THE EUROPEAN FINANCIAL SERVICES LANDSCAPE IN Boosting growth, improving competitiveness and adapting to global challenges

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1 THE EUROPEAN FINANCIAL SERVICES LANDSCAPE IN 2015 Boosting growth, improving competitiveness and adapting to global challenges MARCH 2015

2 The European Financial Services Round Table (EFR) was formed in The Members of EFR are Chairmen and Chief Executive Officers of international banks or insurers with headquarters in Europe. EFR Members believe that a fully integrated EU financial market, a Single Market with consistent rules and requirements, combined with a strong, stable and competitive European financial services industry will lead to increased choice and better value for all users of financial services across the Member States of the European Union. An open and integrated market reflecting the diversity of banking and insurance business models will support investment and growth, expanding the overall soundness and competitiveness of the European economy.

3 TABLE OF CONTENTS A. INTRODUCTION 5 B. GOALS FOR EFFECTIVE REGULATION 7 C. SUMMARY OF MAIN ISSUES AND KEY RECOMMENDATIONS 9 D. MAIN ISSUES AFFECTING THE EUROPEAN FINANCIAL SERVICES SECTOR 15 Facilitating growth, long-term investment and competitiveness 1. Long-Term Investment Infrastructure Financing Consumer Protection Trade Digital Financial Services 24 The critical importance of insurance and asset management 6. Insurance Prudential Insurance Supervision and Systemic Risk Pension Reform 31 Supporting the key role of banks in society 9. Bank Structural Reform Banking Supervision Banking Resolution Banking Prudential 42 Integrated markets, appropriate international standards 13. Shadow Banking Market infrastructure Benchmarks Transaction Tax Taxation Information Exchange Accounting 56 ANNEX I: ABBREVIATIONS 58 ANNEX II: EFR S VISION 61 ANNEX III: MEMBERS OF THE EFR 62 3

4 My first priority as Commission President will be to strengthen Europe s competitiveness and to stimulate investment for the purpose of job creation. We need smarter investment, more focus, less regulation and more flexibility when it comes to the use of public funds. Jean-Claude Juncker, President of the European Commission, 15 July 2014 It is in all our interests to have a successful, competitive financial services sector. We do not make our economy stronger by making our financial services weaker. Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, 6 November has been a year of profound change. But what has been achieved so far is not enough needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track. Mario Draghi, President of the European Central Bank, 17 November 2014

5 A. INTRODUCTION There have been growing signs of economic recovery across Europe in the past year largely due to public and private sector action to resolve an economic crisis that has weighed on growth, investment and employment for more than six years. European institutions and member states have worked closely with the G20 and Financial Stability Board (FSB) to reform the global financial system and to improve resilience against future financial crises. In Europe, the biggest reforms have been banking union and the Bank Recovery and Resolution Directive (BRRD). The Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) will help address the negative loop between banks and sovereigns by reducing the probability of bank failures and the potential cost for taxpayers of an eventual bank resolution process. Now that the direct recapitalisation of Eurozone banks by the European Stability Mechanism (ESM) is possible, a last resort public common backstop will stand there to buttress the credibility of banking union by avoiding an overburdening of those stressed sovereigns that are in a weak fiscal position. Credible public sector backstops are an important pillar of the banking union. The financial sector is at the centre of Europe s economy, serving as the infrastructure that keeps national economies moving. It is undergoing massive operational and cultural changes. It is innovating, rebuilding trust in the financial system and working hard to meet the needs of consumers. European financial services firms must remain competitive, which means that legislators and regulators should respect the diversity of their business models. A competitive and diverse European financial sector is essential to economic growth. These are still critical times for Europe. The economy is under pressure, weighed down by indebtedness, unemployment especially among young people and declining competitiveness. The new European Commission, working closely with the European Council, European Parliament and European Central Bank (ECB), is aware of the challenges. The economy needs to start growing again to create jobs. Many countries have to improve their fiscal positions, undergo structural reforms, become more competitive and stimulate long-term investment. This will not be easy, especially as the demographic profile of Europe is changing and forecasts indicate that economic growth will remain weak. Europe is part of a more integrated world, where other economies are growing faster and becoming increasingly competitive. However, the EU s announced Investment Plan for Europe, which aims to mobilise at least EUR 315 billion in additional public and private spending in the next three years, and the envisaged Capital Markets Union, will be important new drivers of growth and help create an even more integrated Europe. Through this report, the European Financial Services Round Table (EFR) intends to contribute to the debate on key economic and financial issues, share its views with EU policymakers and make specific recommendations. In difficult times it is important we work together to make the right decisions about matters that will boost long-term growth, employment and competitiveness. For that to happen it is vital that there is a well functioning and diverse financial services sector, able to generate sufficient profits and continue to play a role in the economy and in society as a whole. Across Europe, people aspire to improve their quality of life for themselves and their families. Improvement requires the expansion of economic activity to provide high quality food and housing, a stable energy supply, desirable consumer goods, modern and efficient public and private transport, life-enhancing education and essential healthcare. Greater economic activity requires a corresponding expansion and management of the related risks. Banks, insurers, asset managers and other financial institutions have a vital part to play in all of this. Banks keep the stock of money moving efficiently. They provide payment services. They provide a safe home for cash and are an essential source of finance; by intermediating between savers and borrowers, they transform the short-term savings of people and companies into long-term loans and other credit instruments for the smallest to the largest borrowers, including companies and governments. And they facilitate direct investment into the economy. Insurers and reinsurers take on many of the short- to long-term risks faced by individuals and businesses: from the uncertainty that arises from an accident or burglary, to helping people provide for their retirement. The insurance sector contributes to economic growth by covering the productive activities of their customers against unexpected expenses arising from unforeseen events; in return, customers pay a fee, or premium. This benefits both parties because through the pooling of risk there is less volatility and the insurer can hold the risk more cheaply than any single party. 5

6 The strength of an economy has a large bearing on the success or otherwise of its financial services firms. Likewise, these firms play a key role in facilitating economic growth. The European economy has been under substantial pressure over the past few years due to delayed reforms, emerging national protectionism, loss of confidence in European integration, a financial crisis, and loss in international competitiveness. This has led to a slowdown in economic growth and recession in some member states, increasing unemployment and economic fragmentation. Time is of the essence. Without a return to growth in 2015, fiscal balances may worsen and make it even more difficult for governments to honour their promises to provide pensions and healthcare for their aging populations. It is also likely to lead to more unemployment, declining incomes, lower asset values and under-funded retirement provision. There is also a deflation risk, in part due to weak credit expansion. With deflation, debt to Gross Domestic Product (GDP) ratios can soar, creating a pernicious threat to fiscal balances. If the public and private sectors continue to cooperate, and take whatever further action is necessary this year, we should realise our joint ambition to restore Europe to a sound economic footing. 6

7 B. GOALS FOR EFFECTIVE REGULATION An extensive reform agenda for the European financial sector has helped firms refocus on the vital role they play in the economy. Many of the reforms have made the financial sector more resilient and better able to weather future economic or financial crises without taxpayer support. As policymakers continue to discuss new laws and regulations, the European Financial Services Round Table (EFR) is concerned about the amount and unpredictability of regulation and would like to propose a number of high-level goals to ensure effective regulation. Our over-riding objective is to ensure that the reforms will have the desired effects, including boosting economic growth and ensuring the European financial services industry is safe, competitive, sufficiently profitable to be attractive to investors and able to provide the necessary products and services for consumers and businesses, while at the same time avoiding any unintended consequences for the industry and the economy in general. Our goals are to: Find a healthy balance between safety and economic growth. Make the system safer by reducing risk but ensuring that financial firms are still able to be dynamic, competitive and innovative within a framework of long-term and stable growth. Ensure that the financial sector continues to provide the products and services needed by customers, and provide attractive and competitive returns to investors, while complying with increased regulatory requirements. Ensure that regulations do not overburden the financial sector and that specific reforms enable banks and insurers to play their key role in the European economy. Make certain that reforms are logical and consistent with what has been introduced in the past seven years and give the sector sufficient room to meet the needs of customers by offering a variety of services, over different models, and to continue innovating. Ensure a harmonised approach and level playing field across European countries and sectors, where appropriate recognising the structural differences in the assets and liabilities of banks and insurers. Maintain the wide diversity of share ownerships and business models across Europe. This diversity should be respected and treated appropriately in European legislation through proportionality, the principle of subsidiarity and national implementation of EU law. Maintain the diversity of available services and products through rules that foster competition in the area of financial services. For example, the EU should establish appropriate market access rules for non-eu firms. These rules should ensure a safe and stable financial system and a level playing field, while avoiding protectionism. Opt for a global approach to reform where appropriate and without putting European legal, structural, and business models at a competitive disadvantage. This will support consistency, ensure a level playing field that is more effective and preserve the competitiveness of the European financial services industry compared with other parts of the world. Make sure that proper impact assessment studies including cross-sectoral and cumulative impact studies are conducted to estimate the benefits and costs of regulation, not just on the financial sector, but on the economy as a whole. A fundamental principle in financial regulation should be that any new framework must never be detrimental to the long-term funding of the economy. Take stock of existing regulation and ensure that it has been correctly calibrated to support the growth agenda, and effectively implemented, before adding another layer of regulation as this may subsequently be unnecessary, counterproductive or need a different focus. Assess the post-crisis legislation, as well as envisaged legislation, against its overall impact and its ability to support the creation of jobs and growth and investment, and rewrite or withdraw it if necessary. 7

8 Make EU policies and legislation predictable to help companies plan for the future and make sound and predictable investment decisions. Rebuild trust in the EU and its ability to provide satisfactory solutions for all citizens and all economic sectors. Make banks and other financial firms independent of taxpayer support, including through effective resolution tools, thereby reducing moral hazard. In this context, the EFR supports the creation of the banking union and the strong role of the European Central Bank (ECB) as the single supervisor for European banks and the Single Resolution Board (SRB) as its counterpart for resolution. Increase the global competitiveness of Europe s financial services sector, while ensuring it remains sound and safe. Make certain that new regulations only enter into force if they prove to be efficient and fulfil their purpose in a costbenefit-analysis. Furthermore, there should be regular cost-benefit reviews of existing regulations. 8

9 C. SUMMARY OF MAIN ISSUES AND KEY RECOMMENDATIONS The main issues facing the European financial services sector, and the European Financial Services Round Table (EFR) s key recommendations for dealing with them, are summarised here. Full details are given in the next section, Section D. 1. LONG-TERM INVESTMENT Key Recommendations: Convergence on a definition for infrastructure would promote availability of data, innovation and clarity of rules. While banks will continue to be important players in financing SMEs and infrastructure, access to long-term finance for SMEs and infrastructure should be made easier through private and public sector initiatives. Long Term Investment Funds should be supported by adequate regulatory constraints. The high-quality securitisation market should be revitalised to address the funding gap for SMEs and infrastructure financing. 2. INFRASTRUCTURE FINANCING Key Recommendations: In order to maximise market participation, reduce inefficiency, and accelerate the development of infrastructure as an asset class, Europe needs to develop a more standardised and harmonised infrastructure capital market. Policymakers should address legislative and regulatory policies that disincentivize infrastructure investment. A stable legal framework promoting confidence and long-term relationships is essential. Viable infrastructure projects should be created and promoted throughout Europe. More cooperation between the public and private sectors would also be welcome and the use of public private partnerships should be further expanded across member states. 3. CONSUMER PROTECTION Key Recommendations: EFR supports requirements for retail financial institutions and intermediaries to conduct an assessment of the customer s needs, with joint responsibility between the institution and the customer, in order to avoid misselling of products and ensure that the most suitable product is advised to the client, as opposed to measures impacting business models in a negative way without addressing the problem that a lack of suitable advice would create. EU initiatives should not ignore the differences in market practices, language, culture and consumer needs that exist between member states. Likewise they should consider existing local market practices relating to financial education to avoid imposing asymmetrical information requirements towards the customer. Policymakers should consider complementary measures to consumer protection laws and rules, such as self-regulation, codes of conduct, sharing and promotion of best local practices, without undermining agreed-upon EU standards, appropriate procedures and regular dialogue with industry practitioners to prevent mis-selling practices. 9

10 4. TRADE Key Recommendations: Trade agreements should aim to include as many countries as possible to maximise the economic benefits. Finalising negotiations to create the ambitious and comprehensive Transatlantic Trade and Investment Partnership (TTIP) and other Free Trade Agreements, such as with Canada and India, should be prioritised in Financial services regulation and market access should be included in the TTIP in order to improve access to capital and boost economic growth. Regulators should monitor the impact of prudential rules on the supply of trade finance and, if necessary, review their calibration. 5. DIGITAL FINANCIAL SERVICES Key Recommendations: Develop a level playing field for all digital financial services providers, applying the same rules required of financial institutions to new entrants, and in particular for all transactional services (including payments, foreign exchange, lending and advisory), to ensure security for clients. A level playing field can also be achieved by introducing greater flexibility into existing rules for traditional EU financial institutions, in particular concerning the use of big data techniques and location of data. To further enhance consumer protection against cyber risks, regulators should harmonise cyber security standards for the Digital Single Market, based on principles that allow the cross-border sharing of cyber security incidents, as well as best practices and prevention measures between companies and clearly identified competent authorities. 6. INSURANCE PRUDENTIAL Key Recommendations: Certain adjustments to calibrations within the final Solvency II framework are still needed to reflect the long-term nature of the insurance business. Such adjustments will allow insurers to continue to offer long-term guarantees backed by long-term investments. Changes should be made to the way Long-Term Investments (LTIs) are defined and calibrated in the Solvency II framework. This should be done as soon as possible to support European Commission President Jean-Claude Juncker s EUR 315 billion public and private infrastructure investment plan. 10

11 7. INSURANCE SUPERVISION AND SYSTEMIC RISK Key Recommendations: Global insurance initiatives should be compatible with the Solvency II framework to help realise common objectives. ComFrame including the Insurance Capital Standard (ICS) should aim to provide a common basis for convergence of advanced supervisory practices, avoid new or duplicative layers of regulation and supervision and be an economic riskbased approach to group supervision that enables Solvency II to be the European application of any such standards. Any capital surcharge, as part of the systemic supervisory framework, should be a last resort and there must be recognition of the relevant risk management, risk mitigating activities and mitigating factors already embedded in advanced risk based group supervision frameworks such as Solvency II. 8. PENSION REFORM Key Recommendations: There need to be a fair competition within Europe s pension sector and a greater awareness among EU citizens towards their retirement arrangements. The European Commission should identify the various categories of funded pension schemes, products and providers, and to determine where prudential regulation might create uneven playing fields in certain markets across the EU. European pension reform should respect national diversity of social policy and taxation, ensure a competitive internal market and take into account the substantial changes that have already taken place. Demographic changes in Europe mean that private pensions are needed to supplement public ones. The industry needs stability to help deliver this. 9. BANK STRUCTURAL REFORM Key Recommendations: Any bank structure reform rules need to differentiate clearly between proprietary trading and market-making, as the latter has many benefits for all market participants. It is essential that market-making activities and more generally clients related activities stay in the core entity as separation would hurt capital markets activities and make the development of Capital Markets Union impossible. It is imperative to preserve the universal bank business model which ensures greater resilience through diversified activities and geographical markets. An in-depth impact assessment should be undertaken to determine the economic impact and unintended consequences of bank structure reform. Should bank structure reform be implemented, then European banks would be strongly disadvantaged compared with non-eu banks. 11

12 10. BANKING SUPERVISION Key Recommendations: The Single Supervisory Mechanism (SSM) should carefully balance the new central responsibility of the European Central Bank (ECB) with the need to take advantage of the local expertise that national authorities have built up over the years. The EFR supports the ECB s intention to review the national options and discretions in the EU single rulebook. The finalisation of the single rulebook by the European Banking Authority (EBA) and its role as a mediator between home and host supervisors are essential for the single market. The European Commission should follow up on its assessment and consider in the long term a revision of the governance and voting system of the EBA to further improve the capacity of its Board of Supervisors to take decisions in the interest of the EU as a whole and ensure the effectiveness of its role as mediator between home and host. 11. BANKING RESOLUTION Key Recommendations: Establish the Single Resolution Board (SRB) to ensure a uniform approach to the resolution rules and a decision-making structure that is aligned with the SSM. In banking union it needs to be clarified how supervision and resolution are carried out to provide confidence and clarity to the market. While Bail-in and resolution funds remain the primary tools to orderly manage banking crisis and avoid that taxpayer money is used first to cover the losses of banks in trouble, credible backstops are important to ensure the credibility of the whole mechanism, even if they are never needed. 12. BANKING PRUDENTIAL Key Recommendations: Policymakers should resist further substantial increases in capital, liquidity and other regulatory requirements for banks at a time when most EU economies are still experiencing weak growth and addressing macro-economic imbalances. However, evolving international standards such as Total Loss Absorbing Capacity (TLAC) or the Leverage Ratio should be taken into account in order to ensure a level playing field for European firms internationally. There are many regulatory changes occurring simultaneously and a prudent approach would be to allow reforms to take hold before layering on more regulations that may result in unintended consequences. A balance needs to be found between simplicity, risk-sensitivity and the comparability of risk-weighted assets. 12

13 13. SHADOW BANKING Key Recommendations: The objective of further regulation should be clearly defined and aimed at proposing solutions to genuine problems that have not already been addressed. Existing sources of data should be fully leveraged. Regulation should support the smooth functioning of money market funds, securitisation markets and repo and securities lending. Any unintended consequences of proposed changes to prudential rules should be understood and mitigated. 14. MARKET INFRASTRUCTURE Key Recommendations: Regulators must defer to each other s rules where they achieve equivalent outcomes. This is vital to avoid further fragmentation of the global market and significant market disruption where Central Counterparties (CCP) rules are not mutually recognised and duplicative transaction-level requirements apply. Balanced legislation on recovery and resolution regime for Financial Market Infrastructures (FMIs) is required. The forthcoming EU legislative proposal on CCP recovery and resolution must strike an appropriate balance on recovery and resolution requirements given the importance of CCP services for financial stability. Policymakers should ensure that incentives to promote central clearing are not undermined by prudential regulation (such as the Leverage Ratio.) In order to avoid too many change projects for Central Securities Depositories (CSDs) and market participants at the same time, European Securities and Markets Authority (ESMA) could consider a phase-in approach for the settlement discipline regime and use the information available at the Target 2 Securities (T2S) platform. 15. BENCHMARKS Key Recommendations: The new regulatory regime for benchmarks should be flexible and allow workable requirements to be applied to indices where appropriate safeguards already exist. Where benchmarks are critical to more than one member state or involve contributors and users in more than one member state, ESMA is best placed to assume supervisory oversight functions. The proposed equivalence regime needs to be given further consideration. No jurisdiction outside the EU is regulating benchmarks in a similar fashion, so equivalence regime is unworkable and hence an adequate grandfathering regime should be put in place until an equivalence decision is granted or a workable recognition/endorsement regime should be implemented to avoid market disruption and financial instability. The definition of critical benchmarks should be based on both quantitative and qualitative criteria in order to include those benchmarks below the EUR 500 billion threshold that are nevertheless used to reference retail contracts across the EU. 13

14 16. TRANSACTION TAX Key Recommendations: The EFR urges the 11 participating states and the European Commission to cancel plans for an EU Financial Transaction Tax (EU FTT). The tax would not achieve its intended goals and would have significant harmful effects on financial markets and economies, putting Europe at a competitive disadvantage. Policymakers should consider that similar taxes in the UK, Sweden and Switzerland have led to capital outflows, reduced trading activities, less liquidity and created distortions in markets. 17. TAXATION INFORMATION EXCHANGE Key Recommendations: Full convergence on one final information exchange model including timing of implementation, and safety of customer information transmitted, are of utmost importance. There should not be several different standards on information exchange as this would unnecessarily increase implementation costs. More clarity is needed on how the EU envisages phasing out the EU Savings Tax Directive (STD) and replacing it with the global Common Reporting Standard (CRS) (or the CRS as embedded in the Directive on Administrative Cooperation (DAC)). The EFR is also concerned about the limited progress made by the CRS jurisdictions on issuing the detailed implementation guidelines. More detail is needed on the process that will be used to match and prioritise countries with one another under the CRS to facilitate the automatic exchange of information exchange. 18. ACCOUNTING Key Recommendations: The EU should utilise the new European Financial Reporting Advisory Group (EFRAG) structure so that private sector and national stakeholder interests are fully taken into account in a transparent decision-making process that is also aligned to the objective of global convergence. International Financial Reporting Standards (IFRS) accounting rules require stronger political and macroeconomic framing. They should also recognise the diversity of business models, in particular for insurance companies with their long-term perspective and the assets they hold to back their liabilities. Accounting authorities should be encouraged, without being detrimental to European interests, to continue to try to converge the international and US accounting systems, and to ensure that efforts to make standards more compatible are of a high quality, workable and are able to reflect all types of business models. 14

15 D. MAIN ISSUES AFFECTING THE EUROPEAN FINANCIAL SERVICES SECTOR Facilitating growth, long-term investment and competitiveness 1. LONG-TERM INVESTMENT Background Long-term investment (LTI) is essential for the economy and society as a whole. Funds held by financial institutions are invested in long-term energy, transport and other infrastructure projects, as well as in businesses, including small and medium-sized enterprises (SMEs), real estate and other assets. The European Commission in its Green Paper on the long-term financing of the European economy, published in March 2013, asserts that the most pressing challenge for Europe is a return to sustainable and inclusive growth, creating jobs and enhancing its international competitiveness. The Commission regards large-scale, long-term investment as essential for reviving growth and employment across Europe. It has sparked a debate on how to foster more long-term financing and how to improve and diversify the system of financial intermediation. In November 2013, the Economic and Monetary Affairs Committee (ECON) of the European Parliament (EP) published its own-initiative report on the long-term financing of the European economy, containing suggestions on how the Commission should tailor its follow up to its Green Paper. The report welcomes the Commission s proposals, acknowledging that longterm investment is the key to economic growth but is hindered by the lack of alternative equity and debt financing instruments that are available for EU companies. The EU s announced Investment Plan for Europe, which aims to mobilise at least EUR 315 billion in additional public and private spending in the next three years, and the envisaged Capital Markets Union, can both be important new drivers for boosting long-term investment across Europe. Infrastructure projects, when they give rise to stable and predictable cash flows, may be suitable investments for insurers and long-term savers. However, they need to have access to information on a range of projects to choose from. As for longterm investment in SMEs, this is being held back for a number of reasons. Many SMEs prefer to raise funds through bank borrowing rather than the capital markets. This is often due to the high costs of access which are not in relation to the borrowing needs of SMEs. Traditional lending via banks has proven to be a reliable source of financing, as well as helping SMEs access the capital markets when appropriate. Indeed, the European Commission has rightly noted that the real economy in Europe will continue to rely on the banking sector for a long time. For this reason, it is important to reactivate the healthy balance of financial flows between banks and SMEs. Nevertheless, it is an area that in recent years has come under pressure. Transferring part of the SME reliance on traditional bank-based financing to market-based financing could mitigate part of the pressure. In addition, creating a trustful regulatory framework for crowdfunding could also help many SMEs to access alternative sources of finance. In this regard, as a response to the need for revitalising the securitisation market, the European Financial Services Round Table (EFR) has helped to launch a European market-led initiative, Prime Collateralised Securities (PCS), where an independent, not-for-profit entity defines and promotes best market standards and practices in the securitisation market. More should be done to promote Venture Capital (VC) and business angels as a source of SME finance. There is no integrated venture capital market in Europe, and VC funding is fragmented along national lines; this increases funding costs and limits opportunities for entrepreneurs and investors alike. There also remain significant obstacles in the form of double taxation, tax treatment uncertainties and administrative requirements that will continue to hold back venture capital. Finally, historical data proves that European households traditionally choose basic deposits when placing assets. Since a substantial portion of European assets is held by households they play a significant part in finding a solution for securing sustainable and long-term growth in Europe. Successful activation of these assets could become vital in securing financing for SMEs and infrastructure. 15

16 Possible Impacts The European Commission recognises that long-term investment has diminished in recent years for a number of reasons, including the economic situation in Europe and post-financial crisis regulatory reforms. It is looking for ways to rectify the situation, but needs to be aware that parts of its regulatory reform programme have contributed to the problem as it has created some real obstacles to long-term funding. Insurance companies, occupational pension funds and other institutional investors are well suited for long-term financing and investment. They have substantial portfolios with long-term horizons, and continue to seek out diversification and yields. Unfortunately, current European regulatory reforms in combination with market trends to deprive the European economy of healthy long-term financing. Certain elements of the Solvency II directive may make it more difficult for insurance companies to invest long term, due to unfavourable capital requirements for some asset classes. Especially long-term infrastructure financing and high-quality securitisations suffer from high capital charges. The European insurance sector unanimously requested that the measures for implementing Solvency II (the so-called delegated acts ) proposed by the European Commission should send a clear and strong message in favour of long-term investment. Unfortunately, the Solvency II delegated acts, which were published in October 2014, show only limited improvement in support for long-term investing except for some marginal change on the treatment of securitisations. Many of the concerns expressed by the insurance sector in particular those focused on the inconsistency between the regulatory framework and Europe s ambitious plan on investment, growth and job creation have not been sufficiently considered. On high-quality securitisation, the designation criteria need to be revised to avoid discriminating against junior tranches, and capital charges should be capped to the underlying assets (the look-through approach, which is not fully applied in the current version). The European Central Bank (ECB) could promote such adjustments, which are essential to reviving securitisation markets. Banks are traditionally the major conduits of finance, but new regulations might in certain cases reduce banks appetite for long-term lending. Non-banking financial institutions shadow banks are stepping into the gap. The European authorities intend to regulate shadow banking, which is in general supported by the EFR to ensure a level playing field with other financial institutions. The newly agreed European Long-Term Investment Fund (LTIF) framework could become an important source of investment and direct financing for SMEs. However, its success will to some extent depend on the inclusion of insurance companies, long-term savers and integration with the well-functioning Undertakings for The Collective Investment of Transferable Securities (UCITS) framework. Multinational and national development bank programmes such as guarantee facilities, risk-sharing agreements, bank financing and global loans should be further developed. These instruments are very useful, especially for financing SMEs that cannot access the capital markets. 16

17 EFR Recommendations Convergence on a definition for infrastructure would promote availability of data, innovation and clarity of rules. At a national and European level the visibility of the range of infrastructure projects seeking private finance could be made much clearer, particularly for small and medium- sized projects. While banks will continue to be important players in financing SMEs and infrastructure, access to long-term finance for SMEs and infrastructure should be made easier through private and public sector initiatives. LTIFs should be supported by adequate regulatory constraints. SMEs are far more reliant on bank borrowing than large companies and are generally wary of tapping into the debt capital markets which tend to provide longerterm finance. Governments, banks, insurance companies, development banks and others should explore what can be done to help SMEs access these markets, while expanding the EU project bonds initiative would help build scale in the market for infrastructure bonds. LTIFs should be supported and a functioning secondary market with full collaboration between European fund structures will be central for ensuring that the new fund structure can achieve the defined goal of assisting European growth. The high-quality securitisation market should be revitalised to address the funding gap for SMEs. Re-developing the European SME securitisation market securitising bank loans to SMEs, with or without credit risk mitigation from the European Investment Fund (EIF) or other official bodies could provide an attractive alternative for investors and a stable source of liquidity and capital for SMEs. If properly designed, such a system could significantly diversify sources of funding for SMEs, lower funding costs and reduce the exposure of the sector to any future constraints within the banking sectors. 17

18 2. INFRASTRUCTURE FINANCING Background Investment in infrastructure is a driver of global economic growth. Europe requires infrastructure investments both debt and equity of between EUR 1.5 trillion to EUR 2 trillion to meet the goals of its Europe 2020 strategy. However, there is a substantial funding challenge as traditional lenders are under pressure to deleverage and reduce their balance sheets. National governments and private investors, particularly long-term institutional investors, therefore have a vital role to play. Private investment is hampered by the relative inaccessibility of infrastructure as an asset class due to highly technical and bespoke projects and financing structures, a lack of benchmarking and performance data, and national infrastructure plans that lack depth and are short on commercially viable projects. The new European Commission is prioritising infrastructure financing in its Investment Plan for Europe, which aims to mobilise at least EUR 315 billion in additional public and private investment in the economy over the next three years. The European Financial Services Round Table (EFR) supports measures that would help infrastructure become a more accessible asset class for institutional investors. Such measures include greater transparency, the harmonisation of projects, structures, financing and performance, a common legal framework, standard project documentation, a common investor prospectus, the development of best practices, and greater availability of benchmarking and performance data. There are a number of global initiatives underway to promote more investment in infrastructure. For example, the G20and the B20 (the Business 20 forum that brings together business leaders from the G20 countries), have called on the public and private sector to: Reaffirm the critical importance of infrastructure in national growth plans. Establish, publish and deliver independently assessed infrastructure plans. Establish a Global Infrastructure Hub to encourage collaboration between governments, the private sector, developments banks and international organisations. Implement best practice procurement and approvals processes. Work towards greater promotion and protection of cross-border investment and increase the availability of long-term infrastructure financing. Possible Impacts There are many legislative, regulatory and tax barriers to infrastructure investment and new ones are being constructed. For example, within Solvency II the risk weighting of infrastructure investment in the standard formula and other regulatory capital charges will act as disincentives to institutional investment. Instead, infrastructure investments should be subject to capital charges that take account of their specific characteristics, such as their lower risk of default higher recovery rates and more stable cash flows than corporate bonds. It would help if relevant insurance regulatory frameworks allowed a separate fixed income classification for infrastructure debt, rather than require it to be classified as an illiquid asset under alternatives. It would also be beneficial if governments maintained stable policies. Sudden or frequent changes in policy (such as the many changes seen in several countries financial incentives regimes for renewable energy projects) reduce investor appetite. More cooperation between the public and private sectors would be welcome and Public-Private Partnerships (PPPs) in infrastructure projects should be expanded across Europe. PPPs are under-used in some member states so it would be useful if policymakers were to promote successful PPPs as examples of best practice to be emulated in states where their use has been minimal. 18

19 The many different sources of capital available for infrastructure projects, including publicly funded institutions such as the European Investment Bank, should be promoted. The public sector should do more to help private sector companies identify all the different aspects of infrastructure financing such as credit enhancement, guarantee programmes, and Multilateral Development Banks (MDBs). Furthermore, governments should do more to cover risks that the private sector is not willing to cover. For instance, the number of national projects eligible for Project Bonds Credit Enhancement (PBCE) could be increased to develop investor appetite for infrastructure assets. Governments should also review how infrastructure projects are taxed and consider changing the rules to attract investors. Policymakers should maintain an open dialogue with the biggest investors like larger pension funds and insurers and consider changing policies to meet investors needs. Besides improving investors appetite for infrastructure projects, governments should ensure there are enough attractive projects in the pipeline to meet demand. The reasons for the limited use of PPPs in some countries should be investigated, a range of different PPP models should be promoted and PPP documentation and benchmarking data should be harmonised. EFR Recommendations In order to maximise market participation, reduce inefficiency, and accelerate the development of infrastructure as an asset class, Europe needs to develop a more standardised and harmonised infrastructure capital market. By creating a common framework for project due diligence and disclosure, or a pan-regional passport, infrastructure investing will become more accessible to long-term institutional investors. A standardised framework should maintain some flexibility so that different jurisdictions could impose additional requirements where necessary. Policymakers should address legislative and regulatory policies that disincentivize infrastructure investment. A stable legal framework promoting confidence and long-term relationships is essential. The public and private sectors should be encouraged to cooperate in project financing. They should also work together to meet the recommendations made by the B20 to promote more investment in infrastructure. The public sector should play a key role in a project s initial stage: it should set priorities, provide a transparent procurement procedure, offer initial financial support, provide guarantees and mitigate risk. Viable infrastructure projects should be created and promoted throughout Europe. More cooperation between the public and private sectors would be welcome and the use of public-private partnerships should be further expanded across member states. As well as improving investor demand for infrastructure projects, governments should address the supply side by creating enough projects to meet demand. They should promote the right allocation of structural and cohesion funds (through, for example, the Connectivity Europe Facility) to tackle inefficiencies. Such funds create significant leverage and attract additional public and private resources through the use of innovative financial instruments such as EU Project Bonds. Resources available for the EU 2020 Project Bond Initiative, carried out by the European Investment Bank, should be increased. A European infrastructure strategy should be developed by encouraging member states to define priority projects, especially those that will have a sustained impact on economic growth. To avoid inefficiencies and the waste of financial resources, improved mechanisms for project selection is needed. 19

20 3. CONSUMER PROTECTION Background In the immediate wake of the financial crisis, the regulatory focus first turned to solvency and liquidity. From the Capital Requirements Directive IV (CRD IV), the Capital Requirements Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD) and Solvency II in the EU, to the Dodd-Frank Act in the US, enhanced prudential regulation especially of systemically important financial institutions took centre stage in an effort to stabilise the financial system. However, the focus soon switched to consumer protection to deal with the series of high-profile mis-selling and other incidents that led to a general loss of public confidence in financial institutions. Within the banking union, it is argued that the transfer of prudential supervision responsibility to the European Central Bank (ECB) may provide an opportunity for national supervisors to be more attentive to conduct of business and consumer protection issues. Within the insurance industry, the European Insurance and Occupational Pensions Authority (EIOPA) is also regarding consumer issues as one of its main priorities and is aiming to bring greater harmonization of practices throughout Europe. The G20 s High-Level Principles on Financial Consumer Protection issued in October 2011 provide a credible plan for the future of financial consumer protection regulation. These principles emphasise: a) avoidance or disclosure of conflicts of interests in the provision of advice; b) product choice and ease of switching; c) transparency and product suitability; d) recourse for customers when dissatisfied. The European Union has made a concerted effort to advance a common consumer protection agenda to apply the principles set out by the G20. These consumer protection initiatives have common objectives, namely to increase transparency in financial transactions to reduce the risk of conflicts of interest, to stimulate an easier and more convenient access to financial services through harmonised definitions and rules across the EU, to promote the development of efficient complaint and redress mechanisms, and to enhance competition to put downward pressure on prices. The European Commissioner for Financial Stability, Financial Services and Capital Markets Union, Jonathan Hill, supports the creation of a single market for retail financial products. Such a market should consider the diversity of ways in which clients are served by the financial sector and intermediaries. Financial institutions are following these developments closely since consumer protection is a necessary condition for regaining consumer confidence and business growth. The European Financial Services Round Table (EFR) supports these objectives. Nevertheless, it is important to find a way to both protect consumer interests and to preserve appropriate financial innovation, security and competitiveness. It is also essential to make sure that regulations aimed at protecting and helping consumers do not end up acting against them as a result of burdensome information procedures, lengthy and complex security checks and, above all, higher costs. Furthermore, too strict rules could end up creating a narrower offering of services and products for certain segments of customers. Consumer protection measures often imply substantial changes in distribution channels, disclosure requirements, and authentication processes, which translate into higher operational costs and increased prices for end-users. The optimal outcome strikes a balance between providing the right amount information to customers and the best procedures for dealing with customers, and the costs of doing so. If the appropriate balance is not struck, the information and procedures can become so burdensome for all involved that their purpose is weakened. In addition, consumer protection rules should not lead to the provision of uniform services and products within the financial services sector as this would not serve customers diverse needs and could even affect financial stability. In particular, service and product information provided to customers must be allowed to vary depending on the specifics of those services and products. 20

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