed, the burdensome limitations to engage in trading activities may reveal unintended consequences preventing banks from participating in securities markets (all forms of bonds and equities), as regulation pushes for a substantial reduction of the amount of securities in the trading book as well as in the banking book. The overburdening provisions/requirements included in the regulations, with their complexity, implementation challenges, administrative burden are likely to reduce demand for these securities and negatively impact the liquidity of the market, which may even prevent other investors, private or institutional, from engaging in (some) securities markets.
• Compliance detail and compliance costs:
The regulatory compliance costs resulting from the legislative package and its implementing measures generated, and continue to generate an increasingly high burden for all banks. The question arises whether these costs are still proportionate to the purpose the legislative package intended to pursue. This is even truer for smaller and medium sized co-operative banks for which the combined compliance cost start to become unbearable.
In the area of retail banking, more and more product specific legislation is introduced (at level 1) with ever high degrees of detail (at level 1 and 2). The side effect of such legislation is that cost-efficiency and compliance replace customer satisfaction as the primary driver for doing business. This results in reduced access to services (e.g. support of branch/ATM networks
becomes too expensive), customer choice and innovation.
• Excessive formalism:
Excessive formalism will potentially discourage (potential) investors from capital markets investments and drive banks to withdraw from their role as intermediaries due to cost and liability risks. We can already see today, that the combined effect of recent regulation is already leading to the limitation of certain services to retail clients. Many retail investors refrain from using the support provided by investment advice, and thus potentially miss important opportunities on capital markets. We fear that if legislation is not adequately calibrated and properly designed (e.g. product governance requirements), it could further reduce investment opportunities for retail investors. One concrete example is the new target market regime together with restrictive provisions for advisory and inducements.
• Goldplating by national authorities and courts
At the same time, legal certainty is important in order for banks to fulfil their function as intermediaries between investors and companies and all counterparties to be aware of their rights and obligations and exercise them or fulfil them accordingly. For example, we have seen that general provisions established in MiFID I and MiFID II in order to protect consumers and their national transpositions, are being used by national courts in certain member states to make an interpretations in a very overreaching way, going beyond the legal requirements and making a 'de facto' demand for the 'execution only' regime to involve activities (such as assessing suitability and/or appropriateness) which legally only concern other investment services such as investment advice and portfolio management. Moreover, these court rulings put the burden of proof exclusively on the investment firm side with very demanding and unrealistic requisites. As a result, investment firms have lost faith in their ability to effectively demonstrate their correct and lawfully conduct, no matter how true this is. This is leading in our view to restrictions in the offer of products, due to litigation risk and legal uncertainty. This outcome is highly detrimental not only for the industry, but also for investors and for citizens as a whole due to the limitations for the ability of the economy to finance itself and grow, which is an aim of the Commission which we strongly share. For that purpose, we consider that legislation should explicitly aim to include a 'safe haven' wording for investment firms so that their intermediation function is not severely hindered even if they comply with rules. There is an inherent risk to all financial investments that should be accepted as such irrespective of the investment services offered (be it execution only, investment advice, portfolio management, ...) and European law should take this point of view into account when trying to develop the CMU objectives.
• Timing of implementation of legislation:
Another important point that needs to be duly considered in the design of the regulatory framework is the timing factor. Adequate, realistic and legally effective implementation periods should ensure in future that the legislative acts of the different stages are coordinated with each other and that there is still sufficient time to implement the new regulations in time. Two recent examples show that this is not always the case. Both MiFID II and the PRIIPs Regulation are supplemented by comprehensive Level II measures, without which implementation cannot take place. Both legislative projects failed to adhere to the timetable envisaged, which led to considerable legal uncertainty and significant additional costs. In order to avoid this in future and to ensure that Level 2 can be adopted appropriately and without time pressure, the implementation deadlines for the market participants should be based on the enactment of Level 2 (e.g. 12 months after publication in the Official Journal of the EU).
In the same vain, we would recommend that the European Supervisory Authorities would need to have an instrument similar to no-action letters - which are available to most other financial markets regulators-in order to improve the speed with which it can respond to pressing issues and ensure supervisory convergence. Experience has shown that this is necessary under specific circumstances (e.g. the case of quickly evaporating liquidity) in order to avoid market disruptions. The kick- in of the EMIR margin requirements on 1st March 2017 clearly shows this necessity.
• Diversity of the banking sector:
And finally, there are powerful systemic benefits that derive from the diversity of business models and the ownership structure in the banking sector. These benefits are notably increased competition and higher resilience. When firms operate with different incentives and goals, the competition for the customer will be even more intense as based on different ways to serve them. This improves consumer choice and innovation. At the same time, it contributes to the system being more resilient: when there is a shock such as the global financial crisis, firms with different business models are affected in different ways and will react differently. The regulatory and supervisory framework should ensure that the diversity of the banking sector is preserved and in doing so that also co-operative banks and building societies are able to continue fulfilling their important role in the economy, especially for the financing of households and SMEs. The specific business models of these entities, mandates a design of rules that are fit to purpose. Business models should be factored in consistently throughout supervision, regulatory practices and approaches, as well as in recovery and resolution strategies. A “one size fits all” approach for all banks, irrespective of the size, business model and activity can cause distortion.
Please Download the PDF to find some further considerations of the EACB with regards to some specific consultation Questions.