Documents considered by the Committee on 2 May 2018 Contents

12Financial Services: long-term EU regulatory plans

Committee’s assessment

Politically important

Committee’s decision

(a)—(c) Cleared from scrutiny; drawn to the attention of the Treasury Committee

Document details

(a) Communication from the Commission: Action Plan on Financing Sustainable Growth; (b) Communication from the Commission: FinTech Action plan for a more competitive and innovative European financial sector; (c) Communication from the Commission: Completing the Capital Markets Union by 2019—time to accelerate delivery

Legal base

Department

Treasury

Document Number

(a) 39560, 7216/18, COM(18) 97; (b) 39561, 7217/18, COM(18) 109; (c) 39562, 7219/17 COM(18) 114

Summary and Committee’s conclusions

12.1In spring 2018, the European Commission published three separate policy papers on different aspects of the financial services industry and the measures—both regulatory and non-regulatory—it is considering to boost the availability of capital within the Single Market and to ensure financial services providers can contribute to the EU’s wider objectives on sustainable economic growth and the ‘digital economy’. The three papers, which we have described in more detail in “Background” below, are:127

12.2In spring 2018 the Commission also proposed legislation to accompany the Fintech Action Plan (a new Regulation on licensing of crowdfunding platforms)131 and the Capital Markets Union (on covered bonds;132 cross-border distribution of collective investment funds; non-performing bank loans; and assignment of claims).133 These we have considered in more detail separately. It has confirmed that future proposals for further regulatory reform in the financial services sector are due later in 2018, including in particular:

12.3The Commission is also undertaking further work to identify legal barriers to the development of innovative financial products, as well as assessing the need for EU legislation on investment disputes between EU Member States.136 These efforts may lead to further legislative proposals further down the line, most likely after the new College of Commissioners takes office in November 2019.137

12.4Although the Commission has already published a number of legislative proposals that aim, in part, to prepare the EU for the implications of the UK’s withdrawal for the European financial services industry,138 there is no direct Brexit angle to these latest policy papers. In particular, the documents do not mention any substantial changes to the EU’s “equivalence” regimes in financial services,139 which are is under review because of Brexit.140 The outcome of that process—and to what extent it may be modified to accommodate the UK as Europe’s foremost financial centre after it leaves the Single Market—is not yet clear. In addition, it has been reported that the Commission is preparing to table “emergency legislation” to avoid a legal vacuum in cross-border contracts for financial services between the UK and the EU-27 if no transitional arrangement is legally in place by 29 March 2019.141

12.5The current European Commission has pursued a wide-ranging policy agenda for financial services in recent years, primarily as part of the Capital Markets Union. The UK’s decision to leave the EU has motivated further legislative change in anticipation of the Union’s primary financial motor leaving its regulatory jurisdiction. It is clear from the Commission’s recent papers that further legislative proposals are likely in due course on areas as varied as SME listing, transparency requirements for asset managers and investment dispute settlement between EU countries.

12.6Overall, the European Scrutiny Committee currently retains twenty proposed Directives and Regulations on financial services under scrutiny as they progress through the EU’s legislative machinery.142 One of the reasons for this is the continued uncertainty about the impact new EU policy measures may have in the UK, due to the wider lack of clarity about the future economic partnership with the EU-27 following Brexit and the date when the UK will ultimately leave the Single Market (and can begin disapplying EU law).

12.7At present, the latter turning point is scheduled to occur in December 2020, when the post-Brexit transitional period is due to end. However, the Government has not ruled out seeking an extension if necessary in view of progress in making domestic preparations for life outside the EU and the state of the negotiations on a new UK-EU trade agreement. As such, it is possible—and in some cases likely—that new EU financial services legislation will have to be implemented because it will take effect during the transition. However, the Government will not have a vote, or formal involvement in the wider legislative process, after the UK ceases to be a Member State.

12.8The impact of EU legislation on the UK after it leaves the Single Market is less clear. At that point, UK financial services providers will lose their ‘passports’ to operate across the EU without the need for local authorisation in other Member States, and instead become “third country” operators with restricted access to the EU market for banking, investment services and asset management. Concretely, in the context of the three policy papers we have discussed in this Report, an exit from the Single Market means for example:

12.9While no UK-EU trade agreement will fully make up for that loss of access, the Government is seeking to mitigate the impact through an unprecedented trade agreement on financial services. Although the Treasury has not published any detailed proposals, the Chancellor has said the UK wants a new arrangement where bilateral cross-border access is the default presumption. Access would be limited through ad hoc sector-specific decisions by either party if there were to be a significant divergence in regulatory approach, subject to a yet-to-be-created dispute settlement mechanism. Leaving the matter of the acceptability of this proposal to the EU-27 aside, we remain concerned that even this approach, while not placing the UK under a legal obligation to implement the EU acquis, could still lead to de facto long-term regulatory alignment with the EU rulebook to avoid the risk of a sudden loss of market access.

12.10The Committee will continue to closely monitor any developments in the negotiations on a new UK-EU financial services agreement to assess the extent of, and processes governing, any continued regulatory alignment after Brexit. In light of the fluidity over the scope of the future UK-EU economic partnership, and the length of the post-Brexit transitional period, we are forced to conclude that the European Commission’s long-term regulatory agenda for the financial services sector—as outlined in its recent policy papers—is relevant to the UK. Accordingly, we draw them to the attention of the House, and the Treasury Committee in particular. We now clear the documents from scrutiny, as any specific legislative proposals will be subject to scrutiny in their own right.

Full details of the documents

(a) Communication from the Commission: Action Plan on Financing Sustainable Growth: (39560), 7216/18, COM(18) 97; (b) Communication from the Commission: FinTech Action plan for a more competitive and innovative European financial sector: (39561), 7217/18, COM(18) 109; (c) Communication from the Commission: Completing the Capital Markets Union by 2019—time to accelerate delivery: (39562), 7219/17 COM(18) 114.

Background

12.11In March 2018, the European Commission published four policy papers with high-level proposals for future regulatory and non-regulatory initiatives affecting the EU’s financial services industry:

12.12We have summarised the key elements of each of the remaining three policy papers below, focussing on areas where the Commission envisages or is already preparing legislative initiatives. We considered these to be important as it is not yet clear to what extent the UK and EU’s markets for financial services will remain linked after Brexit, or to what extent the UK’s post-Brexit regulatory framework may continue to be aligned with the Single Market acquis, in the long term (see “Summary and conclusions” above).

Fintech Action Plan

12.13The digitalisation of financial services (“fintech”) has increased significantly in recent years, primarily in the area of intermediation and distribution, such as price comparison websites for insurance and ‘robo-advice’ for investors, but also in other ways (for example the use of ‘big data’ analysis to create tailored risk profiles for customers in the insurance industry, or even entirely new products such as crypto-currencies using blockchain technology).

12.14The European Commission has expressed its support for the use of fintech where it acts as an enabler for the EU’s policy objectives in the area of financial services, such as its Consumer Financial Services Action Plan (which seeks to ensure “better access to finance and to improve financial inclusion for digitally connected citizens”) and the Capital Markets Union, which has the aim of deepening and broadening the EU’s capital markets” to provide businesses with a source of finance other than bank loans. Fintech is also a focus area of the 2015 ‘Digital Single Market’ strategy, the Commission’s overall programme of measures to improve access to online goods and services.151

12.15Despite its potential benefits for users of financial services, the Commission and other regulatory bodies are also aware of fintech’s impact on “regulatory compliance and supervision”. While digital technologies can “facilitate, streamline and automate compliance and reporting and improve supervision”, they also represent numerous regulatory challenges: they can disrupt established methods of protecting consumers and investors (particularly where firms operate around the ‘regulatory perimeter’), pose new cyber-security risks, and can lead to the unforeseen build-up of financial instability. To allow new digital ways of providing financial services to be tested safely, the UK’s Financial Conduct Authority operates a ‘regulatory sandbox’, called the Innovation Hub, where “innovative financial products and services” benefit from additional support from the regulator.152

12.16At EU-level, there is already a well-established regulatory framework on both financial services and digital technology that affects the fintech industry. All companies are subject to the General Data Protection Regulation on handling of personal data,153 due to take effect in May this year, and the Anti-Money Laundering Directive when handling potentially suspicious transactions.154 Moreover, the financial services sector itself is highly regulated: EU and national law typically require firms to seek authorisation before they can offer products and services to the market, irrespective of whether they use traditional or innovative means to deliver them.

12.17Nevertheless, the European Commission believes further policy measures—both legislative and non-legislative—are necessary at the European level to stimulate the digitalisation of financial services in a safe and sustainable way. Concretely, it wants to enable innovative financial services providers to scale up throughout the Single Market and thereby increase competition;155 ensure new technologies are interoperable and use common technical standards; and to ensure that the EU’s regulatory framework provides the right balance between encouraging fintech and providing sufficient prudential and conduct oversight.

12.18To achieve these objectives, the Commission’s Action Plan lists a number of policy measures:

12.19The Economic Secretary’s Explanatory Memorandum on the Fintech Action Plan makes no substantive assessment of any of the elements of the Action Plan, as a separate Memorandum was submitted on the proposed Crowdfunding Regulation.158 With respect to the Action Plan, the Minister states only:

“This communication does not reference the UK’s exit from the European Union. If legislative or other changes come about as a result of these initiatives, decisions will need to be taken in the future as to whether the UK continues to align with the EU framework for FinTech.”

Capital Markets Union progress report

12.20The European Commission launched its Capital Markets Union (CMU) programme in 2015,159 followed by an interim review in 2017.160 Its aim is to deepen capital markets across the EU, including by the removal of cross-border barriers to investment, to provide businesses with more competitive sources of finance and reduce the EU economy’s reliance on bank lending. In addition to various non-regulatory measures, the CMU also generated a significant number of legislative proposals (affecting asset managers, investment advisors and banks), the implications for which the European Scrutiny Committee—particularly in the context of Brexit—has considered in detail elsewhere.161

12.21In March 2018, the Commission published its latest update on progress made towards completion of the Capital Markets Union. That same month, it presented a further tranche of CMU legislative initiatives (which we have assessed separately given the need to consider their substance in detail), namely:

12.22Furthermore, as part of its CMU work programme, the Commission is also preparing further legislation on:

12.23The Economic Secretary to the Treasury submitted an Explanatory Memorandum on the Capital Markets Union progress report on 28 March 2018. In it, the Minister reiterates that the Government is a “supporter of the CMU project” and that the policy measures—both legislative and non-legislative—identified by the Commission since 2015 are “the right actions to deliver tangible reform”.165

Sustainable Finance Action Plan

12.24The final financial services policy paper published by the European Commission in March 2018 focussed on social and environmental sustainability, including the effects of climate change. The Commission wants the financial system to be part of “the solution towards a greener and more sustainable economy” by “reorienting private capital to more sustainable investments”. Its High-Level Expert Group (HLEG) on sustainable finance, which included 7 UK members.166 It published its final report in January 2018, calling for measures to ensure assets are invested in “funding society’s long-term needs” and to strengthen financial stability by incorporating environmental, social and governance (ESG) factors into investment decision-making.167

12.25The Commission’s new Sustainable Finance Action Plan builds on the HLEG’s recommendations and sets out a number of initiatives to channel more investment into an “environmentally and socially sustainable economic system” in the EU;168 ensure social and environmental costs are integrated into the risk management processes of financial services providers such as insurers and banks; and increase transparency of corporate sustainability policies to allow investors to differentiate between companies based on their social and environmental approach.

12.26The main policy initiative announced by the Commission to achieve these objectives is a new legal framework to establish an “EU taxonomy” to classify environmentally and socially sustainable economic activities. This would identify under which conditions or criteria any given investment or financial product would contribute to the EU’s sustainability objectives, and could be used to measure financial flows towards sustainable development priorities; identify assets that qualify for financing under sustainability-related EU budget instruments; set sustainability standards in EU financial services legislation (for example requirements to issue official “Green Bonds” under the Prospectus Regulation and the possible incorporation of climate risks into banks’ and insurers’ prudential requirements); and underpin corporate disclosure of sustainability policies and targets to inform investment decisions.

12.27A legislative proposal to establish the principles and scope for the EU Sustainability Taxonomy is due in May 2018, and will focus initially on climate change-related indicators. A technical expert group will then be tasked to provide the substance of the taxonomy, focussing initially on climate change, by early 2019, allowing for subsequent incorporation of its indicators into EU law on a case-by-case basis.

12.28As noted, the Commission has also announced a number of additional initiatives to be undertaken in the coming months and years to achieve the objectives of the Action Plan, including:

12.29In his Explanatory Memorandum on the Sustainable Finance Action Plan, the Economic Secretary has “broadly welcomed” the Commission’s policy agenda.171 He notes that the “UK was influential in the [High-Level Expert Group], with a third of its members drawn from UK institutions”, and the aims outlined in this document are “aligned with the UK’s interests in developing green finance”. He calls this “an area in which the UK has significant expertise” and thus one where it “stands to benefit from any increased export potential in this market” (although he does not refer to the implications of the Government’s decision to leave the Single Market in this regard, which is likely to end the ability of UK-based financial services providers to market their activities within the EU without the need to establish a separate business in one of the remaining Member States).

12.30With respect to some of the areas where the Commission is proposing the EU should legislate, the Minister says it is important for the EU to consider the “need for the future growth of the market”. He adds:

“[…] We understand that legislative action …[on the sustainability taxonomy and the ‘Green Bonds’]… would take a minimum-standards approach. We are urging the Commission to conduct rigorous quantitative and qualitative analysis before deciding to legislate for changes to prudential requirements on green assets and investments. We are urging the Commission to be mindful of domestic regimes that are working well, including those across the European green finance market, and to make sure that any legislative action does not undermine those regimes.”

12.31The Minister concludes by saying that, as long as the UK remains a member of the EU, it will “continue to engage closely with the Commission as well as other stakeholders to ensure that both the debate on sustainable finance and individual policy reforms closely reflect our objectives”. He also acknowledges that “some of the proposals outlined in the Sustainable Finance Action Plan if taken forward may fall during the implementation period”, during which the UK will continue to apply EU law as if it were still a Member State. He makes no further assessment of the implications of that arrangement, especially in view of the fact the UK is due to lose its institutional representation and voting rights over new EU legislation on 29 March 2019.

Previous Committee Reports

None. However, the Committee has considered various legislative proposals related to the CMU Action Plan and the Fintech Action Plan in its Reports of 25 April and 2 May 2018.

Annex: Current and upcoming EU legislative proposals in the area of financial services

12.32The table below lists pending EU legislative proposals directly concerned with financial services which remain under scrutiny; those recently cleared from scrutiny; and the Commission’s confirmed upcoming proposals.

Sector

Proposal

Proposed

Document

Scrutiny status

Banking

Safe and Transparent Securitisation

September 2015

37128

Cleared from scrutiny on 7 December 2015. Regulation published in the Official Journal in December 2017.

Banking

European Deposit Insurance Scheme

November 2015

37332

Remains under scrutiny. Last considered on 21 February 2018.

Investment services

Investment Prospectuses

November 2015

37356

Cleared from scrutiny on 25 January 2017. Regulation published in the Official Journal in June 2017.

Supervision

Fifth Anti-Money Laundering Directive

July 2016

37927

Cleared from scrutiny on 31 January 2018. Awaiting formal adoption by the Council.

Asset management

EU Venture Capital and Social Funds

July 2016

37956

Cleared from scrutiny on 18 November 2016. Regulation published in the Official Journal in November 2017.

Banking

Risk Reduction Measures: recovery and resolution

November 2016

38300

Remains under scrutiny. Last considered on 7 March 2018.

Banking

Risk Reduction Measures: insolvency hierarchy

November 2016

38301

Cleared from scrutiny on21 February 2018. Directive published in the Official Journal in December 2017.

Banking

IFRS9 standard on bank losses

November 2016

38304

Cleared from scrutiny on 13 November 2017. Regulation published in the Official Journal in December 2017.

Banking

Insolvency Directive

November 2016

38313

Remains under scrutiny. Last considered on 31 January 2018.

Clearing

Clearinghouses: recovery and resolution

November 2016

38332

Remains under scrutiny. Last considered on 29 March 2017.

Clearing

Clearinghouses: clearing obligation and trade repositories (EMIR Refit)

May 2017

38703

Remains under scrutiny. Last considered on 22 November 2017.

Clearing

Clearinghouses: supervision and non-EU firms under EMIR

June 2017

38840

Remains under scrutiny. Last considered on 22 November 2017.

Pensions

Pan-European Pension Product

June 2017

38875

Remains under scrutiny. Last considered on 29 November 2017.

Supervision

European System of Financial Supervision

September 2017

39052, 39503, 39055, 39056

Remains under scrutiny. Last considered on 28 February 2018.

Supervision

Location of the European Banking Authority

November 2017

39291

Cleared from scrutiny on 18 April 2018.

Banking

Non-performing loans: credit servicers and enforcement of collateral

March 2018

39588

Remains under scrutiny. To be considered by the Committee shortly.

Investment services

Securities: assignment of third party claims

March 2018

39603

Remains under scrutiny. To be considered by the Committee shortly.

Banking

Risk Reduction Measures: capital requirements

November 2016

38303, 38304

Remains under scrutiny. Last considered on 7 March 2018.

Investment services

Prudential requirements for investment firms

December 2017

39397, 39400

Remains under scrutiny. Last considered on 28 February 2018.

Asset management

Cross-border distribution of collective funds

March 2018

39548, 39549

Remains under scrutiny. To be considered by the Committee shortly.

Asset management

Covered Bonds

March 2018

39544, 39555

Remains under scrutiny. Last considered by the Committee on 25 April 2018.

Investment services

Crowdfunding Regulation

March 2018

39550, 39551

Remains under scrutiny. Last considered on 25 April 2018.

Banking

Non-performing loans: prudential backstop

March 2018

39604

Remains under scrutiny.

Payment services

Single European Payments Area: non-Eurozone countries

April 2018

39616

Remains under scrutiny. To be considered by the Committee shortly.

Insurance

Motor Insurance Directive

May 2018

-

Awaiting document.

Investment services

Listing of SMEs on regulated markets

May 2018

-

Awaiting document.

Investment services

EU Sustainability Taxonomy

May 2018

-

Awaiting document.

Asset management

Sovereign Bond-backed Securities

Q2 2018

-

Awaiting document.

Investment services

Non-financial transparency of asset managers and institutional investors

Q2 2018

-

Awaiting document.

Investment services

Green Bonds under the Prospectus Regulation

Q2 2018

-

Awaiting document.


127 The Commission also published a fourth related document, on measures to reduce stocks of non-performing loans dragging on European banks’ balance sheets. We have considered this document in a separate chapter in this Report as it was accompanied by two concrete legislative proposals.

128 See Commission document COM(2018) 109, “FinTech Action plan: For a more competitive and innovative European financial sector”.

129 See Commission document COM(2018) 114, “Completing the Capital Markets Union by 2019—time to accelerate delivery”.

130 See Commission document COM(2018) 97, “Action Plan: Financing Sustainable Growth”.

131 We have considered the Crowdfunding Regulation in more detail in a separate chapter of this Report.

132 See our Report of 25 April 2018 for more information on the new Covered Bonds Directive.

133 The Committee is yet to formally consider the proposals on assignment of claims, investment funds and non-performing loans as we had not received the Government’s Explanatory Memoranda on these documents as of 19 April 2018.

135 Directive 2009/31/EC. See also the judgment of the European Court of Justice in case C-162/13 (Vnuk).

136 Bilateral investment treaties between Member States set varying standards of treatment outside the EU legal framework for cross-border investment within the Single Market. The Commission’s view is that they are incompatible with EU law because they give rights to investors of certain EU countries and not others. The Commission is pursuing infringement proceedings in respect of several intra-EU bilateral investment treaties (BITs).

137 Given that the European Parliament is approaching the end of its current five-year term, the Commission has a limited window to propose new EU legislation if it wants it adopted before the next European elections in May 2019.

138 Brexit has been cited as a driver behind recent Commission proposals on financial supervision, a relocation requirement for clearinghouses, access to the EU market for ‘third country’ investment advisors, and operations of non-EU banks within the Single Market.

139 Under some pieces of EU financial services legislation, the European Commission—with the support of a majority of Member States—can recognise a non-EU country’s regulatory regime for a specific part of the industry as ‘equivalent’. Such a unilateral decision by the EU triggers prudential or regulatory reliefs for EU-based firms which deal with a provider in the non-EU country in question, or grant those providers preferential market access on a cross-border basis.

140 See Commission document SWD(2017) 102, “EU equivalence decisions in financial services policy: an assessment” (February 2017). In March 2018, the EU-27 called for unspecified improvements to the equivalence framework in light of the UK’s departure from the EU, echoed later in April in a draft European Parliament Report (which will be debated by the full Parliament in September).

141 Financial Times, “Brussels seeks emergency powers to prepare for hard Brexit“ (18 April 2018).

142 See the Annex to this Report for more details on the proposals under scrutiny.

143 The new Prospectus Regulation will replace the existing Prospectus Directive from July 2019. The provisions on ‘third country’ issuers are contained in articles 28 to 30 of the Regulation. The European Commission has recently proposed that the European Securities & Markets Authority (ESMA) should act as the central EU-wide authority for scrutinising any prospectuses submitted under this equivalence regime.

144 We have discussed the new EU crowdfunding regime in more detail elsewhere in this Report.

145 See also our Report of 28 February 2018 on prudential requirements for investment firms.

146 See for more information on Brexit and asset management our recent Report on the cross-border distribution of collective investment funds within the Single Market.

147 See Commission document COM(2018) 109, “FinTech Action plan: For a more competitive and innovative European financial sector”.

148 See Commission document COM(2018) 114, “Completing the Capital Markets Union by 2019—time to accelerate delivery”.

149 See Commission document COM(2018) 97, “Action Plan: Financing Sustainable Growth”.

150 See Commission document COM(2018) 133, “Second Progress Report on the Reduction of Non-Performing Loans in Europe”.

151 See Commission document COM(2015) 192, “A Digital Single Market Strategy for Europe” (May 2015).

154 See our Report of 31 January 2018 on the latest Anti-Money Laundering Directive.

155 An initial assessment by the European Banking Authority (EBA) found substantial differences in the way individual EU countries approached supervision of fintech firms, including crowdfunding platforms.

156 See our Report of 18 April 2018 for more information on the Crowdfunding Regulation.

157 European Commission, “European countries join Blockchain Partnership“ (10 April 2018).

158 The proposed Crowdfunding Regulation, which forms part of the Action Plan, is the subject of a separate Explanatory Memorandum.

159 See Commission document COM(2015) 468. The previous Committee published a Report on the CMU on 28 October 2015.

160 See Commission document COM(2017) 292.

161 With respect to previous legislative proposals as part of the CMU, see for example our Reports on EU Venture Capital Funds; the European System of Financial Supervision; and prudential requirements for investment firms. See for more information on all CMU proposals the Annex to this Report.

162 Bilateral investment treaties between Member States set varying standards of treatment outside the EU legal framework for cross-border investment within the Single Market. The Commission’s view is that they are incompatible with EU law because they give rights to investors of certain EU countries and not others. The Commission is pursuing infringement proceedings in respect of several intra-EU bilateral investment treaties (BITs).

164 Directive 2009/31/EC. See also the judgment of the European Court of Justice in case C-162/13 (Vnuk).

165 Explanatory Memorandum on the Capital Markets Union submitted by HM Treasury (28 March 2018).

167 High-level group report

168 The Commission notes the EU has an ‘investment gap’ of €180 billion (£x) to achieve EU climate and energy targets by 2030. According to estimates from the European Investment Bank (EIB), the overall investment gap in transport, energy and resource management infrastructure has reached a yearly figure of €270 billion.

169 The Commission is consulting on the EU’s legal framework for corporate reporting until July 2018.

170 Benchmark providers have been developing ESG benchmarks to capture sustainability goals, but the Commission says the lack of transparency regarding their methodologies has affected their reliability. It argues transparent and sounder sustainable indices’ methodologies are needed to reduce ‘greenwashing’ risks.

171 Explanatory Memorandum submitted by HM Treasury (11 April 2018).




Published: 8 May 2018