Capital Markets Union and financial integration

The European Commission published proposed reforms to foster Capital Markets Union (CMU) and financial integration. The proposed reforms were accompanied by a Commission communication and an impact assessment.

Key features of the proposed reforms are;

  • Stronger coordination of supervision across the EU; the European Supervisory Authorities (ESAs, which comprise EBA for banking, EIOPA for pensions and ESMA for securities and markets) will set EU-wide supervisory priorities, check the consistency of the work programmes of individual supervisory authorities with EU priorities and review their implementation. They will monitor authorities' practices in allowing market players - such as banks, fund managers and investment firms - to delegate and outsource business functions to non-EU countries.

The proposal contains a new Article 31a of the ESA Regulations which aims at strengthening the coordination function of the ESAs to ensure that the national competent authorities (NCAs) effectively supervise outsourcing, delegation and risk transfer arrangements in third countries. The ESAs shall monitor those arrangements.

    • NCAs will be required to notify ESMA before issuing an authorisation or registration where the business plan of the financial institution entails the outsourcing or delegation of a material part of its activities or any of the key functions or the risk transfer of a material part of its activities into third countries, to benefit from the EU passport while essentially performing substantial activities or functions outside the EU. ESMA may issue an opinion regarding the non-compliance of an authorisation or registration with EU law.
    • A financial institution will be obliged to notify the NCA of the outsourcing or delegation of a material part of its activities or any of its key functions, and the risk transfer of a material part of its activities, to another entity or its own branch established in a third country. The NCA concerned shall inform ESMA of such notifications on a semi-annual basis.
    • ESMA shall monitor whether NCAs verify that outsourcing, delegation or risk transfer arrangements are concluded in accordance with EU law,
    • ESMA may issue recommendations to the NCA concerned, including recommendations to review a decision or to withdraw an authorisation. Where the NCA concerned does not follow the recommendations within 15 working days, the NCA shall state the reasons and ESMA shall make its recommendation public together with those reasons.
  • The proposals extend direct capital markets supervision by ESMA. The Commission is proposing to make ESMA the direct supervisor over certain sectors of capital markets across the EU:
    • Capital market data: ESMA will authorise and supervise the EU's critical benchmarks and endorse non-EU benchmarks for use in the EU.
    • Capital market entry: ESMA will be in charge of approving certain EU prospectuses and all non-EU prospectuses drawn up under EU rules.
    • Capital market actors: ESMA will authorise and supervise certain investment funds, namely European Venture Capital Funds, European Social Entrepreneurship Funds and European Long-Term Investment Funds.
    • Market abuse cases: ESMA will have a greater role in coordinating market abuse investigations. It will have the right to act where certain orders, transactions or behaviours give rise to well-founded suspicion and have cross-border implications or effects for the integrity of financial markets or financial stability in the EU.
  • Improved governance and funding of the ESAs (including that some of the ESAs' funding will be funded by contributions from the financial sector).
  • Promoting sustainable finance and FinTech

    • The ESAs will promote sustainable finance while ensuring financial stability. They will take account of environmental, social and governance-related factors and risks in all the tasks they perform.
    • The ESAs will prioritise FinTech and will coordinate national initiatives to promote innovation and strengthen cybersecurity. They will take account of technological innovation in all the tasks they perform.

The proposals – the main Regulation and the subsequent changes to a number of sectorial Directives – will next be discussed by the European Parliament and the Council.

ESMA and EBA guidelines on assessment of suitability of management body members

ESMA and the EBA published final guidelines on the assessment of the suitability of members of the management body and key function holders in accordance with the CRD IV Directive and the MiFID II Directive and also published a press release. The guidelines specify that all institutions (which are subject to the CRD IV Directive or MiFID II) are required to assess the members of the management body (institutions that are subject to the CRD IV Directive must also assess all key function holders that have a significant influence over the institution under the overall responsibility of the management body). The guidelines cover issues including:

  • The scope of suitability assessments.
  • The notions of suitability listed in Article 91(12).
  • Diversity within the management body.
  • Suitability policy and governance arrangements.
  • The assessment of suitability by institutions and by competent authorities.

The guidelines will enter into force on 30 June 2018.

EuVECA and EuSEF Regulations

The European Parliament announced that it adopted the proposed Regulation amending the European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation). The Regulation now needs to be formally adopted by the Council. The text adopted by the Parliament has not yet been published.

The EU Parliament had previously issued a briefing paper on amending the EuVECA and EuSEF Regulations.

ESMA report on Trends, Risks and Vulnerabilities (TRV).

ESMA's latest report on Trends, Risks and Vulnerabilities (TRV) identifies high asset price valuations as the major risk for European financial markets in the second half of 2017. The main risk drivers are uncertainties around geo-political developments, the resilience of economic growth as well as debt sustainability. Market and credit risks, as a result of geopolitical, growth and debt concerns, continued to be very high, while liquidity and contagion risks remained stable but high. The outlook on operational risk remains elevated but the outlook is now negative due to heightened concerns around cyber security. Overall, ESMA’s risk assessment for the second half of 2017 remains unchanged from 1H17.

Anti-Money Laundering/ Combating the Financing of Terror/ Corruption

FATF Mutual Evaluation Report of Ireland

As detailed above, in 2016 the Financial Action Task Force (FATF) conducted an assessment of Ireland’s anti-money laundering and counter-terrorist financing system. FATF published their Mutual Evaluation Report on Ireland which concludes that “Ireland has a sound and substantially effective regime to tackle money laundering and terrorist financing….” In addition the Report highlights “National coordination mechanisms and the Private Sector Consultative Forum (PSCF) were fruitful in broadening the understanding of its ML and TF risks across all relevant agencies and with the private sector.” FATF also published an executive summary of the report and a presentation of the key findings, ratings and priorities. A more detailed summary of the FATF findings is set out here.