A lot more work lies ahead
Eric de Gay de Nexon, Head of Strategy, Market Infrastructures and Regulation, Societe Generale Securities Services, considers the role of regulation in post-crisis securities markets and who has benefitted most from the exceptional additional investment required.
In Europe, action taken in the wake of the crisis has often been characterised as a regulatory Tsunami. This reflects not only the number of directives and regulations at level one and level two of the regulatory process, but also their incredible level of complexity. This has led to the production by European Supervisory Authorities (ESAs) and National Competent Authorities (NCAs) of hundreds, even thousands of level 3 documents taking the form of Q&A, Guidelines, Instructions and Policies).
These have been aimed at deciphering and summarising, as much as possible, the principles and rules designed by the European Commission and then adapted and transposed into Member States’ laws. With the best will in the world, the result is an incredibly complex regulatory framework, often difficult to understand and challenging to master. The multiplicity of rules and their intrinsic complexity combined with the diversity of domains targeted has had some negative effects on the industry, the financial markets and investors. The first one and perhaps more important are the costs and the level of resources that have been allocated to regulatory projects at the expense of business development for financial players during the last 10 years.
This situation has been even more detrimental to small players or retail investors due to the lack of proportionality and side effects of some measures which have not been rightly anticipated or measures that do not achieve or partially their initial goals. This is the case for MIFID II (markets in financial instruments directive II) and EMIR (European Market Infrastructure Regulation) for instance.
As far as MIFID II is concerned, the negative impact on research provision, but also on the liquidity of some market segments, may be mentioned. Strengthening transparency obligations and improving products so that they better meet an individual investor’s needs and profile are highly commendable.
But can we be sure that the way it has been designed is always understandable by clients? Can we be sure that they will not in fact divert investors away from financial products? Are they universally affordable by all market players? And might they not lead to a two-tier system as has been the case in the UK (RDR) which has made it harder for smaller investors to access customised advice? It must be recognised that the regulators have in some cases identified those side-effects and proportionality issues and have either made or are making proposals for resolving or mitigating such issues.
This is a step in the right direction but it remains difficult for some market players to attain the right level of compliance on a timely basis, especially due to potential misinterpretation of rules and concepts and/or to the lack of, or simply late, answers from ESAs and NCAs to the industry’s questions. As we all know, MIFID II and MIFIR came into force at the beginning of this year and yet there are still significant uncertainties, for instance in the reporting area, that mean project teams are still on standby to carry out any further necessary work. The Settlement Discipline Regime of CSDR (levying penalties or managing buy-in for late settlements) is also a very good example: the industry has been waiting for the Regulatory Standards for more than two years. The latter will now come into force in September this year, triggering a 24-month period for Financial Market Infrastructures (FMIs) and participants to develop the required solutions, while there are still some substantial and tricky issues being discussed with ESMA (the European Securities Market Authority).
Last but not least, is the segregation issue introduced by the alternative investment fund managers directive (AIFMD) and UCITS V: the way rules have been defined in the two texts has led to a messy situation where some have implemented the rules at high cost while others who argue against have refused to do so, leading the European Commission to finally review the implementing texts with a third way solution which no one is satisfied with. The lack of consistency and harmonisation across various regulations does not help; the reporting requirements in general illustrate this situation, as is the case with EMIR, SFTR or CSDR.
We are far from having identified all the impacts, negative or positive, of this new regulatory framework and more generally on the way it will influence and redesign the landscape of financial markets: this is because we are still finalising its implementation. We need now to live with the new rules on a day-today basis and see, business area by business area, how structures and behaviour evolve. It will not evolve overnight but mature over time. What makes it difficult to anticipate the trends beyond the impacts that have already identified is twofold.
One, we do not have a clear idea of the future political priorities of the next Parliament and European Commission or how, and in which direction, they will orientate their policy regarding financial services. Especially in a context that will be influenced by Brexit. Two, we have to consider the influence on the current framework and the set-up of new usages being introduced by digital and new technologies
and the relevant regulatory framework.
In conclusion, we are exiting one cycle and entering a totally new one. Despite much huffing and puffing, little or nothing definitive has yet been achieved, despite the amount of time, effort and money expended. A lot more work lies ahead…