1 CURRENT DEVELOPMENTS IN THE REGULATORY FRAMEWORK OF THE EUROPEAN BANKING SYSTEM Prof. Christos Vl....

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CURRENT DEVELOPMENTS IN THEREGULATORY FRAMEWORK OF

THE EUROPEAN BANKING SYSTEM

Prof. Christos Vl. GortsosSecretary General, HBA

November 2007

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TABLE OF CONTENTS

A. Introductory RemarksB. The European financial regulatory frameworkC. Operation and supervision of credit institutionsD. Operation and supervision of capital markets E. Consumer protectionF. Payment and settlement systemsG. Combating financial crime

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A. INTRODUCTORY REMARKS

1. Levels of regulatory intervention in the financial sector a. International level (Basel Committee on Banking Supervision, IOSCO, FATF, OECD, CPSS) b. Community level c. National level Currently, the principal source of regulatory intervention in the financial sector are the legal acts adopted at Community level within the context of achieving the integration of the internal market in the European Community.

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A. INTRODUCTORY REMARKS

2. Reasons for regulatory intervention in the European financial sectora. Necessary prerequisites – negative integrationFinancial services trade liberalisation

b. Adequate prerequisites – positive integration • Ensuring the stability of the banking system – capital markets – insurance market• Ensuring that markets are fair, efficient and transparent • Combating of financial crime• Protection of consumers of financial services• Efficiency of payments systems

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B. THE EUROPEAN FINANCIAL REGULATORY FRAMEWORK

1. What rules are applied to credit institutions • Operation and supervision of credit institutions (under C)• Operation and supervision of capital markets (under D)• Consumer protection (under E)• Operation of payments and settlement systems (under F)• Combating of financial crime (under G)• Insurance mediation• Personal data• Tax law and accounting law• Commercial law• Labour law• Environmental liability

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B. THE EUROPEAN FINANCIAL REGULATORY FRAMEWORK 2. How the rules are produced • Legislative procedure

• Co-decision procedure• Lamfalussy procedure (under 3 below)

• Self-regulation

• Codes of ethics• European Payments Council• Ombudsman

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3. Lamfalussy procedure The Lamfalussy procedure concerns the way of producing rules in European financial law and was adopted by the Community institutions in 2002, initially in the capital markets sector. Its extension to the banking and insurance sectors was then decided in 2004 The Lamfalussy procedure consists in four levels:Level 1Aim: Adoption of a general regulatory framework and determination of the issues as to which technical implementing measures should be adopted by the European CommissionProcedure: Adoption of Community acts by the classic procedure of co-decision of the Council and the European Parliament on a proposal of the European Commission

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3. Lamfalussy procedure (cont.) Level 2Aim: Concretization of the framework principles of Level 1Procedure: Adoption of technical implementing measures in the form of a Directive or Regulation by the European Commission. Provision of technical assistance by sectoral technical committees Level 3Aim: Joint interpretation and consistent implementation of the measures of Levels 1 and 2 at a national levelProcedure: Co-ordination of actions by the sectoral committees and issuing relevant guidelines Level 4Monitoring by the European Commission of the compliance of the Member States with the measures adopted

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Level 1 Level 2 Level 3

Type of legal act Basic legal act Implementing measures

Recommendations / Guidelines

Legislator European Parliament / Council

European Commission

CEBS/CESR/

CEIOPS

Support mechanisms

EBC/ESC/EIOPC (as advisory committees)

EBC/ESC/EIOPC (as advisory and regulatory committees)

CEBS/CESR/

CEIOPS (as advisory committees)

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White Paper on Financial Services Policy (2005-2010)

• Better lawmaking• EC regulatory and supervisory structures• Ongoing and future legislative activities (2005-2010)• The external dimension

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C. OPERATION AND SUPERVISION OF CREDIT INSTITUTIONS

1. Committee of European Banking Supervisors (CEBS)

The current issues:

• Liquidity risk (under a)

• Review of the large exposures regime (under b)

• Supervision in third countries (under c)

• Options and discretions in the CRD (under d)

• Definition of own funds (under e)

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(a) Liquidity risk

CEBS has been invited to provide the European Commission • a survey of the regulatory framework adopted by the

members states and • an analysis of selected topics related to liquidity risk

management.

The objective is to identify those issues which may require changes in the current regulatory framework and promote regulatory and supervisory convergence at EU level

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(b) Review of the large exposures regimeCEBS has been invited to provide the European Commission with

feedback in the following areas• purpose and metrics of the large exposure regimes• a range of specific issues (i.e indirect concentration risk)

The objective is a wider ranging review of the current large exposures regime

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(c) Supervision in third countries

This issue relates to general guidance issued under article 143 of the Directive 2006/48/EC on the equivalence of arrangements for consolidated as well as for supplementary

(conglomerates) supervision in third countries

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(d) Options and discretions in the CRD

CEBS is invited to conduct by May 2008 an indepthtechnical analysis on the exercise of options and discretionsidentified in its supervisory disclosure framework byindicating for each of them:• the use of the options and discretions in each Member State• the extent to which further harmonisation might be achieved in terms

of reducing the number of discretions and options of the CRD.

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2. Directive 2007/44/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector

• The Directive will streamline the criteria and timescale of the assessment procedure applied by European supervisory authorities in cases where qualifying holdings are acquired in the financial sector

• The adoption of this Directive is a decisive step towards strengthening European competitiveness in particular by promoting cross-border consolidation

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3. Commission’s Consultation on reorganisation and winding up of credit institutions (Directive 2001/24/EC)

The purpose of Directive 2001/24/EC is to ensure that a credit institution and its branches in other Member States are reorganised or wound up according to the principles of unity and universality

Main issues of the consultationi) the problems of cross-border reorganisation and winding-up of

banking groups, and the obstacles to the transferability of assets in a crisis situation; and

ii) gaps and ambiguities in the current Directive identified so far

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D. OPERATION AND SUPERVISION OF CAPITAL MARKETS

1. Markets in financial instruments (MiFID)

CESR Level 3 measures: • Protocol on the supervision of branches under MiFID

The protocol aims in fostering greater cooperation between authorities in the exercise of their core supervisory functions over investment firms and credit institutions that provide cross-border investment services. The protocol sets out a framework for co-operation between competent authorities under two different models: (a) joint supervision conducted through common oversight programmes, and (b) requests for assistance based on efficient allocation of supervisory tasks.

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1. Markets in financial instruments (MiFID) (cont.)

CESR Level 3 measures: • Passport under MiFID – Recommendations for the implementation of the

Directive and Statement on practical arrangements regarding the late transposition of MiFID

The purpose of the recommendations is to have a common approach on the notification procedures and on the future collaboration between the home and the host authorities that will be necessary in order to guarantee efficient and consistent supervision on cross-border activities. The main aims of these recommendations are, inter alia, the clarification of some aspects regarding the supervision of tied agents, MTFs and representative offices, the elaboration of pragmatic solutions for the transition from the ISD passport to the MiFID passport, and the prioritisation of those aspects where investment forms need clarity in the short term.

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CESR Level 3 measures:

• Protocol on MiFID Passport NotificationsThis Protocol provides a framework for the co-operation of competent authorities with regard to the implementation of the passport notification provisions of the MiFID. It supplements the provisions of the CESR Multilateral Memorandum of Understanding (1999) which provides the general basis for mutual cooperation of CESR Members.

• Q & A on best executionThis process-driven approach aims to promote market efficiency and investor protection by fostering competition between trading venues and promoting investor confidence by ensuring that firms are obtaining the best possible result for their clients’ order.

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CESR Level 3 measures: • Inducements under MiFID

Recommendations clarifying the range of application of the regime, specifying a common approach to the understanding of the different categories of payments within Article 26 of Directive 2006/73/EC.

• List of minimum recordsThe recommendation sets out the content of the list of minimum records that competent authorities need to draw up in accordance with Article 51 (3) of Directive 2006/73/EC and that investment firms have to keep.

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• Publication and consolidation of markets dataThese guidelines and recommendations are meant to facilitate the understanding of certain requirements of the MiFID and its Implementing Regulation on publication and consolidation of market information. They also intend to facilitate a consistent implementation of the relative provisions without imposing further obligations on investment firms, MTFs or regulated markets.

• MiFID transaction reportingGuidance to three aspects of transaction reporting is provided, i.e. (a) practical solutions for the reporting obligations for branches, (b) clarification as to what constitutes “execution of a transaction” for transaction reporting purposes, and (c) operational solutions for some aspects of reporting channels.

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• Non-equities transparencyIn this paper CESR concludes that it has not been identified an evident market failure in respect of market transparency on bond markets and so it believes that any increase in transparency would need to be carefully tailored to ensure that liquidity provision and levels on competition are not damaged. In other words, a thorough cost-benefit analysis should be undertaken by the Commission before any regulatory action.

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1. Markets in financial instruments (MiFID) (cont.)CESR Level 3 measures:• Report on commodity and exotic derivatives

This paper is part of CESR’s response to the Commission’s request for assistance on commodity and exotic derivatives in order to determine (a) which relevant entities, activities and instruments should be covered by the scope of EU financial markets regulation in these areas, and (b) whether current regulation needs to be adapted to take into account the specificities of the commodities and commodity derivatives markets.

• New arrangements for the reporting of derivatives trades in accordance with MiFID

CESR developed in cooperation with the industry new arrangements for transaction reporting. These include, (a) reporting on non-securities derivatives (including commodity derivatives) and (b) an alternative way for the identification of securities derivatives on some derivatives markets (the Alternative Instrument Identifier).

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2. Clearing and settlement in the EU

Giovannini barrier 3

• Corporate Actions

Monitoring of market implementation of the Market Standards on Mandatory Distributions:

Announcements, Information from (I)CSD to participants, Information from Custodian banks and/or (I)CSD participants, Data relating to announcements, Resources, Processing of payments.

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3. TARGET2-Securities

• On 6 July 2006, the Governing Council of the European Central Bank decided to further explore in cooperation with central securities depositories and other market participants, the setting up of a new service –called TARGET2-Securities – for securities settlement in the euro area

• The objective of the project is to allow the harmonised settlement of securities transactions in euro which are settled in central bank money. Synergies for the market with other facilities operated by the Eurosystem will be sought, in particular in connection with the future TARGET2 payment system

• The Governing Council of the ECB intends to hold another public consultation by the end of 2007, requesting comments on fully articulated user requirements. Only after this public consultation the Governing Council will decide on the development phase

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3. TARGET2-Securities (cont.)

Objectives • Provide a single venue where all EU assets can be exchanged for euro• Reduce cost of cross-CSD settlement via a single settlement platform and

standardized communication protocols• Reduce complexity and associated operational costs and risks by

harmonizing market rules and practices for clearing and settlement related corporate events

Benefits of T2S on post-trading

• Increased market liquidity and access to wider investor base lead to lower cost of capital for issuers

• Increased market liquidity and lower cost of portfolio diversification lead to better return for investors

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4. Investment Management

• White Paper on enhancing the Single Market framework for investment funds

• European Parliament: Draft report on Asset Management II

• CESR’s Consultation paper – Content and form of Key Investor Information (KII) disclosures for UCITS

CESR makes specific recommendations on a number of key points, including objectives and scope of KII, format and general content, risk-reward, past performance, charges.

Purpose: Review of the Directive 85/611/EC by the end of 2008

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4. Investment Management (cont.)

Private Placements

• European Commission’s feedback statement on its consultation on the functioning of private placement regimes in Europe, and on the case for a common EU regime

The Commission concludes that the possibilities for private placements differ widely across EU Member States and that there is a good level of support for a European regime, in particular for non-harmonised open-ended investment funds, to which the Prospectus Directive does not apply.

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4. Investment Management

Hedge Funds• Hedge Fund Working Group Consultation Paper - Draft

Code of Conduct of the London-based hedge fund industryThe proposed standards are rooted in the UK/FSA background but aspire to become globally applicable. They are presented in a consultation document in order to allow hedge fund managers and other stakeholders to be involved in the development of the standards.

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5. Other issues

Investor protection and transparency• Level 3 - Commission Recommendation on the electronic network of officially

appointed mechanisms for the central storage of regulated information referred to in Directive 2004/109/EC of the European Parliament and of the Council

• Other Level 3 issues under consideration: The implementation of the options given by the Transparency Directive to Member States Further consideration of the mechanisms for the storage and filing of regulated information Q&A document on the inconsistencies in the practical application of the Transparency

Directive

Prospectus• Assessment of the application of the Prospectus Directive and the level 2 Regulation• Level 3 measures under preparation

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5. Other issues (cont.)Market abuse• Level 3 measures under preparation. Issues identified for further work

(October 2007 –June 2009) include: List of sanctions and measures applicable under the MAD, in order to accommodate concerns about the diversity of measures and sanctions applied in Member States. Harmonisation of requirements for insiders lists. Suspicious Transactions Reporting Stabilisation Regime Twofold notion of inside information Mapping of the existing thresholds in Member States and other practices of CESR Members as regards notifications of transactions by persons discharging managerial responsibilities and consideration of whether there is a case for recommending adjustment of the threshold. Develop guidance on the definition of inside information with regard to commodity derivatives to the extent possible.

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5. Other issues (cont.)

Credit Rating Agencies

• IOSCO Code of Conduct Fundamentals for Credit Rating Agencies – (CESR intends to monitor the compliance by CRAs with the Code and

submit its report probably by mid 2008)

• European Commission Issues an Additional Request for CESR to review the role of Credit Rating Agencies. Main issues for consideration:- Transparency of Credit Rating Agencies (CRAs) rating methodologies,- Human resources allocated to rating and monitoring,- Periodic monitoring of the ratings and timeliness of rating actions,- Potential conflicts of interest (i.e. remuneration structures of CRAs)

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E. CONSUMER PROTECTION

1. Proposal for a Directive on credit agreements for consumers

Main issues• The principle of responsible lending: a. duty to provide explanations

and b. obligation to assess the consumer’s creditworthiness• Provision of exhaustive pre-contractual information• Introduction of new provisions on the way of calculating the Annual

Percentage Rate of Charge• Right of withdrawal: period to exercise the right of withdrawal is 14

days

The Plenary of the European Parliament is expected to adopt the Directive in December 2007 or January 2008

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2. Future expected developments in the field of consumer protection

• Green Paper on Bank Accounts and Customers’ Mobility: the aim is a. to improve customer mobility in relation to bank accounts, b. to boost competition in financial services and c. to allow customers to make full use of the internal market.

• Green Paper on the Retail Financial Services:a. Report on the Green Paper on retail financial services to be delivered by the European Parliamentb. Single Market Review to be published by the Commission: it will include the findings of the consultation on retail financial services

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2. Future expected developments in the field of consumer protection (cont.)

• White Paper on Mortgage Credit: the objectives of the White Paper will be: a. to facilitate lenders’ cross-border activity, b. to facilitate customer mobility,c. to enhance product diversity and d. to improve and modernize consumer protection. Concrete measures will be proposed as regards early repayment, information requirements, annual percentage rate of charge, advice, property valuation, assessment of consumers’ creditworthiness, foreclosure procedures and land registers & registration.

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2. Future expected developments in the field of consumer protection (cont.)

• Review of the Directive 2002/65/EC concerning the Distance Marketing of Consumer Financial Services on the conclusion of cross-border contracts: Conduct a study from an economic perspective in cooperation with stakeholders affected by the Directive, examining whether or not the Directive has achieved its objectives.

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F. OPERATION OF PAYMENT and SETTLEMENT SYSTEMS

1. SEPA SEPA is the area in which:Citizens, firms and other economic agencies will be able to make electronicpayments in euro in the European Economic Area with the same conditions,rights and obligations, regardless of their country of establishment The political dimension of SEPA Focus on the Eurozone: SEPA will be delivered to the countries of the Eurozone

as a priority Countries which do not belong to the Eurozone will be able to participate in thepan-European systems of payments and will be able to adopt the relevantstandards and practices to contribute to the single euro payments market

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1. SEPA (cont.)

• The EPC is a self-regulatory decision-making organisation of the European Payment Industry

• The development and delivery of competitive 'SEPA Payment Schemes' are a competence of the EPC

• The adoption of the 'SEPA Payment Schemes' will be:– a decision of the EPC and the national banking systems, so that they can develop

the basic prerequisites (e.g., capability of delivery) in due time– a decision of each bank so that it can provide its clientele with SEPA payment

services• The adoption of 'SEPA Schemes' at a national level to supplement or replace

existing 'infrastructures' at national level is a decision for the national banking communities

• Within the framework of PE-ACH, the possibility of merging the national ACHs is a decision for the users and/or shareholders

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1. SEPA (cont.) Launching of SEPA payment instruments

• 1.1.2008, SEPA for Cards (at least one card payment product with EMV chip)

• 28.1.2008, SEPA credit transfers for citizens and business

• 1.11.2008, SEPA direct debits for citizens and business

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2. TARGET2

• The Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system went live in January 1999, at the same time as the introduction of the euro

• In October 2002, the Governing Council of the ECB decided to

develop the next generation of TARGET (TARGET2)

• In 2003, three national central banks of the euro area - the Deutsche Bundesbank, the Banque de France and the Banca d’Italia - offered to jointly build and operate the SSP on behalf of the Eurosystem

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2. TARGET2 (cont.)

• Under TARGET2 the decentralised structure of the current TARGET system will be replaced by a single technical platform, the so-called Single Shared Platform (SSP)

• TARGET2 is envisaged to start operations on 19 November 2007

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G. COMBATING FINANCIAL CRIME

1. Anti – Money Laundering

(a) Directive 2005/60/EC (3d AML Directive)

• The Third Anti-Money Laundering Directive incorporates into EU law the June 2003 revision of the Forty Recommendations of the Financial Action Task Force (FATF)

• The Directive is applicable to the financial sector as well as lawyers, notaries, accountants, real estate agents, casinos, trust and company service providers. Its scope also encompasses all providers of goods, when payments are made in cash in excess of €15.000.

• Those subject to the Directive need to:– identify and verify the identity of their customer and of its beneficial owner and monitor their

business relationship with the customer; – report suspicions of money laundering or terrorist financing to the public authorities -usually,

the national financial intelligence unit; and – take supporting measures, such as ensuring a proper training of the personnel and the

establishment of appropriate internal preventive policies and procedures. – introduce additional requirements and safeguards for situations of higher risk (e.g. trading with

correspondent banks situated outside the EU).

• Member States should implement the Directive until December 2007

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1. Anti – Money Laundering

(b) Commission Directive 2006/70/EC

Commission Directive lays down implementing measures for Directive 2005/60/ECof the European Parliament and of the Council as regards:

• the definition of politically exposed person• the technical criteria for simplified customer due diligence procedures and • for exemption on grounds of a financial activity conducted on an occasional or

very limited basis

• Member States should implement the Directive until 15 December 2007

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2. Combating Terrorist Financing

Regulation (EC) 1781/2006

• Regulation (EC) No 1781/2006 on information on the payer accompanying transfers of funds lays down rules for payment service providers to send information on the payer throughout the payment chain. This is done for the purposes of prevention, investigation and detection of money laundering and terrorist financing.

• The Regulation transposes Special Recommendation VII (SRVII) of the Financial Action Task Force (FATF) into EU law and is part of the EU Plan of Action to Combat Terrorism.

• Member States shall lay down the rules on penalties applicable to infringements of the provisions of this Regulation and shall take all measures necessary to ensure that they are implemented. Such penalties shall be effective, proportionate and dissuasive.They shall apply from 15 December 2007.

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3. Weapons of Mass Destruction (WMD) proliferation financing

• In June 2007, the FATF adopted guidance regarding the implementation of financial provisions of the United Nations Security Council Resolutions (UNSCRs) to counter the proliferation of weapons of mass destruction (WMD).

• In October 2007, the FATF adopted guidance regarding the implementation of

activity-based financial prohibitions of United Nations Security Council Resolution 1737. This guidance is not binding and is not directly related to any of the Financial Action Task Force (FATF) 40 + 9 Recommendations, and therefore it is not considered in the FATF mutual evaluation or assessment process. It is intended solely to assist jurisdictions in developing guidance for financial institutions to facilitate implementation of the activity-based financial prohibitions contained in S/RES/1737(2006).

1 CURRENT DEVELOPMENTS IN THE REGULATORY FRAMEWORK OF THE EUROPEAN BANKING SYSTEM Prof. Christos Vl....

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