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.

In its August Trends, Risks and Vulnerabilities report, ESMA noted that financial markets are adapting to the new economic environment of durably higher interest rates and inflation. However, overall risks remain elevated, with markets still very sensitive to adverse events and asset managers continuing to face pressure on real portfolio returns.

The EBA's latest quarterly Risk Dashboard shows bank profitability continuing to increase and capital, funding and liquidity ratios remaining strong. However, repayments of the ECB's targeted longer-term refinancing operations are expected to drive these ratios down.

Risk levels for the EU insurance sector remain broadly constant, with all risk categories in EIOPA's Dashboard pointing to medium risk, with the exception of macro risk which is categorised as high. 

Together, these three institutions, in their Autumn Report, warned of the financial stability risks stemming from heightened uncertainty — particularly as it relates to interest rates and liquidity.

Efforts continue to enhance regulatory cooperation, as demonstrated by the announcement of a capital markets partnership commitment between the UK government and India. And following agreement of the new UK/EU Memorandum of Understanding on supervisory cooperation (see the previous edition of European Regulatory Radar), the first meeting of the forum between HM Treasury (HMT) and the European Commission (EC) is expected to take place in October.

The EC has published its latest Sustainable Finance Package (see summary here), including significant updates to the EU Taxonomy, and has asked the ESAs to conduct a one-off climate risk scenario analysis with results expected no later than Q1 2025. The ESAs' consultation on SFDR has closed, and attention is turning to the Commission's consultation, which represents a more fundamental of review of the regime.

Provisional agreement was reached at the end of June on the EU Banking Package, although many details are yet to be published. The package includes implementation of the final Basel 3 reforms, alongside new requirements for third country branches, cryptoassets and ESG risk management.

The European Parliament has reached a position on the revised Solvency II and Insurance Recovery and Resolution Directives, which will now continue to progress through the usual EU legislative process. The first meeting of the trilogue negotiations takes place this month.

The Markets in Cryptoassets Act (MiCA) provisions for stablecoins are set to apply from mid-2024, and provisions for other service providers from 2025. The EBA and ESMA have been consulting on corresponding standards and guidelines. The EC has also published draft legislation for the legal framework of a potential digital euro, alongside a proposal on the legal tender of Euro banknotes and coins to retain their accessibility and acceptance. Meanwhile, the Parliament is fine-tuning proposals for the AI Act.

The EC has made targeted amendments to the Open Banking framework in its PSD3 proposal. Alongside this, it has set out a legislative proposal for a framework for financial data access (FIDA). FIDA would establish an Open Finance framework facilitating responsible access to individual and business customer data across a wide range of financial services. 

Work is progressing on the level 2 rules for DORA, due to be implemented in January 2025. Consultation on the first batch of RTS and ITS has concluded and a second batch is expected. 

The EC's proposals to take forward the CMU action plan continue to be negotiated, but agreement has finally been reached on the MiFIR review — although technical detail has yet to emerge. 

Similarly for asset managers, provisional agreement has been reached on the AIFMD review. In the meantime, the European Systemic Risk Board has argued that there is a need for still more regulatory adjustments to address vulnerabilities in funds. 

And finally, negotiations around AML/CFT and the new sixth AML directive have reached trilogue stage. The package will establish a new AML Authority and strengthen the existing framework.

Although there is still a long list of legislation to finalise, with less than a year to the European Parliament elections and a possible change in Commission President and Commissioners, attention is turning to the future. In her State of the Union address, President von der Leyen highlighted the key challenges facing the EU — a shortage of labour, and the need to manage inflation, transition to net zero and remain globally competitive. She has appointed Mario Draghi to prepare a report on `The future of European competitiveness' and announced that any new piece of legislation would go through a competitiveness check by an independent board. This mirrors the introduction of a secondary objective on international competitiveness and economic growth for UK financial services regulators.