17 October 2017

Financial Markets in brief – new regulation and other developments

There have been many developments in national and European financial markets regulation during the past month. We provide a brief overview of these developments, which include the execution of the Benchmark Regulation in the Netherlands and the EBA’s new guidelines on internal governance.

Highlighted publications

Execution of Benchmark Regulation

The Dutch Minister of Finance has submitted a bill to Parliament to amend the Financial Markets Supervision Act (Wft) and the Economic Offences Act (WED) as part of the execution of the Benchmark Regulation. The bill extends the enforcement powers of the Dutch financial markets supervisor (AFM) to include the power to temporarily ban individuals from performing certain roles within a benchmark administrator. Also, the bill introduces sanctions for breaching the following Benchmark Regulation provisions:

  • the obligation for market parties to exclusively use benchmarks that have been created under the rules of the Benchmark Regulation
  • the requirement of a licence to operate as a benchmark administrator.

The bill is expected to enter into force on 1 January 2018.

 

Best practices for handling errors in enterprises

The AFM has published a report with suggestions and best practices for handling errors. An error is defined as something that has gone wrong unintentionally. Fraud and misconduct, for example, are intentional, and are not covered by the definition. Examples given in the report are accidentally sending confidential information by email or making an entry error on a trading screen. The aim of this report is to demonstrate the importance of creating an open culture with regard to errors, and to encourage enterprises to foster this type of culture. Scientific research has shown that learning from errors can contribute to the ethical behaviour of employees, better quality service provision, and better results of the enterprise. The behaviour of leaders and their reaction to errors – the ‘tone at the top’ – is crucial to how employees think about errors in an organisation.

 

AFM ends accepted market practice on liquidity contracts

The AFM has ended the Dutch accepted market practice on liquidity contracts. Consultation showed there was no interest in continuing the AMP in the Netherlands, which was hardly ever applied by market participants in the past.

 

Opinion on a more proportionate prudential framework for smaller investment firms

Following the European Commission’s call for advice, the European Banking Authority (EBA) has published its Opinion on the design and calibration of a new prudential framework for investment firms. The EBA recommends that a consolidated single rulebook is developed for smaller non-systemic MiFID investment firms. The Opinion covers:

  • the design and calibration of capital and liquidity requirements
  • consolidated supervision
  • reporting requirements
  • the suitability of the proposed framework for commodity derivatives firms
  • the need of macroprudential tools
  • proportional applicability of the remuneration requirements and corporate governance rules to investment firms laid down in the Capital Requirements Directive and the Capital Requirements Regulation.

The EBA also recommends that very simple prudential requirements are introduced for small investment firms that provide limited services or activities.

 

Report on Dutch banking supervision

The Dutch Court of Audit has reviewed the supervision of small and medium-sized banks in the Netherlands. According to the Court of Audit, the Dutch Central Bank (DNB) imposes high capital requirements on these banks and assesses these banks as often and as thoroughly as they assess large banks.

In general, the review found the DNB’s supervision approach to be well-designed, comprehensive and strict. However, some aspects, mainly relating to internal operational processes, could be improved. In addition, the DNB could take measures to enhance the transparency of the setting of capital and liquidity requirements for small and medium-sized banks.

The Court of Audit also concluded that the Minister of Finance has been granted sufficient powers to supervise the DNB, but that he does not make enough use of these powers. It is unclear whether the Minister has all the information required to fulfil his responsibilities in the event of crisis situations at banks that could destabilise the financial system. The Minister should use the existing supervisory tools more actively. In addition, the existing Memorandum of Understanding on the provision of information by the DNB to the Ministry could be updated and tightened.

The third and final conclusion pertains to gaps in audit capabilities for independent review of both European and national banking supervision. The Report includes recommendations for the DNB to safeguard the Court of Audit’s access to supervisory information of small and medium-sized banks.

 

European bank supervisor publishes guidelines on internal governance

The EBA has published the Final Report on guidelines on internal governance, completing the various governance provisions in CRD IV. The EBA puts more emphasis on the management body’s duties and responsibilities in supervising risk oversight. Specific requirements are given for sound management of risks across all three lines of defence. In particular, the EBA sets out detailed requirements for the second line of defence (the independent risk management and compliance function) and the third line of defence (the internal audit function). The EBA also gives specific guidelines for complex structures, for example in offshore financial centres, aimed at increasing the transparency of, and reducing the risks involved with, such structures. This includes reporting on governance arrangements, including in relation to such structures. The framework for business conduct has also been further developed, and more emphasis is put on establishing a risk culture, developing a code of conduct, and managing conflicts of interest.

The guidelines will enter into force on 30 June 2018, at which time the current guidelines on internal governance, published in 2011, will be repealed.

 

European authorities publish suitability test guidance

The EBA and the European Securities and Markets Authority (ESMA) have published a final report on their joint guidelines to assess the suitability of members of management bodies and key function holders under CRD IV and MiFID II. As De Brauw regularly helps prospective managing and supervisory directors to prepare for the assessment, we have contributed to the public consultation on the draft guidelines; here is our earlier In context article on the public consultation. The guidelines will enter into force on 30 June 2018. The existing EBA guidelines, published on 22 November 2012, will be repealed at the same time.

 

Implementation of PSD2 in the Netherlands

The Minister of Finance has launched a consultation on a draft decree implementing the Payment Services Directive 2 (PSD2). The decree will implement new PSD2 requirements for obtaining an authorisation as a payment institution, for internal operations, and for provision of information by payment initiation services providers. The consultation will end on 25 October 2017.

On 22 September 2017, the Minister of Finance informed the Dutch parliament that the draft bill implementing the PSD2 had been sent to the Council of State for advice. He no longer deems it realistic that PSD2 will be implemented before 13 January 2018, by when the Directive must be implemented. It is realistic to assume that the implementation will take place in spring 2018.

 

Consultation on bank licensing and fintech bank licensing

The European Central Bank (ECB) has launched a consultation for draft guides to bank licensing and fintech bank licensing. This is intended to further enhance the harmonisation of licensing assessments for banks in the EU. The guides are aimed at making the application process more transparent, and helping applicants in their preparation phase. The guides cover the application process, the licensing requirements for banks in general, and specific considerations for those with fintech business models. Comments can be submitted until 2 November 2017.

 

Developments on the Insurance Distribution Directive

Following a publication consultation at the end of 2016, the Dutch bill implementing the Insurance Distribution Directive (IDD) was published in September 2017. Following responses to the consultation of the draft bill, several amendments were made. The bill now also includes amendments to the Pensions Act, the Mandatory Occupational Pensions Act, and the Healthcare (Market Regulation) Act. The IDD must be implemented by 23 February 2018.

In addition, the European Commission has adopted two draft Delegated Regulations supplementing the IDD with regard to:

The EIOPA has also published the final report on guidelines on “execution-only” sales.

 

Agreement on new rules for securitisations

The European Parliament and the Council have reached agreement on measures to ensure simple, transparent and standardised securitisation. This includes a regulation on securitisation, which will apply to all securitisation products, and an amendment to the Capital Requirements Regulation to make the capital treatment of securitisations for banks and investment firms more risk-sensitive.

The European Parliament is expected to vote on the proposal later this month.

 

Commission proposes to strengthen powers of European Supervisory Authorities

The European Commission has proposed reforms to strengthen the powers of the European Supervisory Authorities (ESAs). Among other things, the proposal gives the ESAs coordination powers over day-to-day supervision by competent authorities. In addition, the ESAs will promote fintech and sustainable finance.

The proposal also contains new supervisory powers for ESMA:

  • The supervision of certain prospectuses will be transferred from national regulators to ESMA. This will apply to prospectuses for certain wholesale non-equity securities and asset-backed securities, prospectuses by non-EU country issuers, and prospectuses by specialist issuers, such as property companies and scientific research-based companies
  • ESMA will supervise benchmarks that are deemed to be critical
  • ESMA will supervise certain collective investment funds, such as European Venture Capital Funds, European Social Entrepreneurship Funds and European Long-Term Investment Funds
  • ESMA will play a stronger coordinating role in investigations of market abuse with a cross-border dimension.

The proposals will now be discussed by the European Parliament and the Council.

 

New Q&As on the Market Abuse Regulation

ESMA has published an updated version of its Q&As on the MAR to include a new question on article 17(4) of the MAR. It explains how an issuer should deal with a situation where it has delayed a disclosure of inside information and, due to subsequent circumstances, that information loses the element of price sensitivity and therefore its inside nature.

 

Other publications

EC

EBA

ESMA

EIOPA

ECB

Official Journal EU

MinFin

MinSZW

AFM

DNB

Other