The International Regulatory Strategy Group (IRSG) has welcomed the Commission's call for evidence on the EU regulatory framework for financial services. This detailed response is further to its initial submission dated 31 January 2016, a copy of which is attached for ease of reference.
As explained in the initial submission, the IRSG is a practitioner-led and cross-sectoral body comprising leading figures from the UK-based financial and related professional services industry. It seeks to identify opportunities for engagement with governments, regulators and European and international institutions to promote an international framework that will facilitate open and competitive capital markets globally. It is an advisory body both to the City of London Corporation and TheCityUK.
This response is part of the IRSG’s ongoing engagement with the European Commission on the sector’s role in enabling jobs and growth in the broader economy. Many of the areas identified in the call for evidence resonate closely with the past and future work programme of the IRSG. The IRSG welcomes the review into the cumulative impact of previous regulatory reform as part of the wider Better Regulation Agenda and the Regulatory Fitness and Performance Programme. The production of this response was overseen by the IRSG’ cumulative impact assessment steering committee which is compromised of representatives from cross-sectoral institutions and chaired by Alexandria Carr of Mayer Brown. It was widely shared with other IRSG committees, including those that work on data and cyber security issues, post-trade, bank structural reform, supervisory issues and Capital Markets Union (CMU). In addition to concerns that were raised during this process, the committee also reviewed and analysed individual responses to the call for evidence by several financial services institutions to identify further truly cross-sectoral issues.
The IRSG appreciates that, following the financial crisis, the European Union's (EU) focus was on restoring financial stability and confidence in the financial system. This led to increasing amounts of EU financial services regulation and increasing prescription within that regulation. The IRSG understands that writing substantial regulation at a fast pace was necessary at that time and that there have inevitably been unintended consequences. This, however, placed a heavy burden on financial institutions at a time when they had been weakened by the financial crisis and less able to play their crucial role in supporting the real economy. The IRSG recognises that effective, practical and robust regulation is necessary for a strong, stable and supportive financial system: financial stability is a prerequisite to sustainable economic growth. Therefore the IRSG is supportive of the approach taking by the European Commission with the call for evidence and looks forward to continuing to engage with them throughout this process, including through the production of a report on the legislative process more broadly to be launched in June 2016.
The IRSG believes it is important for the lessons from the call for evidence to be learnt and applied to ongoing initiatives such as the Green Paper on retail financial services: better products, more choice, and greater opportunities for consumers and businesses. The IRSG supports the focus on jobs and growth adopted by President Juncker and his Commission. It has welcomed the proposal for a CMU to develop and integrate European capital markets. Financial services are vital to the delivery both of economic growth and a CMU. Each part of the financial system has a role to play: banking, insurance, asset management and market infrastructure.
The IRSG, therefore, welcomes this opportunity to report on the impact of EU financial services regulation. It notes, however, that in many instances it is too early to assess the impact of particular EU legislation, although preliminary conclusions may be drawn. It also notes that quantifying evidence is difficult, both inherently because of the challenge of distinguishing between the impact of very different factors and because of the dearth of accepted methodology in this field. In consequence, it is inevitable that some of the arguments made will rely on logical deduction of the legal and economic consequences of legislation rather than quantitative evidence tied to individual legislative acts.
In the course of gathering its evidence, the IRSG has identified a number of shortcomings in existing legislation. It set out these common shortcomings in its initial submission. They are summarised below for ease of reference with examples drawn from the attached annex which provides the empirical evidence and concrete feedback the Commission seeks:
1.The need for harmonisation should be balanced with the need to recognise diversity, to ensure proportionate regulation and to facilitate the appropriate use of discretion.
Examples of the need for harmonisation include in relation to inconsistent requirements relating to consumer disclosure and the form such disclosure must take (see examples 1 and 3 for Issue 3 (Investor and consumer protection)) and the inconsistent implementation of AIFMD (see example 2 for Issue 9 (Barriers to entry)).
Examples of the need to recognise diversity and to ensure proportionate regulation include CRD IV/CRR treatment of investment firms as if they were banks and all entities within in its scope as if they were large multi-national banks (see example 1 for Issue 4 (Proportionality / preserving diversity in the EU financial sector)), the disproportionate effects of the leverage ratio (see example 2 for Issue 4 (Proportionality / preserving diversity in the EU financial sector)) and the clearing obligation under EMIR (see example 4 for Issue 9 (Barriers to entry)) and the impact of MiFID II and Basel III on non-financial entities (see examples 3 and 4 for Issue 4 (Proportionality / preserving diversity in the EU financial sector)).
2. The consequences of legislative proposals require early identification and consideration. They should be regularly evaluated on an individual and cumulative basis.
Almost all the examples cited in the annex demonstrate the need for early, regular and cumulative evaluation of the consequences of legislation.
3. Financial services regulation ought to support a dynamic, flexible and globally competitive EU.
Examples where regulation has not supported a dynamic, flexible and globally competitive EU include the gold-plating of international prudential standards which results in increased costs of raising finance in the EU (see example 1 for Issue 1 (Unnecessary regulatory constraints on financing)), the inconsistent implementation of AIFMD which has meant that non-EEA AIFMS cannot access all European markets equally (see example 2 for Issue 9 (Barriers to entry)) and the delay in recognising third-country CCPs under EMIR which impedes cross-border transactions (see example 5 for Issue 9 (Barriers to entry)).
4. The legislative process should facilitate the adoption of effective, efficient and timely regulation.
Examples of problems with the effective, efficient and timely adoption of regulation include the setting of unrealistic deadlines in MiFID II / MiFIR and BRRD (see example 1 for Issue 5 (Excessive compliance costs and complexity)) and the delay in recognising third-country CCPs under EMIR (see example 5 for issue 9 (Barriers to entry)).
5. There should be a renewed focus on the consumer and what the consumer needs.
Examples where there is a need for a renewed focus on the consumer are found in many of our examples but particular examples include the inconsistent requirements relating to consumer disclosure and the form such disclosure must take, MiFID II’s categorisation of certain products as ‘complex’ and the lack of specific consideration of vulnerable clients in the disclosure requirements (see examples for Issue 3 (Investor and consumer protection)).
The IRSG has observed that many (if not all) of the shortcomings identified could have been avoided or minimised by adherence to a number of general principles. In consequence and in this paper, before proceeding to the examples of existing legislative shortcomings set out in the attached annex, the IRSG sets out below a number of recommendations which it believes should be adhered to in future legislative process. In consequence and in this paper, before proceeding to the examples of existing legislative shortcomings set out in the attached annex, the IRSG sets out below a number of recommendations which it believes should be adhered to in future legislative process. This builds on work that has already begun elsewhere, for instance the Economic and Monetary Affairs Committee’s own initiative report on stocktaking and challenges of the EU Financial Services Regulation: impact and the way forward towards a more efficient and effective EU framework for Financial Regulation and a Capital Markets Union.
Principles for better regulation
1. In order to ensure consistency, policy coherence, clarity and certainty, to reduce duplicative and conflicting requirements and to ensure an appropriate focus, horizontal framework Principles ought to be adopted in the key areas, including the following:
(b) Territorial and extraterritorial effect
(c) The equivalence process
(d) Proportionality / diversity
(e) Subsidiarity and proportionality
(g) Consumer protection
(i) Asset protection
(j) The legislative timetable
(k) Consistency with international standards and other global approaches
These Principles should be applied across all financial services legislation. In exceptional cases, the need to depart from these Principles ought to be set out in the impact assessment.
We note that other respondents have made similar points. The UK's Financial Conduct Authority, for example, proposes a cross-cutting work stream on disclosure in order to rationalise the information that consumers receive, to ensure that the disclosures provided are most likely to influence the decision-making process and to ensure flexibility to respond to consumers' needs and changes in behaviour. The IRSG endorses the proposal but extends it to wider range of cross-cutting issues.
2. The IRSG welcomes the progress that has been achieved with regard to the impact assessment process but believes more work needs to be done, as the examples cited above on page 2 demonstrate. Building on the Commission’s existing guidelines on impact assessments and in order to minimise unforeseen consequences, to ensure early identification of all consequences of the proposed legislation, to assess the cumulative impact of all proposals and to give clarity and certainty, the IRSG proposes that the impacts to be considered in impact assessments should include the following:
(a) Impact on global competitiveness of the EU
(b) Impact of scope both direct and indirect
(c) Specific extraterritorial impact both direct and indirect
(d) Macro-economic impact, including the impact on markets and behaviour
(e) Impact on liquidity
(f) Impact on end-user / consumer
(g) Impact on jobs and growth
(h) Cumulative impact
The Regulatory Scrutiny Board, as part of its control and scrutiny function, could ensure that each relevant impact has been considered in sufficient detail to enable it to give its positive opinion.
The IRSG would also propose that the impact assessments are revisited as the legislative process develops, so that amendments to the Commission's proposal made by the Council and Parliament and in trialogues are evaluated against the same impacts as originally considered by the Commission and the Regulatory Scrutiny Board. The Regulatory Scrutiny Board's role should be expanded to cover these amendments.
Finally, the IRSG believes it important to assess the actual impact of adopted legislation against the same criteria applied to the legislative proposal. As part of the review that is typically built into each new piece of legislation, the impact assessment should be revisited to ascertain whether the original assumptions prove valid. If they do not, amendment of the legislation ought to be considered.
Regulatory forbearance/ no action letters
3. Many respondents have identified a need for some form of regulatory forbearance at EU level. Comparisons have been drawn with the US where use is made of no action letters.
The IRSG recognises the need for a tool by which urgent and critical action can be taken. The need may arise in the context of the implementation of legislation: Solvency II and MiFID II/ MiFIR demonstrate a need of a mechanism to change the application date of legislation. ESMA itself has pointed out the need for a mechanism to deal with a pressing need to respond quickly to market developments and pointed out that a need to suspend the clearing obligation under EMIR may arise.
The need illustrated above arises because the current tool would be legislative amendment or the introduction of new legislation. This is not difficult in a Member State which is able to introduce emergency legislation as a matter of urgency but the EU legislative process is not designed to act quickly. The IRSG believes that an EU tool or process which allows a rapid response to urgent and critical developments is necessary but recognises that a solution based on the US approach is not necessarily compatible with the EU's legislative architecture. The IRSG suggests, therefore, that consideration be given as to how to address this lacuna.
In order to assist the Commission, the IRSG will consider the form these Principles for better regulation should take, what each individual Principle should cover and how the Principles should be developed. It will also further develop its thinking on impact assessments and regulatory forbearance. The IRSG will report its findings to the Commission in June 2016.
Chair of the IRSG Council
 For further examples see also example 2 for Issue 6 (Reporting and disclosure obligations), example 1 for Issue 10 (Links between individual rules and overall cumulative impact), examples 2 and 3 for Issue 11 (Definitions) and examples 1 and 2 for Issue 12 (Overlaps, duplications and inconsistencies).
 For further examples see the remaining examples for Issue 4 (Proportionality / preserving diversity in the EU financial sector), example 4 for Issue 1 (Unnecessary regulatory constraints on financing), examples 1 and 2 for Issue 2 (Market Liquidity), example 2 for Issue 3 (Investor and consumer protection), the example for Issue 14 (Risk) and the example for Issue 15 (Procyclicality).
 See also example 1 for Issue 2 (Market Liquidity), example 1 for Issue 4 (Proportionality/ preserving diversity in the EU financial sector), example 2 for Issue 5 (Excessive compliance costs and complexity) and example 2 for Issue 11 (Definitions).
 See also example 1 for Issue 2 (Market Liquidity), the examples for Issue 4 (Proportionality / preserving diversity in the EU financial sector), example 3 for Issue 4 (Proportionality / preserving diversity in the EU financial sector), example 1 for Issue 5 (Excessive compliance costs and complexity), example 1 for Issue 8 (Rules outdated due to technological change), example 5 for Issue 9 (Barriers to entry), example 1 for Issue 10 (Links between individual rules and overall cumulative impact) and the example for Issue 14 (Risk).
 In respect of cross-border activity, investment and the in-flow of capital from the rest of the world.
 Impact on those not directly within scope of the regulation but who are indirectly affected because their within-scope counterparties require their compliance to meet their own obligations.