There have been many developments in national and European financial markets regulation during the past month. Among other things, the European Commission has published its proposal for a capital markets union and has launched a consultation on the review of the Prospectus Directive. In addition, supervisory authorities have published a large number of consultation documents, draft rules and other information since the last edition of In context.

Dutch regulation  

AFM investigation into contracts for difference

The AFM has conducted an investigation into contracts for difference. A contract for difference is a financial instrument where two parties agree to settle the value of an underlying investment with each other at two different times. The results of the investigation show that providers of contracts for difference enable their clients to invest in these high-risk products too easily. According to the AFM, the marketing of these providers focuses on an insufficiently targeted group of investors. The information concerning the operation and risks of the product is often insufficient. The AFM urges providers to implement improvements in these areas as soon as possible.

European regulation  

Green paper for Capital Markets Union

The European Commission has launched a consultation on a Capital Markets Union, which should be in place by 2019. With the Capital Markets Union, the Commission intends to explore ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses, particularly small and medium-sized enterprises (SMEs).

The Commission has set out its plans in a green paper which includes the following proposals:

  • The European Commission will encourage high quality securitisation and will free up bank balance sheets to lend. The proposals are set out in more detail in a separate consultation document.
  • The Prospectus Directive will be reviewed to make it easier for firms, particularly smaller ones, to raise funding and reach cross-border investors. The proposals are set out in more detail in a separate consultation document.
  • The availability of credit information on SMEs will be improved making it easier for investors to invest in them.
  • The Commission will work with the industry to put into place a pan-European private placement regime to encourage direct investment into smaller businesses.
  • The Commission will support the taking up of new European long-term investment funds to channel investment in infrastructure and other long-term projects.

The Commission intends to adopt an action plan this summer, setting out its roadmap and timeline for putting the building blocks of a Capital Markets Union in place by 2019.

Review of the Prospectus Directive

The European Commission wants to remedy several shortcomings of the prospectus framework and to reform and reshape the current prospectus regime. This should make it easier for companies to raise capital throughout the EU, while maintaining effective levels of consumer and investor. Among other things, the Commission wants to ensure that a prospectus is required only when it is truly needed; that the approval process is as smooth and efficient as possible; that the information that must be included in prospectuses is useful and not burdensome to produce; and that barriers to seeking funding across borders are reduced.

The consultation document includes the following questions:

  • Is the principle, whereby a prospectus is required whenever securities are admitted to trading on a regulated market or offered to the public, still valid? Should a different treatment be granted to the two purposes (that is, different types of prospectus for an admission to trading and an offer to the public).
  • Should the current exemption thresholds be adjusted?
  • Should a prospectus be required when securities are admitted to trading on an MTF?
  • Should the proportionate disclosure regime be modified to improve its efficiency?
  • Should documents which were already published or filed under the Transparency directive no longer need to be subject to incorporation by reference in the prospectus?

The consultation runs until 13 May.

EU framework for securitisation

The European Commission has launched a consultation on an EU framework for securitisation. The objective of the consultation is to create a sustainable market for high-quality securitisation. This requires better differentiation, and the development of transparent, simple and standardised securitisation. In its consultation document the European Commission lists out the main obstacles and proposes amendments. The consultation runs until 13 May.

Strengthened rules to prevent money laundering and terrorist financing The Council has approved an agreement with the European Parliament on strengthened rules to prevent money laundering and terrorist financing. The main elements are:

  • The directive’s scope will be extended by introducing requirements for a greater number of traders. This will be achieved by reducing the cash payment threshold for the inclusion of traders in goods (from EUR 15,000 to EUR 10,000), and also including providers of gambling services.
  • A risk-based approach will be introduced, using evidence-based decision-making to better target risks. European supervisory authorities will provide guidance.
  • The rules on customer due diligence will be tightened. Obliged entities such as banks will be required to take enhanced measures where the risks are greater, and will be able to take simplified measures where risks are demonstrated to be smaller.
  • The package includes specific provisions on the beneficial ownership of companies. Information on beneficial ownership will be stored in a central register, accessible to competent authorities, financial intelligence units and obliged entities, such as banks.
  • The text provides for maximum fines of at least twice the amount of the benefit derived from the breach or at least EUR 1 million. For breaches involving credit or financial institutions the maximum fines are EUR 5 million (or, in the case of a legal person, 10 per cent of the total annual turnover).

The directive and the regulation are expected to be adopted shortly. Member states will have two years to transpose the directive into national law. 

European and international supervisors

No EU-wide stress test in 2015

The Board of Supervisors of the European Banking Authority has decided not to carry out an EU-wide stress test in 2015. Instead of a stress test, the EBA will be running a transparency exercise, which will provide detailed data on EU banks’ balance sheets and portfolios. The next stress test will be carried out in 2016.

European Banking Authority – publications

Overview of ESMA guidelines

The European Securities and Markets Authority has published overviews of the guidelines and technical standards (final documents and documents under consultation) available on its website. The overviews contain links to the relevant documents.

Other ESMA publications

International Organization of Securities Commissions – publications