EACT Update: The Impact of Financial Regulation

EACT Regulatory Update - January 2016 by Jean-Marc Servat, Chairman, The European Association of Corporate Treasurers (EACT)

It is now seven years since the wave of regulations that followed the financial crisis. The European Commission has launched a call for evidence on the impact of financial regulation. The EACT is gathering evidence to respond, but we would like to make general comments and suggestions for future regulation.

1. Assessment on the impact on non-financial end-users

Going forward there should be an obligation to conduct a thorough analysis on the impact of financial regulation on non-financial companies. Adequate budget should be allocated for such an analysis.

Our fundamental concern is that non-financial companies should not be assumed by default to be the same as financial companies when financial regulation is being developed.

The financial reform of the last years has not always been accompanied by proper assessments on the impact on non-financial end-users and how those impacts could be mitigated. For instance in the impact assessment of CRD IV / CRR there is only a very brief reference on the impact on the real economy, which is mostly a discussion of the impact on lending, in particular to SMEs. Yet it is now clear that the accumulated prudential requirements laid down in CRD IV are changing banking business models and operations, which in turn changes the way in which banks are willing and able to interact with their corporate customers.

Our fundamental concern is that non-financial companies should not be assumed by default to be the same as financial companies when financial regulation is being developed. Imposing financial sector obligations on non-financial companies is neither meaningful nor appropriate.

2. Clarity and consistency of policy objectives

There is a need to clearly define the policy objectives and to consistently apply them throughout legislative texts. There are inconsistencies and tensions either between the policy objectives of the current Commission and some of the regulatory measures taken in the pact years, or between different legislative texts. From our perspective the most important inconsistencies are the following.

The Capital Markets Union has the objectives to create jobs, growth and finance the real economy – however many legislative instruments limit (or are expected to limit) companies’ ability to raise funds. CRD IV, MiFID II and the planned bank structural reform all limit financial institutions’ ability to act as market makers, yet effective market making is part of well-functioning capital markets. The impact of these rules is already visible as certain financial institutions are withdrawing from such activities.

Regarding corporates’ risk management, the importance of hedging by non-financial companies has been recognised by the legislator. However, there is continuous pressure on OTC derivatives, and several legislative texts/proposals would adversely impact non-financial companies’ ability to hedge: EBA’s planned rules for the treatment of CVA, MiFID/MiFIR II, bank structural reform and FTT. Non-financial companies need access to these risk-mitigating instruments and such a permanent regulatory pressure is detrimental for European companies.

3. European System of Financial Supervision

European Supervisory Authorities (ESAs) regulate on issues that impact actors in both the financial and non-financial sectors. Therefore we would expect these authorities to have an understanding of both and to consider impacts on all stakeholders. The ESFS should be reviewed and necessary amendments should be made in order to ensure that.

• There are safeguards and controls in place on the work of the ESAs to ensure that they will not go beyond their mandate and will carefully assess the impact of any proposed measure on all actors, including the non-financials. This has also been pointed out by the European Parliament in its report on ‘Stocktaking and challenges of the EU Financial Services Regulation’: this reminds the ESAs that technical standards, guidelines and recommendations are bound by the principle of proportionality; calls on the ESAs to adopt a restrictive approach to the extent and number of guidelines, particularly where they are not explicitly empowered in the basic act; notes that such a restrictive approach is also required in view of the ESAs’ resources and the need to prioritise their tasks.
  
  
• All relevant stakeholders should be represented in working groups and the ESAs should thoroughly analyse the impact of their measures on financial services end-users.

4. International convergence

Many non-financial companies operate internationally and therefore suffer from a lack of international co-operation and convergence in the area of financial regulation, as the G20 commitments have translated into different legal frameworks. Multinational companies are faced with very different compliance obligations, for instance concerning the use of OTC derivatives in different jurisdictions, which significantly increases the resources needed to ensure compliance, which is both inefficient and costly.

Two aspects require improvement: firstly, the Commission should review whether the current approach of unilateral equivalence decisions is adequate to achieve an outcome of international consistency and convergence. Secondly, only recognising that both the legal regimes achieve equivalent outcomes is not sufficient from companies’ perspective, as they will still have to comply with different rules and processes. Therefore the authorities should also seek to move towards more harmonisation of the detailed rules in place.[[[PAGE]]]

5. Flexibility of the legislative process and adequate level of detail

The financial reforms and their implementation have also shown that there is a need for more flexibility in the legislative process. We believe that flexibility should be built into legislation where possible and appropriate, so that modifications after experience is gained are relatively easily achieved and are not big projects themselves. The consequences of financial regulation for end-users are sometimes hard to predict and may emerge only after rules come into effect.

We understand the legislator’s willingness to draft for more prescriptive and detailed legislation given the shortcomings of the pre-crisis regulation. Whilst in some cases this is adequate, we observe that many rules are currently too detailed which hinders rather than helps to achieve a transparent and efficient financial services system. A good example of this is the reporting rules under EMIR that require over 80 fields in total to be reported, ending up in a high number of mismatches. This inefficient reporting regime prevents the supervisors from having complete and useful information about the concentration of systemic risks, which is the very objective of EMIR.