European Regulatory Radar

Our new issue of European Regulatory Radar (previously named KPMG Regulatory Horizons) brings you the latest updates impacting financial services providers in the region. 

Complementing the UK Regulatory Radar series, European Regulatory Radar includes an overview of the wider economic and political environment, progress across the regulatory agenda, and deep-dive articles on some of the most important developments.

Across the board, authorities continue to emphasise potential financial stability risks. In their spring report, the three European Supervisory Authorities (ESAs) pointed to recent bank failures, liquidity pressures, high interest rates and volatile asset prices, and called for `vigilance in the face of mounting risks'. 

Other firms continue to be in focus too. EIOPA's Risk Dashboard highlighted macro and market risks as being of top concern to insurers, while all other risk categories remained at medium levels. The ESRB's Non-Bank Financial Intermediation Risk Monitor flagged credit risk, liquidity risk and excessive leverage as the three main vulnerabilities for investment funds, and, for the first time, extended its monitoring to include cryptoassets. Also for the first time, the Bank of England has launched a system-wide exploratory stress test to improve its understanding of the behaviour of banks and non-banks in stressed market conditions. And the ECB's latest financial stability review warned of further disorderly adjustments from rate rises on `non-banks', and evaluated potential spillovers between the bank and non-bank sector.

The ECB's review acknowledged that rising rates are revealing “fragilities and fault lines” for banks, which have been under scrutiny recently following recent stresses in the sector. While euro area banks have remained resilient, the ECB notes that higher funding costs and lower asset quality may weigh on profitability. 

Against this backdrop, following agreement on the Windsor Framework in February, the European Commission (EC) and the UK Government signed an MoU for structured regulatory cooperation.

EU authorities and regulators continue to progress new and existing initiatives across various files.

After several years of delay, the EC has presented renewed proposals for a Crisis Management and Deposit Insurance (CDMI) scheme, in an attempt to stop Member States utilising public funds to support smaller failing banks — significant pushback is expected. The EC has also set out ambitious proposals for a retail investment strategy (see article below) and other developments are imminent, including a bill setting out the legal framework for the digital euro. 

Some frameworks have now been finalised. MEPs voted through both the finalised Markets in Cryptoasset (MiCA) and Transfer of Funds legislation, which will both apply from 30 December 2024. The former sets governance standards for crypto companies and introduces key demands on stablecoins, while the latter ensures that crypto transfers can always be traced, and suspicious transactions can be blocked.

Progress on other initiatives remains mixed:

• Trilogues on the EU Banking Package (including CRR3 and CRD6) have now finally concluded, resolving deadlocks on the application of the output floor, fit and proper checks on bank directors, third country branches and supervisory independence. The deal also introduces new additions that go beyond the original Basel proposals, including transitional cryptoasset prudential requirements and ESG risk management.
• For capital markets, MiFIR trilogues are struggling to reach agreement on the framework for a consolidated tape and a ban on payment for order flow, while CSDR trilogues have centred on ESMA responsibilities, tougher rules for foreign players and conditions around the use of mandatory buy-in. 
• For asset management, AIFMD trilogues have focused on finalising details on various topics including delegation of portfolio management and liquidity management tools. 
• MEPs' version of the AI Act has been agreed and trilogues can now begin. The rules, which would become the first law on AI by a major jurisdiction, classifies systems by risk and mandates various development and use requirements.
• Solvency II reforms continue to be stalled in the European Parliament over capital relief and sustainability. Meanwhile the International Association of Insurance Supervisors (IAIS) has released three consultations on 23 June, looking at valuation, capital adequacy and the global Insurance Capital Standard (ICS) as a Prescribed Capital Standard (PCS). This is a key step towards setting the expectations of how the ICS should be used by the supervisors once the monitoring period has concluded. 
• The ESAs are considering how they will operate the joint-oversight model for the Digital Operational Resilience Act (DORA), which is set to come into force in mid-January 2025. A joint DP seeks stakeholder input, in particular on the criteria for critical ICT third-party providers (CTPPs) and the oversight fees to be levied against them.