ESMA Advises EU Institutions and National Competent Authorities on Regulating Crowdfunding In December 2014, the European Securities and Markets Authority (ESMA) published an opinion on investmentbased crowdfunding, along with issuing an advice note to EU policymakers. Investment-based crowdfunding, as distinct from other forms of crowdfunding, is based on project owners pitching their ideas to, typically, non-professional clients in return for an equity stake in the project. In issuing its opinion and advice, ESMA recognises that the development of crowdfunding is a comparatively new trend and was not on the forefront of the minds of EU legislators during the drafting of existing legislation, and therefore it had been necessary to adapt the existing EU regulation to this new area. ESMA’s view is that this has left the potential for legislative gaps, which may require addressing. In its Opinion, addressed to national competent authorities, ESMA states that the EU rules which apply to crowdfunding platforms will depend on, to a large extent, the business model used. The ‘typical’ investment-based crowdfunding platform, which involves a reception and transmission of orders, would have a capital requirement of €50,000 or appropriate equivalent insurance under the Markets in Financial Instruments Directive (MiFID). ESMA highlighted that gathering “expressions of interest” would likely be sufficient to amount to this requirement. The Opinion noted that a crowdfunding platform could encounter difficulties when it came to passporting its permissions. In order to achieve the widest possible audience, it is likely that crowdfunding platforms would require an EU passport. Therefore, those Member States who have developed regimes which allow for lower capital requirements under MiFID Article 3 could prevent a crowdfunding platform having access to a passport. ESMA also noted that there could be weaknesses in investor protection as a result of disapplying MiFID capital requirements, although these could be mitigated using national legislation or regulation. Similarly, those business models structured to avoid the requirements under the Prospectus Directive could encounter similar issues. ESMA also considered that investment-based crowdfunding could, in cases where the project amounted to a collective investment scheme, need to be considered against the requirements of the Alternative Investment Fund Managers Directive (AIFMD), European Venture Capital Funds Regulation and European Social Entrepreneurship Funds Regulation. The Advice note, addressed to the EU institutions, urged policymakers to consider a number of areas surrounding the regulatory framework for crowdfunding platforms. In particular, ESMA stated that legislators should consider the thresholds in MiFID and the Prospectus Directive. ESMA highlighted that one option would be to develop a specific crowdfunding regime which would regulate those platforms operating outside the existing MiFID framework. Commenting on the announcement, Steven Maijoor, Chair of ESMA, announced “ESMA’s aim is to enable crowdfunding to reach its potential as a source of finance, while ensuring that risks to users of crowdfunding platforms are identified and addressed in a proportionate and convergent way across the EU.” “We believe that there are benefits both for investors as well as for platforms by operating inside rather than outside the regulated space.” EC Guidance on Practical Application of Russian Sanctions The European Commission has issued guidance on implementing a number of aspects of the July 2014 sanctions (and subsequent extensions in September and December) against Russia. The guidance takes the form of twenty-six questions and answers, which clarify the European Commission’s stance on what activities would be considered a breach of the 06 | Exchange – International Newsletter sanctions. The focus on the paper is to make clear whether certain activities in relation to financial services and bond markets would be permissible. The questions cover a range of topics, including: ■ Financial assistance; ■ Trade finance; ■ Emergency funding; ■ Other loans; and ■ Capital markets. The guidance states that the sanctions had been selectively targeted by the EU to weaken Russian State-owned financial institutions; reduce the potential for arms transfers to Russia; and prevent the transfer of certain sensitive technologies. When considering how to apply these sanctions, firms should pay attention, not only to the strict legal parameters outlined in the regulations, but also to these overriding objectives. MLD4 and WTR move Closer to adoption Following Political Agreement In December 2014, the Presidency of the Council of the European Union has announced that political agreement has been reached between itself and the European Parliament on the Anti-Money Laundering Directive 4 (MLD 4) and the revised Wire Transfer Regulation (Revised WTR). The first text of the legislation was published in February 2015. The MLD 4 proposal builds on the Financial Action Task Force (FATF) Recommendations published in February 2013, and has been subject to extensive negotiation between the Presidency and Parliament for almost two years. The press release has described the provisions of MLD 4 as going “well beyond” international standards and marking a “considerable step forward in the fight against money laundering and terrorist financing”. Of particular note in the announcement was the introduction of a new requirement that Member States keep and maintain a register of beneficial ownership, in many ways similar to domestic regulation announced by the UK in October 2013. The MLD 4 register will be available to competent authorities, intelligence authorities, obliged entities and persons able to demonstrate a legitimate interest in the field. It has been separately announced that the phrase “legitimate interest” will extend to investigative journalists and other concerned citizens, who will be able to access information such as names, dates of birth, nationalities, residency and details of the nature of ownership. There are also proposals to tighten controls on suspicious transactions for banks, auditors, lawyers real estate agents and casinos; as well as proposals for the EU to conduct supranational AML risk assessments; supervise crossborder payment institutions; and enhance the ability of intelligence agencies to share information and collaborate in investigations. The Revised WTR is designed to aid in the tracing of money transferred within the European Union. There is also the prospect of more “innovative” sanctions to ensure compliance with the regulation. The final proposals will need to be ratified by EU Member States’ ambassadors (COREPER) and a number of committees before it can be put to a final vote in the European Parliament. The final vote is expected to take place sometime in H2 2015. EDPS Advises Regulators of Financial Services about Data Protection Considerations The European Data Protection Supervisor (EDPS), the European supervisory authority in charge of protecting personal data and privacy, has released a set of guidelines for considering data protection when developing EU financial services regulation, in order to ensure that EU institutions integrate data protection principles at the heart of financial services legislation. www.dlapiper.com | 07 The guidelines are designed to act as part of the policy toolkit for EU institutions to ensure that the rights to both privacy and protection of personal data, as enshrined in the Charter of the EU, are protected when new financial services policies and legislation are being produced. The report summarises the nature of the privacy and data protection rights granted under the EU Charter and subsequent legislation, and describes ten analytical steps that should be considered when anticipating new legislation. The steps range from identifying the information to be processed; the legal purpose and basis for processing; the parties who will have access to the information; and any guarantees necessary to protect the individual’s rights. The guidelines proceed to address the practical steps needed to apply this methodology in a financial services regulatory context, for example when drawing up sanctions, whistleblowing schemes and requesting data from telecommunications providers. Looking forward, the EDPS has emphasised its commitment to proactively engaging in consultation at all stages of the EU policymaking and legislative process, both formally and informally. The EDPS has also stated that it will, if necessary, issue public comments on implementing measures by EU supervisory authorities, where its view is not sought beforehand. The EDPS has indicated it will take on board any feedback to its guidelines and has stated its intention to review the effectiveness of the guidelines no later than 2019. New Authority for ECB Intervention in EU Government Bond Market On 14 January 2015, the Court of Justice’s AdvocateGeneral Cruz Villalón (AG) issued his opinion in the case of Gauweiler and Others v Deutscher Bundestag (Case C-62/14) regarding the legality of the European Central Bank (ECB) directly intervening in the EU bond market, prior to the adoption of the quantitative easing (QE) programme adopted on 22 January 2015. The €1.1 trillion QE programme, which was announced on 22 January 2015 by ECB President Mario Draghi in light of the deflationary pressure within Eurozone markets, will be implemented by the ECB directly buying euro-denominated, investment-grade securities on the secondary market. The Gauweiler case was brought to the German Federal Constitutional Court by a number of German politicians and academics, in order to challenge the ECB’s announcement of its institution of an Outright Market Transactions (OMT) programme in September 2012 at the height of concerns about the viability of the Eurozone. The AG’s opinion supports the ECB’s actions while imposing certain obligations on the ECB when it engages in an OMT programme. The opinion states that prior to implementing an OMT programme the ECB must give a proper account of the reasons for adopting the programme identifying clearly and precisely the extraordinary circumstances which justify implementing such a programme. It also indicates that the ECB must ensure the programme retains its character as a “monetary” rather than “economic” measure and that, in order to do so, it must refrain from any direct involvement in the financial assistance programme that applies to the EU Member State concerned (i.e. any state whose bonds are being purchased). However, the AG’s opinion also makes it clear that the ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB’s activity, because the courts lack the expertise and experience which the ECB has with regard to monetary policy. In his conclusion, the AG stated that the OMT programme would be compatible with the EU founding treaties, provided that: ■ “The ECB refrains from any direct involvement in the financial assistance programmes to which the OMT programme is linked; ■ The ECB complies strictly with the obligation to state reasons and with the requirements deriving from the principle of proportionality; and ■ The timing of its implementation is such as to permit the actual formation of a market price in respect of the government bonds.”08 | Exchange – International Newsletter The AG’s opinion is not the decision of the European Court of Justice (ECJ), however the ECJ decision will typically follow the opinion of the AG, even if it modifies some aspects. The ECJ Decision is expected to follow shortly. Hökmark Report Proposes Amendments to Banking Structural Reform Regulation On 7 January, Rapporteur of the European Parliament’s Economic and Monetary Affairs Committee (ECON), Gunnar Hökmark MEP, published a draft report proposing a number of major amendments to the EU’s regulation on structural reform in the banking sector proposal. The focus of the report was on protecting tax-payers and depositors, and therefore the report proposes that structural separation decisions should be considered in the light of the ability to resolve the institution and the risks it poses to financial stability. The report proposed that requiring structural separation of banks should only be one part of a broader range of powers available to the regulator, including imposing particular capital requirements and should not be mandatory. The report aims to resolve some of the derogation issues which have plagued the progress of the bill. Although the report removes the option for derogating the structural separation requirements required by Article 21, there are amendments to Article 9 which would mean that a credit institution could not be forced to separate if it did not deal in investments as principal or hold trading assets. Furthermore, even if those activities were carried out, the entity could still avoid the prospect of separation if it was separately capitalised, had independent management and possessed its own decision making capacity. This approach would act as some relief to large UK banks, whose domestic ring-fencing proposal under the Vickers Report, could have forced UK banks to ‘double separate’ under domestic and EU requirements. Under this new proposal, as a result of UK ring-fenced banks not being permitted to deal in the above mentioned regulated activities, the possibility of double separation would be less likely. There are also proposals for publishing two separate balance sheets for the banking book and trading book, even if these activities are not structurally separated. The report further proposes broadening the definition of proprietary trading to include elements of intentionality, and additional flexibility for using different types of derivatives, including OTC derivatives, to manage risk. The Hökmark Report was published shortly after the Italian Presidency of the Council of the European Union published a progress report on the banking structural reform proposals, in anticipation of the EU Presidency being passed onto Latvia in the first half of 2015. The recommendations of the Hökmark Report were submitted to ECON on 21 January and the contents are likely to change to some degree before the Parliament defines its position. There will be further discussion on banking structural reform by the Parliament and the Council during the first half of 2015, with the new Latvian Presidency having indicated that it wishes to devote significant resources to the issue. HM Treasury Drops Bonus Cap Legal Challenge Chancellor of the Exchequer of the UK, George Osborne, has officially withdrawn the UK’s challenge to the Credit Risk Directive IV (2013/36/EU) (CRD IV) bonus cap proposals following a letter to Mark Carney, Chair of the FSB and Governor of the Bank of England, in which Mr Osborne stated the appeal had “minimal prospects for success”. A number of provisions in CRD IV implemented a limit on variable remuneration, including bonus payments, that were payable to certain “material risk takers” within an organisation. The regulation also requires a number of disclosures regarding the salaries of such individuals. The UK launched its challenge in February 2014 on a number of grounds, including stating that the proposed measures had inadequate Treaty legal basis; were disproportionate; and failed to comply with the principles of subsidiarity, legal certainty and data protection. www.dlapiper.com | 09 However, in November 2014, a non-binding opinion by Advocate General Nilo Jääskinen issued to the ECJ stated that the grounds for challenge should be rejected. In his reasoning, Mr Jääskinen stated that the limits imposed by CRD IV, including a limit on variable remuneration of 100% of fixed remuneration (which can be increased to 200% with shareholder consent) did not amount to a bonus cap or pay fixing, because it did not fix the level of fixed remuneration. It was also noted that creating a unified risk management framework “could not have been better achieved by measures taken at the national level”. Although the ECJ is not required to follow the opinion of the Advocate General, in practice the ECJ often accepts the Advocate General’s findings or makes only minor amendments. In the letter to Mark Carney dated 20 November 2014, published on the government website, George Osborne stated that although he was “increasingly concerned by recent developments that appear to be driving up fixed compensation in the banking industry… it now looks clear there are minimal prospects for success with our legal challenge so we will no longer pursue it. But that should not stop us from pursuing our objective on ensuring a system of remuneration that encourages responsibility instead of undermining it”. As a result of withdrawing the application, the UK will be required to pay the costs incurred by the European Parliament and the Council of the EU in defending the case. European Commission Fines Banks €95 million for Collusion On 21 October, the European Commission announced two sets of fines totalling almost €95 million on a number of major international banks found to have colluded on aspects of the Swiss Franc derivatives market. The first set of fines were given to UBS, JP Morgan and Credit Suisse for a total of over €33.3 million, as a result of their collusion in fixing prices in the “bid-ask” market. The banks were found to have fixed the bid-ask spreads on a number of products to third parties, but maintained narrower spreads for trades between one another. The aim of this price fixing was found to have been to prevent other market participants from competing on the same terms. There would have also been a fine for RBS, however they were given a 100% reduction resulting from immunity granted for revealing the existence of the cartel. The fines also included a 30% discount for UBS and a 25% discount for JP Morgan for their cooperation under the notice. The second ‘set’ of fines involved an illegal cartel between RBS and JP Morgan to influence the Swiss franc LIBOR benchmark interest rate, in contravention of EU antitrust rules. The manipulation involved traders discussing rates of LIBOR submissions, along with respective trading positions and intended prices. Again, RBS received 100% reduction in their fine, as a result of immunity granted for revealing the existence of the cartel, which helped the bank avoid a potential fine of €110 million. JP Morgan received a leniency discount of 40% for their cooperation with the investigation, but were still fined over €60 million. The 2006 Leniency Notice, published by the Commission, entitles the entity which reveals the existence of a cartel to the Commission to justify full immunity, under certain conditions. This has proved highly controversial, in allowing certain organisations to seemingly escape prosecution for breaches of EU law. The Commission, however, has argued it has been effective in encouraging firms to report on cartels and cooperate with the investigation.