EU Commission consultation on the CMU Mid-Term Review

As part of its efforts to achieve an impactful Capital Markets Union (CMU), the EU Commission launched a public consultation on the planned CMU mid-term review. This consultation offers an opportunity for stakeholders to provide targeted input to complement and advance actions put forward in the CMU Action Plan. The results of this consultation will feed into the mid-term review of the CMU Action Plan that the Commission aims to publish in June 2017. The review will seek to strengthen the current policy framework for the development of capital. Respondents are invited to provide evidence-based feedback and specific suggestions by 17 March 2017 through the online questionnaire. A Q&A is available online.

ESMA supervisory convergence work programme for 2017

On 9 February 2017, ESMA published its 2017 supervisory convergence work programme which supplements its 2017 annual work programme by detailing what ESMA will do in 2017 to enhance a consistent supervision of EU financial markets. The priority areas identified are:

  • Ensuring the sound, efficient and consistent implementation of key new EU legislation by preparing for the MiFID II Directive, MiFIR, and the Market Abuse Regulation including the necessary underlying IT infrastructure.
  • Improving data quality through focusing on the efforts of national competent authorities (NCAs) to prepare for and enforce compliance with the various reporting requirements under EU legislation such as the MiFID II Directive, MiFIR, EMIR and AIFMD.
  • Ensuring adequate investor protection in the context of cross-border provision of services.
  • Ensuring effective convergence in the supervision of EU central counterparties (CCPs).

ESMA review of ESAs and EU third-country framework

On 9 February 2017, ESMA published a speech by Steven Maijoor, ESMA Chair, on the review of the European Supervisory Authorities (ESAs) (comprising ESMA, EIOPA and the EBA) and the EU third-country framework for financial markets.

As part of its work relating to the CMU, the European Commission is currently undertaking a review of the ESAs. In the speech, Mr Maijoor sets out possible improvements to ESMA to be considered in the context of that work (including that the tools available to ESMA for improving supervisory convergence across the EU should be strengthened). Mr Maijoor also called for reforms to the EU third-country framework for financial markets, highlighting the fragmented nature of third-country provisions in existing financial services legislation (Mr Maijoor calls for ESMA to be given the power to charge fees to third-country entities requiring recognition). Mr Maijoor also highlights concerns that ESMA raised in its August 2015 report on the review of EMIR.

New ESMA Q&A tool

On 10 February 2017, ESMA published a webpage for a new Q&A tool, which aims to provide a means for ESMA to publicly collect and address questions from stakeholders. Questions can be asked relating to the application of a legislative act within ESMA's remit or on any of ESMA's guidelines or opinions. The webpage sets out all Q&As developed by ESMA under legislative act and provides instructions on submitting questions. ESMA has issued a submission form with guidance on submitting questions. Q&As are a form of guidance and will be published, in English, on ESMA's website.

Joint Committee of ESAs consults on PRIIPs with environmental or social objectives

On 10 February 2017, the Joint Committee of the ESAs published a consultation paper on packaged retail and insurance-based investment products (PRIIPs) with environmental or social objectives (following a request for technical advice from the European Commission, in May 2016). The committee is consulting on a proposal to set minimum requirements, which manufacturers of PRIIPs with environmental or social objectives (EOS PRIIPs) should comply with to ensure that credible products are offered to retail investors. The draft technical advice is set out in section 4 of the consultation paper. The consultation closes on 23 March 2017. The PRIIPs Regulation applies from 1 January 2018.

IOSCO report on loan funds survey

On 20 February 2017, the International Organization of Securities Commissions (IOSCO) published its final report following a survey on loan funds. IOSCO launched the survey in December 2015 on existing practices and experience as regards loan funds in the area of investment funds (comprising loan originating funds and loan participating funds which can be open-ended funds and closed-ended funds, and whether marketed to retail and/or professional investors). Twenty-four jurisdictions participated in the survey. Based on the results of the survey, the report identifies the current position in each jurisdiction and explains how the markets have evolved. It also explains how regulators are addressing the risks associated with funds. These relate to:

  • Liquidity risk.
  • Credit risk.
  • Systemic risks from excessive credit growth.
  • Regulatory arbitrage.

The report concludes that further work on loan funds is not warranted at this stage but notes that IOSCO will continue to monitor this segment of the fund industry with a view to possibly revisiting it for further work, depending on market developments.

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

European Parliament to consider 5AMLD at its mid- March plenary session

The European Parliament updated its legislative procedure file on the proposed Fifth Money Laundering Directive (5AMLD) to reflect that

  • the Parliament's Economic and Monetary Affairs Committee (ECON) and its Civil Liberties, Justice and Home Affairs Committee (LIBE) will vote on their draft report on 5AMLD on 28 February 2017.
  • the Parliament will consider 5AMLD at its 13 to 16 March 2017 plenary session.

On 20 December 2016, the Council of the EU published its fifth Presidency compromise proposal (dated 19 December 2016) on 5AMLD which amends the Fourth Money Laundering Directive (4AMLD). On 20 December 2016, the Council of the EU announced that it has agreed its negotiating stance on 5AMLD. 5AMLD requires a qualified majority for adoption by the Council, in agreement with the Parliament. The Council advises that Member States will have 12 months to transpose 5AMLD into their national laws and regulations, although Member States will have longer periods (24 or 36 months) in which to implement the provisions on beneficial ownership registers.

Joint Committee of ESAs opinion on money laundering and terrorist financing risks

On 20 February 2017, the Joint Committee of the ESAs published an opinion addressed to the European Commission, on the risks of money laundering and terrorist financing (ML/TF) affecting the EU's financial sector. The opinion was prepared under Article 6(5) of 4AMLD.

This provision mandates the ESAs to issue a joint opinion on the risks of ML/TF affecting the EU's financial sector every two years in order to inform the Commission's risk assessment work, as well as the ESAs' work on ensuring supervisory convergence and a level playing field in the area of AML/ CFT and to assist national authorities in their application of the risk-based approach to AML/CFT supervision.

The opinion identifies problems in key areas, including firms' understanding of the ML/TF risk to which they are exposed and the effective implementation, by firms, of customer due diligence policies and procedures. It also notes the difficulties associated with the lack of timely access to intelligence that might help identify and prevent terrorist financing, and considerable differences in the way national regulators discharge their functions. The ESAs state that the risks highlighted in the opinion mean that more has to be done to ensure that the EU's AML/CFT defences are effective. Among other things, the ESAs believe that:

  • To ensure timely access to relevant information on money laundering threats, law enforcement agencies should identify ways to work more closely with firms to facilitate the identification of such risks.
  • Competent authorities should collect AML/CFT supervisory data in a more consistent way to facilitate comparisons and track progress.
  • The Commission, the EU legislators and the ESAs should give further thought to identifying ways in which the ESAs and competent authorities can ensure that the EU's AML/CFT law and the ESAs' AML/CFT guidelines are implemented effectively and consistently in all member states.

The opinion notes that several initiatives are already underway which should address many of the risks identified.

Transparency International report on public disclosure of AML statistics

On 15 February 2017, Transparency International (TI) published a report, Top Secret: Countries keep financial crime fighting data to themselves, which recommends improvements to the public disclosure of AML statistics by national authorities. The report follows analysis conducted by TI of the public availability of AML data by 12 countries (not including Ireland) relating to five areas: international co-operation, AML supervision, legal persons and arrangements, financial intelligence and AML legal system and operations. TI found that data about national authorities' AML work was only partially available in the countries assessed and that where data is public it was often provided by international AML bodies, such as the Financial Action Task Force (FATF), rather than by national authorities. TI recommends that:

  • Financial supervisors should collect and publish AML enforcement statistics on a yearly basis, following the list of indicators recommended by the FATF.
  • The requirement to publish yearly AML enforcement statistics should become a standard recommendation of international bodies including the FATF and the G20. TI notes that the 4AMLD already includes a requirement for EU member states to publish AML statistics. TI also recommends that the FATF should take the lead in promoting standardised AML data reporting.
  • Financial intelligence units (FIU) should publish comprehensive AML statistics to provide a good basis for public monitoring of a country’s AML effort.

Consultation on draft RTS on 4AMLD central contact point

On 10 February 2017, the Joint Committee of the ESAs published a consultation paper on draft regulatory technical standards (RTS) on the criteria for determining the circumstances in which the appointment of a central contact point (CCP), under Article 45(9) of the 4AMLD, is appropriate and the functions of the CCP. Payment service providers and electronic money issuers, with a head office in an EU member state, can operate establishments, such as agents or distributors, in other host member states. These establishments have to comply with the AML/ CTF regime of the member state in which they are based, even if they are not obliged entities themselves and so effective AML/ CTF oversight of such establishments can be difficult. The draft RTS set out the criteria that member states must consider when deciding whether foreign payment service providers and electronic money issuers should appoint a CCP. They also list the functions the CCP should perform. The draft RTS are set out in section 4 of the consultation paper. There will be a public hearing on the consultation on 21 April 2017. The consultation closes on 5 May 2017. The committee will then finalise the draft RTS and submit them to the European Commission for approval.

European Data Protection Supervisor opinion on 5AMLD

The European Data Protection Supervisor (EDPS) published an opinion on 5AMLD. The EDPS analyses the impact of 5AMLD on the fundamental rights to privacy and data protection. It also assesses the necessity and proportionality of personal data processing that would take place under 5AMLD in the light of the policy purposes identified in the Directive. The purpose of the opinion is not to express any merit judgment on the choice of the policy objectives the legislators decide to pursue but, rather, to consider the tools and modes of action that 5AMLD adopts.

Generally, the EDPS finds that 5AMLD takes a stricter approach to effectively countering ML/TF than that set out in 4AMLD. It is concerned that the proposed amendments introduce policy purposes other than countering money laundering and terrorist financing, which do not seem clearly identified. The EDPS refers, in particular, to the fight against tax evasion as a specific goal of 5AMLD, commenting that in 4AMLD tax crimes are relevant merely as a source of illicit funds, but not directly targeted and enforced. It also notes, among other things, that 5AMLD generically mentions the fight against financial crime and enhanced corporate transparency as policy goals. In expanding the purposes of data processing beyond the initial AML/ CTF purpose, the EDPS considers that 5AMLD introduces a significant degree of uncertainty as to the purposes pursued, and on the controllers entrusted with these purposes. This uncertainty reduces data protection safeguards.

Processing personal data collected for one purpose for another completely unrelated purpose infringes the data protection principle of purpose limitation, and threatens the implementation of the principle of proportionality. In particular, the EDPS explains that the proposed amendments raise questions as to why certain forms of invasive personal data processing, acceptable in relation to AML and CTF, are necessary out of those contexts, and whether they are proportionate.

As far as proportionality is concerned, the proposed amendments depart from the risk-based approach adopted by 4AMLD, on the basis that the higher risk for AML/ CTF and associated predicate offences would not allow its timely detection and assessment. The proposed amendments also remove existing safeguards that would have granted a certain degree of proportionality, for example, in setting the conditions for access to information on financial transactions by FIUs.

The EDPS is also concerned that the proposed amendments significantly broaden access to beneficial ownership information by both national competent authorities (NCAs) and the public, as a policy tool to facilitate and optimise the enforcement of tax obligations. Depending on how these provisions are implemented, there could be a lack of proportionality, with significant and unnecessary risks for the individual rights to privacy and data protection.

The EDPS advises that it was not consulted by the Commission before it published its initial 5AMLD proposal but its opinion was solicited by the EU Council.

Article 29 Working Party concerns on 5AMLD

The Article 29 Working Party (WP29) also sent a letter to the Directorate-General for Financial Stability, Financial Services and Capital Markets Union regarding 5AMLD. The letter follows the opinion of the EDPS. The WP29 also highlights concerns regarding an increase in the risk of violating data protection rights in relation to the 5AMLD’s far-reaching changes that will influence the activities of the supervisory authorities, obliged entities and businesses. WP29 was set up under Article 29 of Directive 95/46/EC. It is an independent European advisory body on data protection and privacy. Its tasks are described in Article 30 of Directive 95/46/EC and Article 15 of Directive 2002/58/EC.