The start of the year saw the introduction of the brand new system of high-level European financial regulation.
The old Lamfalussy level 3 committees have been replaced by three new European supervisory authorities along with the creation of the European Systemic Risk Board so the new regulatory system looks set to have a substantial effect on the UK financial sector.
Cicero Consulting director and chief corporate counsel Iain Anderson says: “This is the year we could see the most significant impact of Euro-pean legislation on the UK.”
Seventy per cent of the FSA’s policymaking effort comes from European initiatives, which means the UK regulator will be pushing for enhanced EU co-operation in the light of the financial crisis, as shown in the proposed updates to Mifid due in May.
Cicero Consulting Brussels senior country officer Helena Walsh says: “There is a need to create balance and robust standards across the EU-27.”
For oversight of the banking industry, the Committee of European Banking Supervisors will be replaced with the London-based European Banking Agency and will get an early opportunity to prove its mettle when it carries out stress tests on European banks this spring. However, the pressure will be on to be more robust than last year’s tests by Cebs, where 84 of the 91 banks which passed were subsequently discredited.
Insurance and occupational pension regulation will also become more sophisticated as the Committee of European Insurance and Occupational Pensions gives way to the European Insurance and Occupational Pensions Authority. This body will develop the technical standards in the amendments to Solvency II, due to come into effect in 2012.
Finally, the European Securities and Markets Authority replaces the Committee of European Securities Regulators and the new body will also have its hands full, improving co-ordination between national supervisory authorities. It will aim to harmonise the regulation of shares and bonds across the EU as well as tackling the first Mifid update.
The macro-prudential ESAs will have significantly more power than their predecessors. They will directly supervise credit rating agencies, will have the authority to temporarily ban certain activities and will be able to settle disputes using binding mediation, where previously only non-binding was allowed.
The ESAs will also undertake peer reviews, issue guidance on a comply or explain basis and, crucially, will be able to override the FSA in an emergency.
Walsh says: “These are significant powers for European authorities.”
Despite European reassurances that the powerful ESAs are intended to complement rather than replace national supervision, concerns that they will undermine the FSA are rife, with UK Chancellor George Osborne recently warning Brussels against imposing poorly considered regulation on the UK.
Walsh says: “Although there is no evidence to suggest the FSA will lose power, there is also no way of measuring at this stage how proactive these authorities will be.”
However, she advises the FSA and IFAs to be vigilant, saying they will “need to keep their fingers on the pulse”.
However, not everyone is as cautious of the new regulatory structure. NeedAnAdviser.com director Joanne Walsh says greater European surveillance of the FSA is “brilliant”.
She says: “European legislation is always watered down by the time it gets to us. That may not be the case this time – if the FSA is more stringently monitored by Europe it will have to carry the can more, which could be the best thing that has ever happened for IFAs.”
IFAs may also benefit from other European regulation this year, namely a review of packaged retail investment products and Mifid.
Anderson says: “The interaction between Mifid, Prips and the UK could have a fundamental impact. It is certainly gaining momentum.”
Walsh says: “IFAs should be very engaged with both the Mifid and Prips reviews. Although they are likely to face stricter rules, such as the EC proposal that firms should be prohibited from accepting any payments for benefits from product providers, there may be some market openings for them. Bigger financial conglomerates are likely to come under pressure and possibly fragment into smaller units.”