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A year of execution

The year ahead in Brussels will be one of implementing measures to tighten financial legislation. But will the financial services regulatory programme align with the plans of the G20, or be diluted under pressure from one lobby after another? Whatever the outcome, no-one should expect a bump-free ride.

One major factor during this year of policy execution will be the implementation of the package to upgrade oversight organisations. This includes, for instance, the metamorphosis of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) from an advisory institution into the European Insurance and Occupational Pensions Authority and, likewise, the transformation of the Committee of European Securities Regulators (CESR) into the European Securities and Markets Authority (ESMA). However, the actual implementation, originally set for this year, appears likely to be put back to 2011. Nevertheless, CESR may succeed in 2010 in credit default swaps, currently traded over the counter (OTC), being passed to a system of trade depositories.

Another shuffle of the deck that is certainly starting to raise expectations, concerns Article 22 of the European Commission's proposed regulation to establish ESMA. This article proposes the creation of a Securities and Markets Stakeholder Group, which should represent financial market participants, employees, consumers, investors and users of financial services.

This is already in the focus of at least two investment management groups. The Federation of European Securities Exchanges (FESE), wants to see moves by Brussels to take note of Article 22 and to "fix what is broken in our sector", and to give "full support to the reform of…. the regulatory framework in Europe". Secretary general Judith Hardt says there is a need to get balance in lobbying activity which, she says, so far has been dominated by "sell side" interests.

Funding "to facilitate the capacity-building of investor stakeholders" was announced by the Commission back in March. The director for European affairs at the CFA Institute, Martin Sjöberg, trusts that the Commission will translate its words into deeds soon.

Possible fear of the executioner's block is apparent among European banks regarding the sore subject of capital adequacy. In 2009, the European Banking Federation repeatedly opposed an increase in reserves. It issued dire warnings that an increase in capital levels could "have perverse effects on the real economy". However, economic experts, such as Nicolas Véron, of the Bruegel think-tank, have been recommending "a [comparative] assessment the… long-term viability of… most key banks", in order to restore trust.

At year-end 2009 there was a bolt-from-the-blue collapse by the European Commission from its previously entrenched support for fair value accounting principles. It withdrew its support for the IASB's revised International Accounting Standard, formerly IFRS39, and now renamed IFRS9.

However, the Federation of European Accountants (FEE), will in 2010 continue to support the International Accounting Standard Board's new IFRS9, which specifies fair value standards. FEE is unlikely to change course in 2010.

FEE President Hans van Damme's upholds the theme of "a single set of high quality global accounting standards as called for by the world's major governments". CEO Olivier Boutellis-Taft adds that during the year FEE will continue to urge for full compliance by EU member states of the Statutory Audit Directive, which should have been implemented by 2008.

Commission insiders are asking themselves what effect the appointment of the French national Michel Barnier, a centre-rightist, as the new Internal Market and Services Commissioner will have. He will no doubt review the 2009 Commission's IFRS9 position, a decision attributed to pressures from German and French banks.

As for the Solvency II Directive, the principles-based framework for the world of insurance and touching on pensions, work will carry on with focusing on the implementing measures. Commission official Karel Van Hulle tells IPE that companies will have to continue the preparatory work to enable the Directive, which covers risk-based capital adequacy. This should be complete by 2012.

On the subject of the Commission's proposed Alternative Investment Fund Managers Directive, which sets out to regulate hedge fund activity, the ‘blood and guts' atmosphere seen last summer, is likely to softened and be objective. Clearance through the entire Brussels machinery is expected by the middle of 2010.

One issue likely to come up concerns the crucial ‘passport' system that makes it possible for any EU-domiciled fund to be marketed within all member states. The current ECON parliamentary committee version states that third country funds marketed in the EU would have to be subject to authorisation by individual member states.

This contrasts to the European Commission recommendation. Ugo Bassi, the relevant Commission official, has told Parliament it would prefer to ‘passport' all funds, including third country funds, provided that "their rules are the same, or equivalent, to the EU rules". He warns of risks of ‘fragmentation' and regulatory arbitrage if matters were left to the 27 different member states.

‘Execution' of routine work will also continue during the year. For instance, Brussels must follow existing rules to look into whether or how to revise the MiFID, the Markets in Financial Instruments Directive, and the Market Abuse Directive, which encompasses insider trading.
 

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