European Regulatory Radar

October 2024

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 wider economic and political environment 

After securing her second term as Commission President, Ursula von der Leyen has proposed Commissioners to the EU Parliament for scrutiny. The new Commission, which should be finalised by December, will have to balance regulatory priorities with increasing industry calls for competitiveness.  

The recent 'Draghi Report' presented several recommendations for EU financial services, including ESMA becoming a single supervisor for all EU security markets, and reconsideration of the Basel 3.1 roll-out. Such changes would bring the EU’s capital markets more in line with the US. However, whether any are taken forward remains to be seen.

Regulators have issued various headline reports on the economic environment. Most notably, the autumn Joint Committee Report from the three European Supervisory Authorities (the ESAs – EBA, EIOPA and ESMA) on risks and vulnerabilities in the financial system underlined heightened economic and geopolitical uncertainties.

The Joint Committee has also published its 2025 workplan, focusing on digital operational resilience, sustainability disclosures, consumer protection and securitisation. Alongside this, the ESAs have published their individual 2025 work programmes, prioritising the implementation of mandates received in the previous legislative cycle and preparing for ongoing and upcoming legislative projects e.g. the Retail Investment Strategy.

Post elections in the UK, there has been a positive reset in the UK’s overall relationship with the EU. This could lead to greater cooperation in regulatory oversight as supervisors grapple with common global challenges. However, the EU’s growing focus on the competitiveness of its firms and markets, and the continuing push for ‘strategic autonomy’ means there are unlikely to be any moves to grant UK firms greater access to EU markets in the short term.

 Progressing the regulatory agenda 

Policy initiatives have continued to progress, despite the recent focus on elections.

Banks – The final adopted texts for CRR3 and CRD6 (the EU Banking Package) were published in the Official Journal in June and entered into force in July. Implementation of CRR3 will begin on 1 January 2025, with some transitional periods. However, the Fundamental Review of the Trading Book (FRTB) component has been postponed until 1 January 2026. The EBA has begun to issue amended RTS and ITS to ensure consistency across applicable frameworks.

The EBA has also published its third Basel III monitoring report, assessing the impact of the CRR3 requirements on relevant institutions once fully implemented in 2033. The baseline impact assessment quantifies the difference in minimum required capital between CRR2/CRD5 and the final framework, considering the most impactful EU-specific adjustments within CRR3/CRD6 and including all buffers/Pillar 2 requirements. The EBA finds that EU banks would need a total of €0.8 billion in additional Tier 1 capital, mainly due to capital requirements for the output floor and operational risk.

The EBA’s quarterly dashboard on minimum requirements for own funds and eligible liabilities (MREL) found that most in-scope banks met requirements in line with the Bank Recovery and Resolution Directive (BRRD) deadline in January 2024. The EBA is now considering an overhaul of the resolution planning reporting framework in order to achieve greater harmonisation.

The EBA has begun consulting on draft methodology and guidance for the EU-wide stress test, which will launch in January 2025. The 2025 test will have a wider geographical reach and greater focus on proportionality than the 2023 iteration.

The annual European Resolution Examination Programme (EREP) and European Supervisory Examination Programme (ESEP) reports highlight priorities for the next calendar year. Unsurprisingly, these include operational resilience and completion of the EU Banking Package. Annual data for the identification of global systemically important institutions (G-SIIs) has also been published. 

The ECB has concluded its cyber resilience stress test, which considered how banks would respond to and recover from a “severe but plausible” cybersecurity incident. Overall, this identified some areas for improvement and results will feed into the 2024 Supervisory Review and Evaluation Process (SREP) but will not impact individual firm capital requirements.

The ECB is also consulting on a new guide on governance and risk culture to replace the 2016 SSM supervisory statement and has published assessment criteria and sound practices for banks in relation to digitalisation.

Insurers – As part of the Solvency II review process, EIOPA has launched five consultations on regulatory technical standards (RTS) and implementing technical standards (ITS) covering: liquidity risk management, exceptional sector-wide shocks, undertakings under a dominant/significant influence, scenarios for best-estimate valuations for life insurance obligations and supervision of cross-border activities. Stakeholders have until 2 January 2025 to respond.

In addition, EIOPA is consulting on implementation of the new Solvency II proportionality framework, exploring measures that could be granted to firms who are not classified as ‘small and non-complex’ but who nonetheless have a risk profile that could justify the use of such measures.

An EIOPA opinion on the supervision of captives has been issued and it is implementing measures to facilitate supervisory cooperation when a (re)insurance undertaking relocates within the EU.

Finally, EIOPA has published a summary of its College activities from 2023 as well as areas of focus for 2024, which include prudential resilience, group risk management and value for money.

Meanwhile, the EC has renewed provisional equivalency for the US insurance solvency regime, ten years after this was originally granted.

Asset managers – The EBA and ESMA published a discussion paper on the prudential framework for investment firms, exploring firm categorisation, K-factors, liquidity requirements, and the IFR/IFD interaction with other regulations.

The review of the Sustainable Finance Disclosure Regulation (SFDR) continues, with the ESAs publishing joint recommendations to the EC on improving the Level 1 text.

ESMA consulted on further details to support new rules on fund liquidity management being introduced via the AIFMD II package from April 2026. It covered rules governing the characteristics of liquidity management tools (including on calculation methodologies and activation mechanisms) and draft guidance on how fund managers should select and calibrate LMTs. Separately, the ECB has adjusted its approach to reporting requirements for euro area funds to increase the frequency of reporting from quarterly to monthly and to expand the data to be gathered. These changes take effect from December 2025.  

After some back and forth with ESMA, the ELTIF 2.0 RTS were finally adopted by the EC. After consideration by the Parliament and Council, they are expected to enter into force by the end of 2024. Separately, ESMA confirmed that its ESG fund name guidelines will apply from November 2024 for new funds and from May 2025 for existing funds.

For EEA fund managers seeking to access UK retail investors, the FCA has published final rules to operationalise the Overseas Funds Regime and further guidance.

Capital markets – ESMA has published its second and third packages of consultations as a result of the MiFIR review. These packages include amendments to the RTS on equity transparency, volume caps, systematic internalisers, input/output data for equity Consolidated Tape Providers (CTP), and new rules on the organisational requirements of trading venues. As well as a proposed revision of RTS 22 to improve the reporting of transaction data and proposals to amend RTS 24 on order book data.

The European Council has agreed its position on the retail investment package. Its latest position removes the EC’s proposed ban on certain inducements but introduces safeguards to manage potential conflicts of interest. Trilogues are expected to begin by the end of the year in order to shape the final legislation.

ESMA has published the results of its fifth stress test exercise for Central Counterparties (CCPs), confirming overall resilience. And, ESMA’s first annual report on EU carbon markets concludes that there are no significant issues affecting their functioning.

Operational resilience – The ESAs continue to progress supplementary guidance on the Digital Operational Resilience Act (DORA) ahead of its application date of 17 January 2025 – including on subcontracting, harmonisation of oversight activities, threat-led penetration testing and joint examination teams. However, not all of the technical standards have passed through without issue, with the EC recently rejecting proposals on information registers.  

The BCBS recently closed its consultation on principles for the sound management of third-party risk. Although primarily directed at large internationally-active banks, the principles are intended to be applied on a proportionate basis. Meanwhile the ECB is consulting on its new guide for outsourcing cloud services. The guide aims to clarify both the ECB’s understanding of related legal requirements under DORA and the CRD, and its expectations for the banks it supervises.

Digital finance – The ESAs also continue to progress supplementary Level 2 guidance to support the Markets in Cryptoasset Regulation (MiCAR), including across governance and remuneration, prudential requirements, reporting requirements, transparency requirements, redemption plans and the classification of cryptoassets. MiCAR's ‘stablecoin’ provisions became applicable from mid-June, with the remaining provisions to become applicable from 30 December.

In July, the AI Act was published in the EU Official Journal, making it the first AI law in a major jurisdiction. Provisions related to prohibited AI systems will apply after 6 months, provisions related to generative AI will apply after 12 months, and all other provisions will apply after 24 months. Having acknowledged that the Act needs to be complemented by more specific guidance for the financial sector, the EC sought input from industry to support the implementation of the Act. 

Deep dives 

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