European Regulatory Radar

Welcome to the latest edition of European Regulatory Radar 

The new issue of European Regulatory Radar brings you the latest updates impacting financial services providers in the region. Complementing the UK Regulatory Radar series, European Regulatory Radar provides an overview of the wider economic and political environment, progress across the regulatory agenda and deep-dive articles on some of the most important regulatory developments.  

The European Supervisory Authorities (the EBA, EIOPA, ESMA) have issued their latest Risks and Vulnerabilities (PDF 595 KB) update concluding that risks remain elevated in a context of slowing growth, uncertain interest rates and geopolitical tensions.

The ECB's 2023 macroprudential stress test (PDF 1.00 MB) found that the banking sector remains resilient to adverse scenarios. However, despite improved liquidity and capitalisation, the EBA's quarterly Risk Dashboard still revealed signs of early credit deterioration. This sentiment of a persisting fragility was reiterated in the ECB's latest Financial Stability Review. 

EIOPA's Insurance Risk Dashboard has identified pockets of vulnerabilities stemming from the real estate sector, against an otherwise stable backdrop, while for asset managers and wider non-bank market participants, attention is turning to the development of a new EU macroprudential framework (see below).

Efforts to reinvigorate the EU/UK relationship and enhance regulatory cooperation continue, with the second meeting of the Joint EU-UK Financial Regulatory Forum taking place in May. The discussion focused on (i) regulatory and market developments and financial stability outlook, (ii) banking and anti-money laundering, (iii) sustainable finance (iv) capital markets (v) asset management and (vi) digital finance and AI.

Various policy initiatives progressed at pace in the run up to the European Parliament elections. However, this pace also required some readjustments, as illustrated by ESMA's recent letter (PDF 183 KB) to the European Commission. 

Banks — The European Council has adopted rules implementing the final Basel III standards in the EU. This is the last step of the adoption procedure. The amended Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) can now be published in the EU's Official Journal and will enter into force 20 days later. Member states will have 18 months to transpose the CRD into national legislation. The CRR will apply from 1 January 2025. As part of the EBA roadmap for implementing the EU Banking Package, draft technical standards or guidelines are under consultation for the credit risk treatment of unfinished property, the specification of long/short positions for market and counterparty risk, and the credit risk treatment of acquisition, development and construction exposures.

The EBA and ECB have established a Joint Bank Reporting Committee (JBRC). The new structure will harmonise reporting of statistical, supervisory and resolution data with the aim of developing common definitions and standards and making data reporting more efficient. Together with the recent Data Point Model (DPM) alliance, this represents another step in the process of building an integrated reporting system. 

The ECB has warned banks to expect more intrusive supervisory treatment following significant reforms to its Supervisory Review and Evaluation Process (SREP). These include full deployment of the Multi-Year Assessment (MYA) allowing targeted focus on specific risks, publication of a new methodology for Pillar 2 capital requirements by the end of 2024, deployment of advanced technology and analytics to improve supervisory efficiency, and use of the full supervisory toolkit (including enforcement measures such as periodic penalty payments). Changes will be implemented gradually, starting in the second half of 2024 and being finalised for the 2026 SREP cycle.

Insurers — EIOPA has released details of its 2024 stress test, which will assess resilience under a scenario of escalating geopolitical tensions. Insurers have until mid-August to submit calculations to their supervisors, with results expected in December. EIOPA has also published a peer review on the application of the Prudent Person Principle (PPP), noting a number of areas where national supervisors could improve their application of best practice.

Meanwhile, the European Commission has requested further technical advice on Solvency II delegated regulation, while co-legislators continue to formally adopt other amendments, and the European Systemic Risk Board (ESRB) has issued advice (PDF 1.01 MB) on prudential approaches to environmental and social risks.

The G7 has published a high-level framework (PDF 230 KB) for Public-Private Insurance Programmes (PPIP) to protect against natural hazards. The framework explores how governments and the insurance sector can work together to fill the protection gap caused by increasing frequency and severity of natural catastrophe events. 

Asset managers — ESMA has published a Call for Evidence to gather views on the review of the UCITS Eligible Assets Directive. It has also published amended technical standards under the revised European Long Term Investment Fund (ELTIF) regulation, reflecting feedback (PDF 770 KB)  provided by the Commission. 

The review of the Sustainable Finance Disclosure Regulation (SFDR) continues and the Commission has shared feedback (PDF 770 KB)  on its consultation to reform the level one framework. This indicates that respondents would like to see a more consumer-focused and internationally consistent set of rules. To complement the SFDR, ESMA has published final guidelines on using ESG or sustainability-related terms in fund names.

Negotiations have continued on the proposed Retail Investment Strategy, however trilogues will not commence until later this year. In the meantime, ESMA has published the findings (PDF 998 KB) of its common supervisory action on marketing communications under MiFID II.

The Commission has launched a consultation to feed into its review of the EU macroprudential framework for non-banks, including on areas where EU authorities could be given new tools to address systemic risk. 

For EEA fund managers seeking to access UK retail investors, the FCA and HMT have published a joint roadmap (PDF 300 KB) on the implementation of the Overseas Funds Regime (OFR) to support relevant preparations. The UK will consult on extending the FCA's Sustainability Disclosure Requirements (SDR) to OFR funds in Q3 this year.

Capital markets — Debate continues on how to revive the (nearly ten-years old) capital markets union (CMU), with the ECB Governing Council publishing a statement on advancing the initiative. ESMA has separately put forward recommendations to build “more effective and attractive” capital markets in the EU, making the regulatory and supervisory framework more agile and consistent. 

ESMA has also launched various consultations as part of the MiFID II and MiFIR reviews. For MiFIR, one package covers amendments to pre- and post-trade transparency requirements for non-equity instruments, the obligation to make pre-and post-trade data available on a reasonable commercial basis and reference data requirements. Another package addresses input / output data for Consolidated Tape Providers (CTPs), authorisation and organisational requirements of CTPs, the revenue redistribution scheme for an equity CTP as well as ESMA's initial reflections on how it will select CTPs. For MiFID II, a consultation has been issued on the amendments to commodity derivatives position management controls and position reporting. 

ESMA has also reported the findings of its 2023 Global CCP fire drill in which “no major operational bottlenecks were identified”.

Operational resilience — The ESAs are consulting (PDF 530 KB) on RTS for the conduct of oversight activities under the Digital Operational Resilience Act (DORA), while three other RTS have now been formally adopted. The ESAs have also announced a voluntary dry-run exercise for the collection of registers of information required under the Act. And the ECB is consulting on a new guide (PDF 214 KB) on outsourcing cloud services to cloud service providers. The guide aims to clarify both the ECB's understanding of related legal requirements under DORA and the Capital Requirements Directive (CRD), and expectations for the banks it supervises.

Digital finance — The EBA has launched two consultations under the Markets in Cryptoassets Regulation (MiCAR), the first on guidelines for the redemption plans of token issuers, and the second on an RTS setting out certain complaints handling procedures. ESMA has also published its third MiCAR consultation package, covering all remaining mandates within an 18-month deadline. 

Verena Ross, Executive Director of ESMA, has written a letter to the Commission, Parliament and Council to update them on the implementation of the DLT Pilot Regime, which went live in March 2023, and associated challenges. 

Final rules have been formally adopted on the AI Act. Once published in the EU Journal (expected imminently), it will enter into force 20 days later, making it the first AI law in a major jurisdiction. Alongside the Act, ESMA has published initial guidance to firms on the use of AI in the provision of retail investment services, given their obligations under MiFID II.

The EU elections which have just taken place will result in changes to the composition of the European Parliament and will impact the appointment of the next Commission.

The articles below provide more detailed insights on some of the most significant developments. Click on the links to read more: