COMMISSION STAFF WORKING DOCUMENT on the Call for Evidence Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Call for Evidence - EU regulatory framework for financial services
Date: 2016-11-23
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU law, bank, consumer protection, economic growth, financial legislation, financial services, financing policy, investment, job creation, law of banking

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 23.11.2016  SWD(2016) 359 final   COMMISSION STAFF WORKING DOCUMENT on the Call for Evidence Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Call for Evidence - EU regulatory framework for financial services {COM(2016) 855 final}  
 
 
        Staff Working Document on the Call for Evidence                                                   

1. 

1.1. 

1.2. 

1.3. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

4.1 

4.2. 

4.3. 

4.4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

Contents 

INTRODUCTION ....................................................................................... 3 

Commitment to Better Regulation............................................................... 3 

The Call for Evidence and Capital Markets Union ..................................... 4 

Key messages .............................................................................................. 4 

REDUCING UNNECESSARY REGULATORY CONSTRAINTS 
ON FINANCING THE ECONOMY .......................................................... 7 

Banks' ability to finance the wider economy ............................................... 7 

SME financing ........................................................................................... 15 

Long-term investment ............................................................................... 18 

Market liquidity and trading ...................................................................... 22 

Access to clearing ...................................................................................... 26 

ENHANCING  PROPORTIONALITY  OF  RULES  WITHOUT 
COMPROMISING PRUDENTIAL OBJECTIVES ................................. 29 

Proportionality in banking rules ................................................................ 29 

Proportionality in derivatives markets....................................................... 33 

Proportionality in insurance ...................................................................... 34 

Proportionality in other sectors ................................................................. 35 

REDUCING UNDUE REGULATORY BURDEN .................................. 37 

Supervisory reporting requirements .......................................................... 38 

Public disclosure requirements .................................................................. 44 

Compliance costs ....................................................................................... 47 

Barriers to entry ......................................................................................... 51 

MAKING  THE  REGULATORY  FRAMEWORK  MORE 
CONSISTENT AND FORWARD-LOOKING ........................................ 56 

Unintended interactions and inconsistencies between legislations ........... 56 

Retail investor and consumer protection ................................................... 64 

Gaps and remaining risks in the regulatory system ................................... 70 

Technological developments ..................................................................... 75 

2 

 
 
1. 

1.1. 

INTRODUCTION 

Commitment to Better Regulation 

The  Commission  Communication on  “Better Regulation:  Delivering better results  for  a 
stronger Union”, published on 14 September 20161, stated that well-targeted, evidence-
based and simple regulation is more likely to achieve its goals. More effective regulation, 
which addresses European market failures, should also be proportionate, to avoid undue 
burden on citizens, businesses and public authorities. In effect, better regulation requires 
rules with a focus on their expected effects.  

The  Commission  already  evaluates  the  performance  of  existing  EU  regulation  before 
assessing  the  potential  impact  of  options  for  new  rules  and  holds  open  public 
consultations  to  evaluate  whether  action  already  taken  or  options  for  future  action  are 
best taken at European level or the objective could be better achieved by Member States. 
Since  2003,  when  impact  assessments  became  the  norm,  the  Commission  has  prepared 
975  impact  assessments  to  support  its  proposals.  Since  2010,  the  Commission  has  also 
run  704  public  consultations  and  made  688  ex  post  evaluations  of  EU  legislation. 
Evaluations, impact assessments and public consultations are essential ingredients of the 
Commission's  Better  Regulation  agenda.  Better  regulation  tools  can  deliver  more 
proportionate  rules  and  minimise  unnecessary  costs,  as  well  as  address  interests  and 
concerns identified by stakeholders and the general public. 

Significant  financial  sector  reforms  have  been  achieved  since  the  crisis,  including  the 
single  supervisory  and  single  resolution  mechanism  for  the  banking  union,  bank 
resolution tools, greater deposit protection, new supervisory authorities and an improved 
regulatory  framework  for  banks,  insurance  companies,  financial  markets  and  other 
sectors.  Overall,  these  reforms  have  made  the  financial  system  more  resilient. 
Nonetheless, the complexity of this regulatory effort requires an overall assessment of its 
coherence and consistency with their ultimate objectives.  

With the call for evidence, the Commission has taken its better regulation methodology a 
step  further  by  looking  across  the  entire  body  of  financial  services  regulation  and 
assessing interactions between individual pieces of legislation. In the spirit of the better 
regulation agenda, asking for evidence-based policy making, the call for evidence invited 
external  stakeholders  to  provide  data  and  practical  experiences  about  the  combined 
impact  of  rules.  EU  legislation  should  ultimately  remain  efficient,  consistent  and 

1 COM(2016) 615 final 

3 

 
 
 
                                                 
coherent  with  the  objective  of  balancing  financial  stability  with  a  growth  friendly 
regulatory framework that protects investors properly.  

The call for evidence is in line with the European Parliament’s Resolution "Stocktaking 
and  challenges  of  the  EU  Financial  Services  Regulation:  impact  and  the  way  forward 
towards a more efficient and effective EU framework for Financial". The results of this 
effort  have  fed  into  the  work  of  international  fora,  such  as  the  G-20,  the  Financial 
Stability  Board,  and  the  Basel  Committee  on  Banking  Supervision  (BCBS),  which  are 
assessing  the  overall  coherence  of  the  reforms  undertaken globally.  The  EU  is  the first 
jurisdiction to have launched such a comprehensive and structured approach in financial 
the 
services  regulation.  The  call  for  evidence  gathers  evidence 
implementation of the post-crisis reforms in the light of initial experience, not to question 
the main aspects of the reforms. 

to  fine-tune 

1.2. 

The Call for Evidence and Capital Markets Union 

The  call  for  evidence  complements  one  of  the  Commission’s  flagship  initiatives,  the 
Capital  Markets  Union  (CMU).  CMU  aims  to  diversify  the  financial  system  with 
alternative  funding  tools  to  traditional  banking  services.  It  aims  to  complement  bank 
funding  in  the  EU  with  stronger  capital  markets.  A  more  balanced  distribution  of 
financing  sources  should  ultimately  strengthen  financial  stability  even  further  and 
facilitate  the  access  of  businesses  to  a  source  of  financing  that  is  most  suited  to  their 
particular  situation  and  needs.  It  should  also  create  more  and  better  opportunities  for 
investors, deepen financial integration and increase competition in the financial services 
industry.2 

The call for evidence aims at improving the quality of the current regulatory framework 
in  financial services, including  those  that  will  be  directly impacted  by  CMU  actions.  It 
was thus  meant to verify that financial reforms do not unduly burden access to finance 
and  that  they  are  consistent  across  financial  sectors  and  coherent  in  a  way  that  major 
regulatory  gaps  are  addressed.  To  address  barriers  to  finance  and  unintended 
consequences, the call for evidence supports CMU actions with additional input to make 
appropriate adjustments to the regulatory framework. 

1.3. 

Key messages 

The call for evidence attracted a large amount of interest, with around 300 respondents 
having  shared  their  observations  and  concerns.  As  summarised  in  the  call  for  evidence 

2 See COM(2016) 601 final for more details. 

4 

 
 
                                                 
Summary  Feedback  Statement3,  around  80%  of  the  responses  came  from  the  financial 
industry with the remainder, among others, coming from the public authorities, consumer 
organisations,  NGOs,  think-tanks  and  private  individuals.  In  terms  of  number  of  issues 
raised,  capital  markets  formed  the  second  most  prominent  topic,  following  bank 
regulation. Many of the issues raised are closely aligned with the objectives of the CMU, 
such  as  facilitating  better  access  to  finance  or  reducing  barriers  to  cross-border 
investments. 

Overall,  stakeholders  did  not  dispute  the  fundamental  aspects  of  the  recent  financial 
reforms.  In  fact,  many  expressed  support  or  highlighted  the  benefits  of  the  new  rules, 
which  have  enhanced  the  stability  and  resilience  of  the  financial  system.  Stakeholders 
welcomed  this  exercise  as  an  important  step  in  improving  the  existing  regulatory 
framework  to  strike  the right  balance  between economic  growth  and  financial  stability. 
Although the exercise originally focused on the legislation adopted by the co-legislators 
that  is  already  in  force,  many  responses  were  submitted  on  the  possible  impact  of 
measures that are still being formulated (e.g. as regards the ongoing work of the BCBS). 
These  were  included  in  the  report,  but  the  evidence  on  the  impact  of  rules  not  yet 
implemented is limited.  

The call for evidence has proved to be very useful in drawing attention to examples of 
inconsistencies,  overlaps  and  unintended  interactions  between  different  pieces  of 
legislation.  As  set  out  in  the  consultation  documents,  the  responses  to  the  call  for 
evidence were assessed against the following objectives: 

  promoting economic and financial stability in the EU; 
  maximising  the  benefits  of  the  financial  system  to  the  economy,  jobs  and 
sustainable growth, and promoting better access to finance, notably for SMEs; 

  completing the EU single rulebook and promoting the single market; 
 

restoring  trust  in  the  financial  system  and  ensuring  a  high  level  of  consumer  and 
investor protection; 

  ensuring  the  EU  rules  are  as  simple  and  clear  as  possible  and  keeping  regulatory 

burden to the minimum necessary; and 

  promoting competitiveness of the EU economy. 

Based on a thorough review of all the consultation responses and the evidence provided, 
the public hearing in May 2016 and the subsequent analysis by the Commission services, 
it has concluded that follow-up actions are required in the following areas:   

3  http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/docs/summary-of-

responses_en.pdf 

5 

 
 
                                                 
 
  Greater attention should be paid to areas where rules may be impeding the flow of 
finance  to the  economy. Consideration needs to me  made  as  to  whether the same 
prudential objectives can be achieved in a more growth friendly way. (Chapter 2)  

  There may be scope to increase the proportionality of the regulatory framework as 
part  of  the  wider  aim  to  better  balance  financial  stability  and  growth  objectives. 
Rules should recognise the diversity of financial institutions in the EU and should 
not create unintended barriers to new market players. (Chapter 3) 

  Unnecessary regulatory burdens should be avoided, and rules designed that achieve 
their objectives at minimum cost for firms and, ultimately, end users and the wider 
economy. In particular, the burden stemming from duplications and inconsistencies 
of the various individual requirements should be assessed. (Chapter 4) 

  Unintended  interactions  and  inconsistencies  need  to  be  looked  at  with  a  view  to 
addressing the  remaining  risks in  the  financial  system,  further  enhancing  investor 
trust  and  consumer  protection  and  keeping  the  regulatory  framework  up  to  speed 
with technological development. (Chapter 5) 

In addition to initiating new follow-up actions, notably to fill the remaining gaps in the 
regulatory  framework,  the  additional  insights  and  evidence  gathered  through  this 
consultation will be used for several ongoing work streams, such as:  

  Fitness  checks  and  legislative  reviews  as  part  of  REFIT,  including  on  reporting 

requirements in the financial sector;  

  Calibrating of the measures at both the legislative and implementation levels;  
  Ongoing  policy  work,  e.g.  to  refine  and  accelerate  measures  under  the  CMU 

Action Plan; and 

  Commission  input  into  efforts  at  global  level  to  measure  and  evaluate  the 

combined effect of reforms. 

This Staff Working Document accompanies the Communication on the call for evidence 
which  sets  out  the  follow-up  actions  that  the  Commission  intends  to  take.  It  provides 
background  information  for  the  Communication  but  does  not  contain  any  new  policy 
commitment for the Commission beyond what is set out in the Communication. 

6 

 
 
 
 
 
 
 
2. 

REDUCING  UNNECESSARY  REGULATORY  CONSTRAINTS  ON  FINANCING 
THE ECONOMY 

The financial system plays an important role in helping households and firms to manage 
financial  risks  over  time  and  execute  payments,  which  contribute  to  make  the 
environment  more 
investment  friendly.  Post-crisis  financial  reforms  aimed  at 
strengthening  the  resilience  of  the  financial  system  and  its  diversification  to  better 
withstand  shocks  that  hamper  access  to  finance,  as  during  the  financial  crisis.  Rules, 
however, can create unintended interactions that may impede the flow of finance to the 
economy.  It  is  therefore  important  to  assess  whether  rules  can  achieve  the  same 
prudential objectives in a way that minimises the impact on access to finance for firms 
and households. 

This section reviews submissions arguing that EU rules may hinder access to finance in 
the  following  areas:  banking  activities  (section  2.1);  SMEs  financing  and  long-term 
investments  (sections  2.2  and  2.3  respectively);  market  liquidity  (section  2.4)  and 
clearing services (section 2.5). 

2.1. 

Banks' ability to finance the wider economy 

Firms  and  households  in  the  EU  remain  highly  dependent  on  banks'  capacity  and 
willingness to finance their investments and activities. While the Commission is working 
with the co-legislators to develop the CMU so as to broaden the sources of finance, it is 
imperative that the bank funding channel functions appropriately.  

Most  respondents  agreed  that  the  post-crisis  reforms  steered  by  the  BCBS  and 
implemented  in  the  EU  through  the  Capital  Requirements  Regulation  (CRR)4  and  the 
Capital Requirements Directive (CRD IV)5 were crucial in restoring the resilience of the 
banking sector. Such resilience is a pre-condition for banks to play their role in financing 
the  economy.  However,  respondents  also  expressed  concerns  about  the  impact  of 
upcoming prudential measures being finalised by the BCBS, and how they may interact 
with existing rules in a way that limits the financing capacity of banks.   

Banks have raised over €800bn of capital since the financial crisis. The 2016 stress test 
of the European Banking Authority (EBA) also showed that Europe's banking system is 

4  Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012.   

5 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the 
activity of credit institutions and the prudential supervision of credit institutions and investment firms, 
amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.   

7 

 
 
 
                                                 
able  to  withstand  severe  shocks.  The  Commission's  focus  is  now  to  implement  the 
remaining  BCBS  reforms  to  address  remaining  risks  in  a  way  that  ensures  that  banks 
maintain the capacity to support the growth of the EU economy.  

Submissions focused on three  major pillars of EU bank legislation:  CRR, CRD IV  and 
the Bank Recovery and Resolution Directive (BRRD)6. The first sub-section takes stock 
of issues raised in the context of prudential measures foreseen in the review of the CRR 
and CRD IV. The second sub-section assesses concerns about the way so-called "Pillar 
2" bank capital requirement rules are applied. The third sub-section reflects on whether 
the  prudential  rules  should  be  adjusted  in  light  of  the  banking  union,  whereas  the  final 
sub-section  considers  concerns  about  a  particular  aspect  of  the  bail-in  regime  under 
BRRD. 

A) Prudential measures 

In  reaction  to  the  financial  crisis,  governments,  central  banks  as  well  as  supervisors 
strengthened  the  international  regulatory  framework  for  banks  through  the  Basel  III 
reform agreed in 2010. In the EU, Basel III was implemented by means of the CRR/CRD 
IV package, which introduced stricter rules on capital requirements for banks and laid the 
ground for implementing the international standards on liquidity and leverage.  

A  large  number  of  responses  to  the  call  for  evidence  concerned  the  CRR/CRD  IV 
package including those that are currently under discussion internationally.  

1.  Leverage  ratio  (LR)  reduces  diversity  in  the  EU  financial  sector.  Respondents 
stated the LR endangers diversity in the EU financial sector by reducing the capacity 
of low-risk business models (e.g. public development banks, mortgage banks, banks 
with mainly sovereign exposures) to compete with higher-risk business models.  

2.  Net Stable Funding Ratio (NSFR) impact on repo markets and market making 
activities.  Respondents  argued  that  short  term  transactions  with  other  financial 
counterparties, such as repo/reverse repo, would suffer from an asymmetric treatment 
under  the  NSFR  Basel  proposal.  Short  term  borrowing  transactions  from  financial 
counterparties  receive  a  0%  Available  Stable  Funding  (ASF)  factor,  whereas  short 
term  lending  transactions  with  financial  counterparties  receive  a  10%  or  15% 
Required  Stable  Funding  (RSF)  factor.  Respondents  argued  that  this  could  be 
detrimental  to  the  repo  market  and  to  market-making  activities  in  the  underlying 

6  Directive  2014/59/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  establishing  a 
framework  for  the  recovery  and  resolution  of  credit  institutions  and  investment  firms  and  amending 
Council  Directive  82/891/EEC,  and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC, 
2007/36/EC,  2011/35/EU,  2012/30/EU  and  2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and 
(EU) No 648/2012, of the European Parliament and of the Council.   

8 

 
 
  
                                                 
repo's collateral (sovereign bonds, corporate bonds, etc.) given that well-functioning 
repo markets are essential for banks' ability to manage liquidity and market-making 
related  inventory,  and  therefore  to  the  market  liquidity  of  this  underlying  repo's 
collateral. 

3.  NSFR impact on derivatives activities. Respondents argued that the NSFR's lack of 
risk  sensitivity  and  treatment  of  margins  would  penalise  derivatives  activities  and 
reduce end-users ability to hedge risks. Respondents contended that this would result 
in  important  stable  funding  requirements  for  EU  banks  on  their  offering  of  risk 
hedging  tools  to  credit  institutions  and  end-users,  including  corporates,  and  hence 
may incentivise them to reduce the offer or shift additional costs to end-users. 

4.  LR impact on clearing services:  Banks acting as clearing members argued that, if 
the LR were not to allow the initial cash margins received from clients to reduce the 
potential  future  exposure  on  the  client  leg  of  the  centrally  cleared  client  derivative 
transaction,  then  this  would  result  in  a  disproportionate  increase  in  capital 
requirements  for  this  low  margin  business.  They  argued  that  this  could  adversely 
affect  the  provision  of  central  clearing  services  to  clients,  which  is  contrary  to  the 
G20 objective of promoting central clearing (see also section 2.5). 

5.  Trade  finance  under  the  NSFR/LR.  Respondents  argued  that  trade  finance  loans 
are less risky than standard corporate loans, but this lower risk is not fully reflected in 
existing or forthcoming requirements. As regards the former, they expressed concern 
that  some  of  the  rules  on  how  banks  have  to  measure  risks  when  using  internal 
ratings-based  (IRB)  approaches  unduly  penalise  trade  finance.  On  the  latter,  they 
voiced  concerns  that  neither  the  LR  nor  the  NSFR  would  recognise  the  particular 
nature  of  trade  finance,  calling  for  specific  adjustments,  such  as  lower  NSFR  RSF 
factor or exempting trade finance from calculation of the LR.  

6.  LR – Liquidity Coverage Ratio (LCR) interaction. Some respondents referred to 
potential adverse interactions between the LR and the LCR. The LR penalises banks 
for  holding  High  Quality  Liquid  Assets  (HQLA),  which  are  required  by  the  LCR. 
While  conceptually  valid,  the  LCR  and  LR  pursue  different  prudential  objectives 
(liquidity  and  capital),  which  credit  institutions  have  to  meet  in  parallel.  The  EBA7 
concluded in its report on the LR that correlations between the LCR and the LR are 
very weak and that many institutions manage to hold significant buffers on top of all 
prudential requirements at the same time.  

7  See  EBA  report  on  LR  of  3  August  2016;  https://www.eba.europa.eu/documents/10180/1360107/EBA-

Op-2016-13+%28Leverage+ratio+report%29.pdf  

9 

 
 
 
 
 
 
 
                                                 
7.  Impact of BCBS work on reducing excessive variability in  risk weighted assets 
(RWA).  Concerns  were  also  raised  on  the  upcoming  calibration  of  the  revisions  at 
the BCBS level to tackle the excessive variability in risk-weighted assets, through the 
use  of floors,  amendments  to  the approaches for  credit and operational  risk  and the 
Fundamental Review of the Trading Book (FRTB). Concerns were raised that these 
measures  would  significantly  increase  capital  requirements,  which  would  be 
reinforced  by  a  similar  complementary  increase  in  TLAC  requirements.  These 
increased  capital  and  bail-in  requirements  could  have  an  unwarranted  effect  on 
funding costs and loan supply by banks. These concerns should be considered against 
the background of the Group of Central Bank Governors  and Heads of Supervision 
(GHOS)  statement  that  the  BCBS  will  focus  on  not  significantly  increasing  overall 
capital requirements. That ambition is shared by the Commission and Member States 
alike, as highlighted by the ECOFIN conclusions of July 2016.  

Some  of  the  concerns  raised  have,  where  appropriate,  fed  into  the  preparation  of  the 
CRR2 package8, which contains targeted measures to reflect the warranted concerns that 
have been raised in the call for evidence.  

Whilst it is true that for banks with overall low risk weights, the LR may indeed become 
the  most  constraining  capital  requirement  measure,  the  LR  is  a  non-risk  sensitive 
measure.  As  stated  by  the  EBA,  the  LR  and  the  risk-based  capital  requirements  should 
function  in  a  complementary  manner,  with  the  LR  defining  a  minimum  backstop  of 
capital to total exposure requirement through the cycle and the capital ratios allocating 
capital on a risk sensitive basis. Exempting certain exposures (based on risk sensitivity) 
from  the  LR  or  reducing  the  calibration  of  the  LR  for  certain  business  models  might 
reduce the effectiveness of the LR as a backstop measure. Nevertheless, there are cases 
where some adjustments are warranted, such as public development banks' lending to the 
public  sector  and  pass-through  promotional  loans.  These  banks  are  subject  to  legal 
constraints  on  their  business  models  and  thus  have  less  discretion  to  manage  their 
balance  sheet  or  income  compared  to  universal  banks  that  can  freely  choose  their 
business  model.  In  those  cases,  the  LR  ratio  as  proposed  by  the  BCBS  may  have  an 
undesirable adverse impact on the access to finance. As a result, in the CRR2 package, 
the Commission proposes to exclude from the LR exposure measure: public development 
loans and pass-through promotional loans provided by public development banks set up 
by a Member State, central or regional government or municipality.  

8 The "CRR2 package" describes the combination of risk reduction measures in the following proposals: 
"Proposal for a Regulation of the European Parliament and the Council amending Regulation (EU) No 
575/2013  and Regulation  (EU) No 648/2012",  "Proposal  for  a Directive  of  the European  Parliament 
and  of  the  Council  amending  Directive  2013/36/EU",  "Proposal  for  a  Directive  of  the  European 
Parliament and of the Council amending Directive 2014/59/EU" and "Proposal for a Regulation of the 
European Parliament and the Council amending Regulation (EU) No 806/2014". 

10 

 
 
                                                 
Second,  as well-functioning  repo markets are important  for both  market-making on the 
underlying  collateral  and  liquidity  management  of  banks,  a  recalibration  of  the  stable 
funding requirements for short-term transactions with financial institutions compared to 
the Basel NSFR treatment has been proposed, subject to a review clause.  

Third,  the  Basel  treatment  of  derivatives  under  the  NSFR,  in  particular  the  20%  RSF 
factor that applies to gross derivatives liabilities and the treatment of variation margins 
received,  has  been  amended  in  the  CRR2  package  proposal  in  order  not  to  hinder  the 
functioning  of  EU  financial  markets  and  the  provision  of  risk  hedging  tools  to  credit 
institutions and end-users.  

Fourth,  as  regards  the  LR,  the  BCBS  agreed  that  initial  margin  cannot  offset  the 
potential  future  exposure  of  derivative  exposures  that  a  bank  centrally  clears  on  a 
client’s  behalf.  The  CRR2  package  proposal  will  allow  the  deduction  of  these  initial 
margins so as not to undermine the provision of central clearing services by institutions 
to clients.    

Finally, as regards trade finance, the EBA recommends a specific treatment in the NSFR, 
as these short-term transactions are less likely to be rolled-over than other types of loan 
to non-financial counterparties. As regards the LR, short term trade finance exposures, 
such as letters of credit, are often subject to higher capital charges under the risk-based 
framework, so the LR would not be constraining compared to the risk-weighted capital 
requirements.  However,  this  is  different  for  export  credits  guaranteed  by  sovereigns  or 
export credit agencies which receive a considerably lower risk weight. In such instances, 
the leverage ratio would be a constraining capital requirement, leading to higher capital 
charges.  Given  these  considerations,  the  Basel  NSFR  has  been  slightly amended  in  the 
CRR2  proposal  to  incorporate  a  specific  treatment  for  trade  finance  activities,  whilst 
export credits guaranteed by sovereigns or export credit agencies will be excluded from 
the proposed LR. 

B) Pillar 2 requirements 

Bank capital requirements stem from three distinct categories:  

(1) 

(2) 

(3) 

"Minimum"  requirements  applicable  to  all  banks  (so-called  Pillar  1  capital 
requirements);  

Additional capital requirements imposed on individual institutions by supervisors 
for  risks  not  covered  or  not  sufficiently  covered  by  Pillar  1  (so-called  Pillar  2 
capital requirements); and  

The combination of various buffer requirements related to certain risks applicable 
to  all  institutions  or  a  subset  of  institutions  (so-called  combined  buffer 
requirement). 

11 

 
 
Responses to the call for evidence as well as responses to the public consultation on the 
CRR/CRD  IV  and  results  of  the  EBA's  monitoring  of  existing  supervisory  practices 
highlight  that  Pillar  2  capital  requirements  are  an  important  determinant  of  an 
institution’s overall level of capital. Competent authorities adopt different approaches to 
determining and applying Pillar 2 capital requirements, which raise concern both in terms 
of legal certainty for investors and level-playing field.  

Respondents also voiced concerns about the relation between Pillar 1, Pillar 2 and buffer 
capital requirements (so called "stacking order" of capital requirements) and  the impact 
they  may  have  on  the  automatic  restrictions  on  earnings  distribution,  foreseen  when 
buffer capital requirements are breached.9  

Moreover,  it  is  argued  that  the  current  CRD  and  CRR  rules  allow  for  different 
interpretations  of  how  Pillar  2  capital  requirements  may  be  imposed  and  their 
relationship with Pillar 1 and buffer requirements. This may result in different amounts 
of (Pillar 2) capital imposed on individual banks across Member States, which have an 
impact on the Maximum Distributable Amount (MDA) trigger. In addition, banks are not 
obliged to publicly disclose the level of Pillar 2 capital requirements, although they can 
be  invited  by  supervisors  to  do  so.  If  not  disclosed,  investors  including  those  in 
Additional Tier 1 (AT1) instruments cannot predict when the restriction on distributions 
may be triggered (MDA restrictions).  

An  institution  will  typically  hold  more  capital  than  required  to  ensure  that  there  is 
adequate margin to avoid any breach of the combined buffer. If, however, the competent 
authority suspects that an institution may not be able to meet its capital requirements at 
all times, it may provide Pillar 2 'capital guidance' to the institution. Respondents argued 
that the nature of such guidance should be clearer. As 'capital guidance' is not a formal 
requirement, automatic and immediate consequences in terms of restrictions on earnings 
would  not  apply  for  institutions  operating  below  the  guidance  level,  but  still  above  the 
combined  buffer  capital  requirement.  Finally,  respondents  also  argued  that  it  may  be 
appropriate  to  consider  a  more  effective  use  of  the  combined  buffer  requirement  in 
practice. 

In  the  CRR2  package,  the  Commission  proposes  to  disclose  additional  Pillar  2  capital 
requirements  imposed  by  supervisors  and  clarifies  some  aspects  of  Pillar  2  capital 
requirements, including the "stacking order", by: 

(i)  distinguishing  more  clearly  between  Pillar  1  (applicable  to  all  banks)  and  Pillar  2 
(bank specific) capital requirements;  

9   According to the CRD, an institution is subject to automatic restrictions on earnings distribution when 
its total capital falls below the sum of Pillar 1 capital requirements, Pillar 2 capital requirements and 
the combined buffer capital requirements.  

12 

 
 
                                                 
(ii) clarifying the difference between Pillar 2 capital requirements (to be met by the bank 
at all times and subject to public disclosure) and Pillar 2 capital guidance (which implies 
an  expectation  that  the  institution  has  additional  capital  beyond  mandatory  capital 
requirements); 

(iii) clarifying that the MDA shall be calculated by taking into account Pillar 1, Pillar 2 
and buffer capital requirements (but not the Pillar 2 capital guidance) and that the AT1 
instruments should be given priority if, as a result of the MDA calculation, distributions 
have to be limited.  

C) Adjusting prudential rules in light of the Banking Union 

Respondents  argued  that  the  level  of  application  of  prudential  requirements  and  the 
exercise of supervisory options should  be adapted in  light  of the Banking Union.  Bank 
prudential  requirements  apply  at  both  consolidated  (group)  level  and  at  the  level  of 
individual subsidiaries. However, they can be waived in certain instances. For example, 
the  application  of  capital  requirements  to  a  subsidiary  can  be  waived,  if  located  in  the 
same  Member  State  as  the  parent  institution.  Moreover,  since  January  2015,  the 
application  of  liquidity  requirements  at  individual  level  can  be  waived  for  institutions 
authorised in several Member States under certain conditions.  

Some  respondents  argue  that  the  conditions  governing  these  waivers  are  too  strict  and 
fragment  capital  and  liquidity  in  the  single  market.  Some  claim  that  the  possibility  to 
establish  cross-border  liquidity  sub-groups  and  waive  individual  liquidity  requirements 
so far has been of limited practical effect. They therefore argue that the waivers, as well 
as the exercise of supervisory options, should be adapted in light of the Banking Union, 
so that the euro-area is considered as one jurisdiction.  

The financial crisis has led many banks to reduce cross-border activities and refocus on 
home markets and core activities. In some instances, this fragmentation may have been 
amplified by national supervisors' attempt to ring-fencing capital, liquidity and funding 
to  protect  national  depositors  and  ensure  continuity  of  national  activity.  However,  the 
establishment of the Banking Union might warrant a review of the conditions governing 
the waiver of the application of prudential requirements at an individual level for entities 
that  are  supervised  at  a  consolidated  level  across  the  banking  union.  In  fact,  those 
entities are also subject to the Single Resolution Mechanism (SRM), which provides for a 
common  system  and  centralised  decision-making  for  resolving  banks  and  paying  for 
resolution.  There  is  accordingly  a  degree  of  pooled  resources  for  managing  the  fiscal 
consequences of bank failures, as well as harmonised rules and supervision. In light of 
progress made on the Banking Union, the Commission is proposing in the CRR2 package 
measures that have the potential to foster the integration of cross border banking in the 
Banking Union area, subject to appropriate safeguards. This could potentially improve 
the  ability  of  cross-border  banks  to  manage  capital  and  liquidity  within  the  group, 
reduce fragmentation and enhance banks’ capacity to finance the economy. 

13 

 
 
D) BRRD bail-in recognition language (Art. 55) 

Respondents have raised practical concerns with Article 55 of the Directive 2014/59/EU 
establishing a  framework for the recovery  and resolution (BRRD).  The BRRD requires 
banks to include a clause in their contracts with third country counterparties governed by 
the  law  of  a  third  country,  by  which  the  creditor  recognises  the  bail-in  power  of  EU-
resolution authorities. This obligation is particularly relevant for branches of EU banks in 
third countries, as their business is usually governed by contracts under local law.  

Respondents  argued  that  banks  encounter  two  types  of  difficulties  when  seeking  to 
comply with Article 55 BRRD. First, certain non-EU counterparties refuse to include a 
contractual  clause  recognising  an  EU  bail-in  power,  applying  their  own  or  standard 
internationally agreed contractual terms in their banking contracts, e.g. liabilities to non-
EU  financial  market  infrastructures,  trade  finance  liabilities  (letters  of  credit,  bank 
guarantees  and  performance  bonds).  As  banks  often  lack  the  means  to  force  their 
counterparties to accept these clauses, the only way to comply with Article 55 would be 
not to enter into a contract at all. Second, even if non-EU counterparties are prepared to 
accept such clauses in their contracts with EU-banks, in some cases the local supervisor 
may  not  allow  it.  Another  related  issue  is  the  wide  scope  of  Article  55  applying  to  all 
liabilities but those excluded from bail-in and eligible deposits. The consequence is that, 
in  some  cases,  it would practically prevent  banks from operating in  third countries.  In 
order  to  comply,  banks  would  either  have  to  adopt  costly  structural  measures,  such  as 
converting their  branches in  third countries into subsidiaries, or  completely  discontinue 
certain business activities. 

To achieve a credible resolution regime, there must be reassurance that global institutions 
can be resolved in an orderly manner without causing disruptions to the financial system 
and  to  the  economy  in  general.  This  is  only  possible  if  institutions  hold  sufficient 
liabilities that can actually be bailed-in in resolution. In this spirit, the EU agreed initially 
on  a  broadly  worded  provision  (Article  55  of  BRRD),  whereby  any  liability,  which  is 
subject to the law of a third country would not escape the normal loss absorption cascade 
in resolution, and therefore, would not be treated more favourably than other liabilities of 
the same type only for the reason that they are not subject to EU law. Yet, this should not 
be seen as a one-size-fits-all approach. A series of instruments, including trade finance, 
are of the utmost importance for international trade, in particular, for small and medium 
sized  EU  companies.  In  this  regard,  Article  55  should  not  worsen  access  of  European 
manufacturers and  service providers  to  trade finance  instruments, which would weaken 
their competitiveness in international markets with potential adverse economic effects in 
the EU.  

In  order  to  quantify  the  possible  issues,  the  Commission  services  gathered  further 
evidence and carried out an analysis. The conclusions are that the issue on subordinated 
and senior  debt  governed by non EU law is  generally sizable for  parts of  the industry, 
but there are large divergences across individual firms. For contingent liabilities arising 

14 

 
 
from  e.g.  trade  finance  products  (e.g.  letters  of  credit),  liabilities  vis-a-vis  Financial 
Market  Infrastructures/Central  Counterparties  (FMIs/Central  counterparty  clearing 
houses "CCPs") and derivatives contracts, it may be that the costs outweigh the benefits 
of imposing this contractual recognition. 

The  Commission  therefore  proposes  to  amend  Article  55  of  the  BRRD  to  ensure  that 
resolution  authorities  can  apply  the  requirement  for  contractual  recognition  of  bail-in 
provisions for  non-EU  creditors in a pragmatic manner. The authority can exclude the 
obligation  by  means  of  a  waiver,  if  it  determines  that  this  would  not  impede  the 
resolvability  of  the  bank  and  that  it  is  legally,  contractually  or  economically 
impracticable for banks to include the bail-in recognition clause for certain liabilities. In 
these cases, those liabilities should not count as MREL and should rank senior to MREL 
to minimize the risk of breaching the No-Creditor-Worse-Off (NCWO) principle. 

2.2. 

SME financing 

Small and Medium-sized Enterprises (SMEs) are the backbone of the EU economy and 
the main source of employment and growth. They largely rely on bank credit to finance 
their activities (in particular, short-term credit lines and leasing). To date, other sources 
of financing, such as equity and debt capital markets, are not widely available but mainly 
limited to large companies and/or companies in countries with larger capital markets.  

A) Bank lending 

As  regards  bank  lending  to  SMEs,  respondents  advocated  continuation  of  the  current 
supporting  factor  (SF)  for  loans  to  SMEs  and  extension  of  capital  relief  to  banks’ 
investments in bonds and equities issued by SMEs. The European Parliament also called 
on  the  Commission  to  examine  the  possibility  of  recalibrating  the  supporting  factor, 
including size and threshold, and to examine possible interactions with other regulatory 
requirements, in a Resolution on Access to finance for SMEs which was adopted on 15 
September 2016.10 

Under the Basel rules, SME loans are subject to lower capital requirements than loans to 
large enterprises, either because they can be classified as retail exposures or due to their 
reduced  size  when  they  are  allocated  to  corporate  exposure.  When  classified  as  retail 
exposures, SME loans attract a flat risk-weight of 75% under the Standardized Approach 
(SA)  and  a  reduced  correlation  coefficient  under  the  Internal  Ratings  Based  (IRB) 
Approach.  When  classified  as  corporate  exposures  under  the  IRB  Approach,  SME 
exposures nevertheless receive a lower capital requirement on the basis of a factor which 
depends on their size.  

10  Resolution  on  Access  to  finance  for  SMEs  and  increasing  the  diversity  of  SME  funding  in  a  Capital 

Markets Union, (2016/2032(INI)). 

15 

 
 
                                                 
Moreover,  in  order  to  avoid  abruption  of  bank  lending  to  SMEs  in  light  of  the  overall 
increase in the minimum required capital requirements for banks the CRR introduced a 
SF  on  these  Basel  rules  resulting  in  a  capital  reduction  of  24%  for  SME  loans  below 
EUR 1.5 million.  

Currently,  bank  loans  below  EUR  1,5  million  to  SMEs  receive  a  reduction  in  capital 
requirements  compared  to  loans  to  larger  enterprises.  In  the  CRR2  package,  the 
Commission  is  proposing  to  extend  the  ‘SME  supporting  factor’  to  all  SME  loans, 
including  those  larger  than  EUR  1,5  million  on  the  basis  of  evidence  obtained  on  the 
actual  riskiness  of  SME  loans  over  the  whole  economic  cycle,  while  ensuring  that 
minimum capital requirements remain consistent with the riskiness of SME loans. 

B) Market financing 

Respondents broadly supported the reforms to capital market regulation. They however 
expressed  concerns  about  how  the  market  abuse,  prospectus  and  securities  market 
legislation affects market financing of SMEs.  

Market  abuse  regime  and  SME  growth  markets. Some  respondents  argued  that  the 
market abuse regime places a high burden on issuers in SME growth markets, which may 
ultimately result in less activity and thus reduced financing for SMEs. Particular concerns 
relate to the widening of scope of issuers' duties under the Market Abuse Directive and 
Market Abuse Regulation (MAD/R)11 regime to companies listed on Multilateral Trading 
Facilities (MTFs), such as providing insider lists and notifying managers' transactions. 

Several  elements  should  be  taken  into  consideration  when  assessing  stakeholders' 
concerns: (i) under certain conditions, SME growth market issuers are already exempted 
from certain requirements, like the special regime for drawing up an insider list, and (ii) 
as per experience of the competent supervisory authorities across the EU, the majority of 
cases  of  market  abuse  involve  issuers  of  a  smaller  size.  The  Commission  services 
therefore  consider  that  the  alleviated  burden  for  SME  growth  market  issuers  has  been 
carefully  set  to  strike  the  balance  between  encouraging  SMEs  to  join  these  trading 
venues  and  protecting  investors.  The  Commission  services  will  closely  monitor  market 
developments to ensure that the balance holds in practice once the SME growth markets 
are operational. 

11  Directive  2014/57/EU  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on  criminal 
sanctions  for  market  abuse  (market  abuse  directive)  and  Regulation  (EU)  No  596/2014  of  the 
European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) 
and  repealing  Directive  2003/6/EC  of  the  European  Parliament  and  of  the  Council  and  Commission 
Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.   

16 

 
 
                                                 
Prospectus Directive12. Stakeholders argued that the prospectus requirements for issuers 
are  too  burdensome  and  raise  the  cost  of  access  to  capital  markets,  in  particular  for 
smaller companies.  

In  November  2015,  the  Commission  issued  a  proposal  to  revamp  the  Prospectus 
Directive, which is under negotiation. 

MiFID inducement rules and investment research in SMEs. 

Trade  execution  services  and  investment  research  are  frequently  sold  as  a  bundle  to 
portfolio managers, whereby the research is generally offered as a secondary feature to 
make  the  offering  of  the  trade  execution  service  more  attractive.  In  the  Commission 
Delegated  Directive  research  can  be  paid  for  in  one  of  two  ways:  (1)  out  of  manager's 
own resources  or  (2) from a research payment account,  separately  and unbundled from 
commissions  for  the  trade  execution  service.  Other  operational  arrangements  for  the 
collection  of  the  client  research  charge,  whereby  payment  for  research  is  collected 
alongside  a  transaction  commission,  will  be  allowed  if  the  arrangements  comply  with 
specific conditions. Some respondents argued that these rules will impede the provision 
of research, especially in the area of SMEs. Furthermore, it was claimed that the price of 
SME research would increase, as it would have to be budgeted independently.  

As part of  the  broader work on SME financing and listing, the Commission will  assess 
the  implementation  of  the  rules  under  the  Markets  in  Financial  Instruments  Directive 
(MiFID  II)  on  investment  research  in  relation  to  SMEs.  While  the  changes  overall  are 
expected  to  reduce  conflicts  of  interest  and  improve  the  functioning  of  the  market,  the 
effect of the rules on the provision of SME research needs to be monitored closely. 

C) Prudential treatment of leases 

Some  stakeholders  raised  concerns  on  the  new  International  Financial  Reporting 
Standards 16 (IFRS)13 on lease accounting issued by the IASB in January 2016, which is 
currently  in  the  endorsement  process  in  the  EU.  The  standard  introduces  a  new  asset 
category,  i.e.  the  right  to  use  a  leased  asset.  It  does  not  however  explicitly  specify 
whether such rights are tangible or intangible assets in the financial statements. This lack 
of clarity is viewed as problematic by some respondents because prudential rules require 
different  levels  of  capital  for  different  asset  categories,  with  intangible  assets  to  be 

12 COM(2015) 583 final.  

13  Commission  Regulation  (EU)  2015/2113  of  23  November  2015  amending  Regulation  (EC)  No 
1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 
1606/2002  of  the  European  Parliament  and  of  the  Council  as  regards  International  Accounting 
Standards 16 and 41 

17 

 
 
                                                 
deducted  fully  from  the  highest  quality  of  regulatory  capital  with  a  potentially  high 
adverse impact on capital ratios. 

The Commission services will invite the EBA to follow this issue, taking into account the 
views of the Basel Committee. 

2.3. 

Long-term investment 

Many  respondents  argued  that  regulation  may  reduce  financial  institutions'  ability  to 
finance long-term investments, in particular infrastructure investments. Most respondents 
focused on insurance legislation (Solvency II)14 and bank legislation (CRR/D). However, 
respondents  also  highlighted  legislation  governing  certain  funds  (Regulation  on 
European  Long  term  Investment  Funds,  ELTIFs)15,  accounting  rules  and  taxation  as 
factors deterring more long-term investments.  

A) Solvency II impact on long-term investment  

Respondents expressed two concerns on how Solvency II may limit insurance companies' 
ability to finance long-term investments: volatility of valuation and high capital charges. 
As regards volatility, respondents argued that the market-based valuation of the one-year 
risk  measure  framework  for  assets  and  liabilities  can  create  significant  balance-sheet 
volatility,  when  the  asset/liability  management  is  not  fully  reflected  in  the  valuation 
approach.  This  volatility  increases  during  periods  of  market  stress,  especially  for  long-
term debt, because capital requirements increase with duration. Insurers will have to hold 
capital  buffers  to  cope  with  both  balance  sheet  volatility  and  solvency  capital 
requirements.  Respondents  argued  that  this  can  incentivise  insurers  to  exhibit  pro-
cyclical behaviour by too quickly disposing of these long-term assets in a bearish market 
environment. While the respondents acknowledged that the co-legislators have agreed on 
the  long-term  guarantees  measures  package  that  partly  mitigates  volatility,  they  argued 
for  relaxing  the  conditions  for  its  application.  For  example,  the  conditions  for  this 
matching  adjustment  might  be  too  limiting  and  they  only  partially  mitigate  market 
movements (by not mitigating default spreads).   

Furthermore,  respondents  argued  that  capital  charges  on  specific  assets  are  above  the 
actual risks that these assets create for insurers. Respondents argued that their long-term 

14  Directive  2009/138/EC  of  the  European  Parliament  and  of  the  Council  of  25  November  2009  on  the 

taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).   

15 Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European 

long-term investment funds 

18 

 
 
 
                                                 
investment  perspective  should  be  better  reflected  in  the  methodology  for  calibrating 
capital  requirements.  The  issue  is  particularly  important  for  illiquid  assets  such  as 
infrastructure, private placements and SME loans, which have no market price. Finally, 
respondents  also  called  for  a  review  of  risk  calibrations  for  other  asset  classes 
(Commercial  mortgage-backed  securities  "CMBS",  real  estate,  strategic  equity 
participations, private equity, securitisation, etc.). 

In  the  Solvency  II  framework,  the  long-term  guarantees  package  provides  for  a  set  of 
measures  that  mitigate  artificial  balance  sheet  volatility.  The  conditions  for  the 
application  of  these  measures  are  designed  to  preserve  an  adequate  level  of  risk-
sensitivity. The legislators have scheduled a review of the long-term guarantees package, 
and the European Insurance and Occupational Pensions Authority (EIOPA) is tasked to 
deliver  annual  reports  on  the  impact  of  the  framework.  The  Commission  services  will 
carefully follow any indications on excessive volatility and pro-cyclical behaviour, with a 
view to alleviate these issues where appropriate. 

The Commission will also assess the prudential treatment of private equity and privately 
placed  debt  in  Solvency  II  to  evaluate  if  this  constitutes  an  impediment  to  investments. 
Action as regards the calibration of simple, transparent and standardised securitisation 
will  depend  on  the  timing  of  co-legislators'  agreement  on  a  framework  for  simple, 
transparent and standardised securitisation.  

B) Infrastructure investments 

Encouraging  investments  in  infrastructure,  in  particular  from  insurance  companies  and 
banks, is part of the Investment Plan for Europe's to stimulate investments and growth in 
the  European  Union.  A  targeted,  risk-sensitive  treatment  of  long-term  infrastructure 
investments  subject  to  prudential  criteria  under  Solvency  II  and  CRR  can  play  an 
important role. 

As part of the CMU Action Plan launched on 30 September 2015, and based on expert 
advice from EIOPA, the Commission lowered risk charges for 'qualifying infrastructure 
projects'. The risk calibration for investment in unlisted equity shares of such projects has 
been reduced from 49% to 30%. Risk charges for investments in infrastructure debt were 
also reduced by up to 40%, depending on the credit worthiness. Whereas these changes 
were  welcomed,  some  stakeholders  nevertheless  called  for  an  extension  of  this  new 
measure to infrastructure corporates. 

As regards the banking sector, some stakeholders raised concerns about the more severe 
prudential  treatment  of  specialised  lending  envisaged  by  the  Basel  Committee  in  its 
consultation  paper  of  December  2015  on  the  revision  of  the  standardised  approach. 
According  to  these  submissions,  the  consultation  paper  wrongly  assumes  that,  when 
compared  to  corporate  lending,  specialised  lending  is  a  riskier  activity.  Respondents 
argued  that  historical  data  and  recovery  rates  show  that  this  is  not  the  case.  These 
stakeholders  asked  for  the  introduction  in  the  standardised  approach  of  a  more  risk-

19 

 
 
sensitive treatment compared to the current one (specialised lending exposures are treated 
as corporate loans). 

As regards insurance, assessment is under way on how to revise the capital charges for 
infrastructure  corporates.  The  Commission  services  are  currently  assessing  EIOPA's 
advice, delivered in June 2016, with a view to adopting a further amendment to Solvency 
II in 2017 to reduce capital charges for investments in infrastructure corporates. 

Similarly,  in  the  CRR2  package,  the  Commission  proposes  to  lower  credit  risk  capital 
requirements for banks' investments in infrastructure which fulfil a set of criteria able to 
reduce significantly their risk profile. Capital requirements for credit risk on exposures 
to entities that operate or finance physical assets that provide or support essential public 
services  would  be  multiplied  by  the  factor  0.75  provided  they  comply  with  the  criteria 
mentioned above. 

C) Accounting rules 

Stakeholders  highlighted  the  importance  of  the  accounting  framework  in  determining 
incentives  for  long-term  investment.  Specific  concerns  were  raised  about  the  IFRS 
dealing with the treatment of financial assets (IFRS 9 "financial assets"). This standard is 
still  to  be  implemented  at  EU  level.  As  regards  the  impact  on  long-term  investment,  a 
few stakeholders criticised the ban on the recognition of capital gains and losses in the 
profit and loss account on the disposal of equity investments. They argued that financial 
statements  will  not  depict  the  resulting  performance  properly,  affecting  investments  in 
equity. Several respondents addressed the impact of fair value accounting, arguing that it 
has a potential to exacerbate the effects of economic cycles and increases pro-cyclicality. 

Respondents  from  the  insurance  industry  also  argued  that  it  is  essential  that  IFRS 
appropriately reflect the activities of insurers in their financial statements, including the 
provision  of long-term  guarantees and long-term investment.  In  this regard, they raised 
particular concerns about the interaction between IFRS 9 "financial assets" and the future 
insurance  contract  standards  (IFRS  17).  The  latter  is  being  finalised  (expected  early 
2017, with application date in 2020 or 2021) by the International Accounting Standards 
Board (IASB) and will have to go through the EU endorsement process before becoming 
EU  law.  Insurance  representatives  argue  that  there  is  a  need  for  an  option  to  defer  the 
implementation of IFRS 9, so it can be implemented at the same time as the future IFRS 
17. Also, IFRS 17 needs to be finalised in a way that works appropriately with IFRS 9 to 
avoid adverse effects on insurers' long-term activities.  

As  regards  the  impact  of  IFRS  9  on  long-term  investment,  the  Commission  services' 
analysis in the context of the endorsement process of this standard found that significant 
changes  in  the  investment  strategy  of  insurers  are  not  expected  as  a  result  of  this 
accounting change. However, the Commission services will closely monitor its impact in 
this area to ensure there are no adverse unintended effects on long-term investments. In 
the area of banking, see section 5.1.C. 

20 

 
 
As regards the interaction between IFRS9 and the future insurance contracts standard, a 
solution  to  the  misalignment  of  the  application  dates  of  IFRS  9  and  the  upcoming 
insurance  standard  has  recently  been  finalised  by  the  IASB.  The  Commission  services 
are currently considering whether the IASB solution is satisfactory for Europe. 

D)  European  venture  capital 
entrepreneurship funds (EuSEF) Regulations17 

funds 

(EuVECA)16  and  European 

social 

The  analysis  of  the  responses  suggests  that  there  is  widespread  support  for  broadening 
the range of managers permitted to manage and market funds using the "EuVECA" and 
"EuSEF" labels by including managers authorised under the Alternative Investment Fund 
Managers Directive (AIFMD)18.  

Stakeholders  also  expressed  mixed  views  over  reducing  the  minimum  investment 
required  to  invest  in  EuVECA  and  EuSEF  funds  by  non-professional  investors 
(€100,000).  Some  respondents  were  in  favour  of  reducing  it,  thereby  broadening  the 
range  of  potential  investors  in  order  to  increase  choice  for  non-professional  investors. 
Other respondents considered the risk profile, contractual obligations and illiquid nature 
of  investing  in  venture  capital  and  social  enterprises  to  not  necessarily  be  suitable  for 
retail investors with less capital. Others noted that additional tailored investor protection 
rules would be necessary to support this group of investors, the cost of which would not 
offset potential increases in the investor base.  

Moreover,  the  majority  of  responses  supported  an  expansion  of  the  range  of  assets 
eligible  for  investment  by  EuVECA  funds,  arguing  that  the  definition  of  qualifying 
portfolio undertakings is too restrictive. Finally, responses also suggested increasing the 
limit on employee numbers and removing the turnover and balance sheet limits. 

On 14 July the Commission adopted a proposal to revise existing rules on EuVECA and 
EuSEF  funds19.  The  proposal  would  open  up  the  market  for  these  funds  to  AIFMD-
authorised managers, so that they can offer a full range of products to clients from their 
home and other Member States, which in turn would increase the overall penetration of 

16  Regulation  (EU)  No  345/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 

European venture capital funds.   

17  Regulation  (EU)  No  346/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 

European social entrepreneurship funds.   

18  Directive  2011/61/EU  of  the  European  Parliament  and  of  the  Council  of  8  June  2011  on  Alternative 
Investment  Fund  Managers  and  amending  Directives  2003/41/EC  and  2009/65/EC  and  Regulations 
(EC) No 1060/2009 and (EU) No 1095/2010. 

19 COM(2016) 461 final, 14.7.2016. 

21 

 
 
                                                 
such  funds. The proposal  would maintain the entry ticket of  €100,000 for the minimum 
investment  in  EuVECA  and  EuSEF  funds.  It  would  permit  EuVECA  investments  in 
undertakings with up to 499 employees (small mid-caps) and in small and medium-sized 
enterprises  listed  on  a  SME  growth  market  as  defined  in  Markets  in  Financial 
Instruments Directive (MiFID II)20. It would also permit follow-on investments in a given 
undertaking that, after the first investment, does not meet the definition of the qualifying 
portfolio  undertaking  any  more.  Moreover,  the  proposal  would  decrease  costs  by 
explicitly  prohibiting  fees  imposed  by  competent  authorities  of  host  Member  States, 
simplifying  registration  processes  and  determining  the  minimum  capital  to  become 
manager. 

E) Tax barriers to cross-border investment 

Stakeholders  highlighted  burdensome  withholding  tax  procedures  as  a  major  barrier  to 
cross-border  investment.  Double  taxation  agreements  concluded  between  states  should 
normally  allow  investors  directly  or  indirectly  investing  (among  others)  through 
investment  funds  to  avoid  double  taxation,  either  by  getting  relief  at  source  or  by 
benefiting from full or partial refund. However, relief or recovery of withholding tax is, 
in practice, difficult notably because of the complexity of the procedures, which are also 
costly and require time to reclaim funds. The non-standardised nature of withholding tax 
procedures  may  also  require  the  need  to  hire  local  entities  to  reclaim  the  funds. 
Investment  and  pension  funds  claimed  to  be  particularly  impacted  by  complex 
withholding tax procedures. 

In line with the CMU Action Plan, the Commission services started an exchange of best 
practices  among  Member  States  to  make  withholding  tax  procedures  more  efficient. 
Work is ongoing with Member States towards agreeing on a code of conduct in 2017 to 
encourage  relief  at  source  when  possible  and  make  procedures  to  reclaim  withholding 
tax more efficient. 

2.4. 

Market liquidity and trading 

Some  industry  responses  argued  that  specific  pieces  of  legislation  and  their  cumulative 
impact have had a detrimental impact on market liquidity, particularly in corporate bond 
and repo markets. However, other respondents question whether regulation was the main 
driver,  arguing  that  other  factors  play  a  greater  role  and  that  the  rules  are  overall 
beneficial for stability and growth. All agree on the need to gather more data and deepen 
the understanding of recent liquidity dynamics.  

20  Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15 May  2014  on  markets  in 

financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. 

22 

 
 
                                                 
Market participants warned that regulation reduces banks' willingness and ability to act 
as  market  makers  and  to  transact  in  repo  markets,  pointing  to  the  impact  of  specific 
(existing  and  upcoming)  rules  and  the  cumulative  effect  of  banking  and  capital  market 
regulation. 

A) Impact of banking rules 

As regards the impact of existing banking rules, stakeholders claimed that higher capital 
requirements  under  the  CRR/CRDIV  have  made  it  more  capital-intensive  for  banks  to 
hold inventory of certain securities and trading assets and that the liquidity coverage ratio 
(LCR) increases banks' demand for high quality liquid assets (HQLA).   

However, the main concerns related to upcoming banking rules, where work is ongoing 
at international level at the BCBS. Some of these overlap with the concerns presented in 
section  2.1  to  banks'  ability  to  finance  the  economy  (e.g.  impact  of  the  NSFR). 
Nevertheless, two specific concerns regarding the impact on market liquidity in particular 
were also expressed. 

Leverage  Ratio  (LR).  Respondents  argue  that  the  LR  is  constraining  broker  dealers’ 
balance  sheets  particularly  with  respect  to  low  margin  business,  such  as  repos,  and 
incentivises  market-makers  to  hold  fewer  inventories  on  their  balance  sheets.  A 
preliminary  investigation  by  the  European  Systemic  Risk  Board  (ESRB)21  into  the 
potential impact of a LR requirement on market liquidity, found that aside from any costs 
due  to  the  potential  adjustment  actions,  the  LR  is  also  expected  to  support  market 
liquidity, particularly during periods of stress because it makes firms better able to absorb 
shocks. The ESRB also investigated the impact of the LR on inventories, trading assets 
and repo activity from the date of the BCBS announcement in 2010 until end-2014. The 
findings  suggest  that  banks  that  needed  to  improve  their  leverage  ratios  to  meet  a  3% 
requirement  or  market  expectation  have  been  doing  so  in  part  by  reducing  the  size  of 
their balance sheets. However, neither trading assets nor repos have significantly fallen 
as a share of these banks’ total assets since 2010. Furthermore, the preliminary statistical 
analysis investigating the relationship between dealers’ inventories and their LR showed 
very little evidence of a significant relationship between the two since the start of the data 
series in 2014. 

Fundamental  Review  of  the  Trading  Book  (FRTB).  Under  the  revised  BCBS 
framework, capital will be calculated for trading activities at a desk level. The framework 
will also include liquidity horizons for trading risks, requiring more capital for less liquid 
products.  Some  stakeholders  expressed  the  concern  that  the  rules  might  significantly 

21 See EBA report on LR, Annex 3 - ESRB preliminary investigation into the potential impact of a leverage 

ratio requirement on market liquidity, August 2016  

23 

 
 
                                                 
increase the total risk-based capital requirements. Illiquid markets (e.g. corporate bonds) 
are likely to be impacted more than liquid ones.  

In the CRR2 package the Commission proposes adjustment to the BCBS proposal on the 
leverage ratio (see section 2.1.A) and the FRTB. As regards the latter, the FRTB will be 
phased-in  so  as  to  avoid  potential  disruptions  of  certain  banking  services,  such  as 
market-making,  due  to  a  steep  and  sudden  increase  in  the  overall  market  risk  capital 
requirements of EU banks.  

B) Impact of capital market regulation 

Short-Selling  Regulation  (SSR)22.  Stakeholders argue  that  the  scope  of  the  exemption 
for market-making activities for uncovered short sales of shares, sovereign debt securities 
and  sovereign  CDS  is  too  narrow.  Because  of  the  way  market-making  activities  are 
defined in the SSR, the exemption can be read as only granted in relation to a financial 
instrument that is traded on an EU trading venue where the market maker is a member. 
This  would  mean  that  market-making  activities  on  instruments  that  are  not  admitted  to 
trading  or  traded  on  any  trading  venue  cannot  qualify  for  the  exemption  since  the 
membership requirement cannot be met. Stakeholders disagree with this interpretation of 
the  notion  of  "market-making  activities"  and  consider  the  membership  requirement  as 
being excessively restrictive. 

MiFID II and Markets in Financial Instruments Regulation23, MiFID/R (application 
from 3/1/2018). Market operators and investment firms express concerns that the scope 
of the pre-trade transparency regime makes it harder to hedge the risk of the position and 
allows other traders to benefit by taking counter positions in the interdealer market. To 
compensate  for  the  risk  of  adverse  price  movements,  the  spread  may  rise  (or  in  some 
extreme cases dealers may not quote at all). 

Central  Securities  Depositories  Regulation,  CSDR24  (applicable  2  years  after  the 
entry  into  force  of  the  relevant  technical  standards).  The  CSDR  aims  to  reduce  the 
number  of  settlement  fails  through  a  range  of  measures  including  –  as  a  last  resort  –  a 
mandatory buy-in (i.e. an obligatory execution of the initial trade within a certain number 
of days from the date of the trade) and cash penalties on the party that fails to deliver the 

22 Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short 

selling and certain aspects of credit default swaps. 

23  Regulation  (EU)  No  600/2014  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  on 

markets in financial instruments and amending Regulation (EU) No 648/2012. 

24  Regulation  (EU)  No  909/2014  of  the  European  Parliament  and  of  the  Council  of  23  July  2014  on 
improving  securities  settlement  in  the  European  Union  and  on  central  securities  depositories  and 
amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012. 

24 

 
 
                                                 
securities ('settlement discipline' measures). Together, these measures should discourage 
settlement fails, leading to a more efficient and reliable settlement. Nevertheless, several 
issues were raised:  

  First,  dealers  claim  that  the  introduction  of  the  mandatory  buy-in  regime  may 

have a negative impact on market liquidity.  

  Second,  respondents  argued  for  flexibility  in  the  application  of  buy-ins,  in 
particular  with  respect  to  less  liquid  assets  and  assets  traded  on  SME-growth 
markets.  

  Third,  it  was  argued  that  the  buy-in  should  be  undertaken  at  the  trading  level 

rather than at the CSD level.  

  Finally,  stakeholders  argued  for  sufficient  time  to  prepare  for  the  application  of 

the rules on settlement discipline. 

Concerns  about  the  level  of  liquidity  are  important,  but  there  is  a  need  to  understand 
better  the  specific  impact  of  regulation  on  the  market  and,  importantly,  to  identify  any 
unintended effects. Under the CMU Action Plan, the Commission services are reviewing 
the  functioning  of  the  corporate  bond  markets  in  the  EU.  To  feed  into  this  process,  a 
study has been launched on the drivers of corporate bond market liquidity and an expert 
group of  market experts has been  established. Further analysis of  repo markets  is also 
warranted,  given  their  central  importance  for  market  liquidity  and  banks'  liquidity 
management. Alongside the comprehensive review of corporate bond markets as part of 
the  CMU  Action  Plan,  the  Commission  services  will  also  assess  the  functioning  of 
markets in repurchase agreements. 

With  regards  to  the  exemption  for  market-making  activities,  the  Commission  services 
plan to evaluate the definition of the market making activity in the SSR. 

Measures supportive of market liquidity have already been introduced in the other areas:  

-  The  revised  MiFIR  RTS  2  introduced  a  more  cautious  pre-trade  transparency  regime 
via a phase-in regime for non-equity instruments. This ensures that only the most liquid 
instruments  are  covered  by  the  scope  of  the  pre-trade  transparency  requirements. 
Specific concerns  on the pre-trade transparency requirements for package transactions 
have  also  been  addressed  via  an  amendment  of  MiFIR  (as  part  of  the  amendment 
relating to the extension of the application date).   

- The majority of the concerns raised on CSDR settlement discipline requirements have 
been taken into account. The CSDR delegated act on cash penalties and the draft RTS on 
settlement discipline are carefully calibrated by introducing more proportionate rules for 
less liquid instruments as well as instruments traded on SME growth markets (e.g. lower 
penalties for settlement fails and longer periods before buy-ins are launched). Moreover, 
European Securities and Markets Authority's (ESMA) draft RTS provides for the  buy-in 
taking place at the trading level as unanimously requested by industry. Finally, ESMA's 
draft  RTS  proposal  and  the  Commission's  delegated  act  on  the  parameters  for  the 

25 

 
 
calculation  of  cash  penalties  include  a  two-year  phase-in  to  provide  industry  with 
sufficient time to adapt. 

2.5. 

Access to clearing 

Many  respondents  voiced  concerns  about  possible  inconsistencies  arising  from  the 
interaction of market infrastructure (European Market Infrastructure Regulation, EMIR)25 
and  predominantly  banking  legislation  (CRR)  but  also  fund  management  legislation. 
There are three inter-related strands to these concerns. 

A) Ability of banks to provide clearing services 

EMIR requires that liquid and standardised OTC derivatives are centrally cleared through 
an  authorised  CCP.  Access  to  CCPs  is  possible  through  a  clearing  member,  which  in 
most  cases  is  a  large  dealer  bank.  Many  respondents  noted  that  small  financial 
counterparties  with  limited  derivatives  activity  often  find  it  difficult  to  access  clearing. 
The respondents also argued that the leverage ratio would be penalising for banks acting 
as clearing members, as their exposures (in the numerator of the ratio) do not take into 
consideration the risk-reducing effect of (segregated) initial margins (see section 2.1). As 
a result, this may disincentive banks to continue acting as a clearing member or providing 
client  clearing  services,  possibly  leading  to  further  concentration  in  CCP  membership, 
higher costs and reduced access to client clearing. Another obstacle noted by respondents 
was the uncertainty as regards segregation and portability options, and their implications 
for both clearing members and their clients. Respondents pointed out certain challenges 
in applying these requirements, which might be difficult to implement in certain Member 
States due to domestic insolvency laws. 

The Commission services will consider these points as part of the forthcoming review of 
EMIR  in  2017,  in  the  framework  of  REFIT,  which  will  be  accompanied  by  an  impact 
assessment which will consider the various issues at stake in more depth. Regarding the 
LR,  the  BCBS  agreed  that  initial  margin  cannot  offset  the  potential  future  exposure  of 
derivative  exposures  that  a  bank  centrally  clears  on  a  client’s  behalf.  In  the  CRR2 
package,  the  Commission  proposes  an  adjusted  LR  to  ensure  clearing  is  not  unduly 
penalised (see also section 2.1.A). 

B) Margin payments 

A  related  problem  is  that  of  access  to  cash  collateral  for  margining  purposes.  EMIR 
requires  the  exchange  of  collateral  for  both  centrally  and  bilaterally  cleared  derivatives 

25 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories. 

26 

 
 
 
                                                 
transactions. CCPs generally require variation margin to be paid in cash. Pension funds 
are currently exempt from clearing under EMIR, based on the assumption that they hold 
little cash and could have difficulties accessing cash collateral in the repo markets in the 
required  volumes.  This  exemption  is  set  to  expire  on  16  August  2017,  but  can  be 
prolonged  for  an  additional  year. Once  the  current  clearing  exemption  expires,  pension 
funds argued that they would be faced with either having to: (i) rely on repo markets for 
collateral  transformation,  which  may  not  provide  a  robust  solution  in  times  of  market 
stress; and/or (ii) increase their cash holdings relative to their non-cash asset holdings.  

As  mentioned in  section 2.1, respondents argued that the proposed new CRR  measures 
(LR, NSFR) would discourage banks from providing repo services at a reasonable cost. 
Moreover,  respondents  argued  that  for  bilaterally  cleared  contracts,  banks  increasingly 
require pension funds to post variation margin in cash, in anticipation of the forthcoming 
LR and NSFR, where non-cash variation margin received is not recognised as reducing 
the exposure. As a result, pension funds argued that they would have to hold significantly 
higher  amounts  of  cash,  which  can  have  a  negative  impact  on  their  returns  and  can 
increase even more the demand for cash on markets.  

The  prudential  measures  proposed  in  the  CRR2  package  stem  from  international 
standards  being  developed  by  the  Basel  Committee.  The  Basel  Committee  has  just 
concluded consultations on possible revisions to the Basel III leverage framework, which 
included  questions  related  to  e.g.  introducing  an  adjusted  version  of  the  standardised 
approach  on  counterparty  credit  risk  (SA-CCR)  to  determine  the  exposure  value  of 
derivatives under the leverage ratio, instead of the current exposure method (CEM). The 
BCBS is not considering allowing non-cash variation margins for the calculations of the 
LR  exposure  and,  as  aconsequence,  for  the  calculation  of  the  NSFR.  Given  the 
importance  of  the  issue,  the  Commission  proposes  to  allow  the  recognition  of  Level  1 
HQLA  received  as  variation  margins  to  reduce  the  derivative  exposure  for  the 
calculation of the NSFR in the adopted CRR2 package. 

Moreover, the Commission services will, in the context of the EMIR Review in 2017 and 
following-on from  the  EMIR Report26, assess the relevant technical standards linked to 
EMIR.  Specifically,  the  Commission  services  will  assess  the  requirements  for  pension 
funds  in  particular  in  view  of  their  difficulties  in  meeting  CCP  cash  collateral 
requirements (see also "proportionality in derivatives markets", section 3.2). Moreover, 
the Commission services will consider  whether or  how corporates and small financials 
should be captured by clearing and margining requirements. 

C) UCITS restrictions focusing on OTC derivatives 

26 Adopted by the Commission on the same date as the call for evidence Communication 

27 

 
 
                                                 
Respondents argued that the application of several restrictions set out in the Directive on 
Undertakings for Collective Investment in Transferable Securities (UCITS)27  to centrally 
cleared  OTC  derivatives  is  at  odds  with  EMIR's  policy  objectives  on  central  clearing. 
They  claim  that  the  statutory  counterparty  exposure  limits  (5%  or  10%)  constrains 
UCITS'  ability  to  invest  in  cleared  OTC  derivatives.  Stakeholders  questioned  whether 
those  diversification  limits  are  still  appropriate,  given  the  EMIR  central  clearing 
obligation. Furthermore, stakeholders claimed that UCITS cannot use the cash proceeds 
from  a  repo  transaction  to  post  margins  for  cleared  OTC  derivatives  transactions.  This 
restriction  derives  from  ESMA's  Guidelines  on  ETFs  and  other  UCITS  issues  which 
prohibit any reuse of cash by the UCITS fund.  

The  Commission  services  have  requested  ESMA  to  analyse  the  evidence  submitted  on 
UCITS restrictions as regards the use of OTC derivatives. Any potential follow-up will be 
part of the UCITS review. 

27  Directive  2014/91/EU  of  the  European  Parliament  and  of  the  Council  of  23  July  2014  amending 
Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating 
to  undertakings  for  collective  investment  in  transferable  securities  (UCITS)  as  regards  depositary 
functions, remuneration policies and sanctions. 

28 

 
 
 
 
                                                 
3. 

ENHANCING  PROPORTIONALITY  OF  RULES  WITHOUT  COMPROMISING 
PRUDENTIAL OBJECTIVES 

Proportionality  is  at  the  centre  of  the  Commission’s  Better  Regulation  agenda. 
Regulation  must  be  applied  in  a  proportionate  manner  to  regulated  entities,  reflecting 
their business model, size, systemic significance, as well as their complexity and cross-
border activity. More proportionate rules will help promote competition and enhance the 
resilience  of  the  financial  system  by  safeguarding  its  diversity  and  dynamism  without 
compromising  prudential  objectives.  Lower  entry  barriers  will  allow  new  players  to 
substitute  for  services  lost  when  less  resilient  firms  exit  the  market.  At  the  same  time, 
care  must  be  taken  to  ensure  that  measures  aimed  at  enhancing  proportionality  do  not 
distort the level playing field.  

Respondents raised the issue of proportionality of legislation in several areas, including 
in  particular  banking  (section  3.1),  derivative  markets  (section  3.2),  insurance  (section 
3.3), fund management and credit rating agencies (section 3.4).  

3.1. 

Proportionality in banking rules 

The concept of proportionality is clearly recognised in the CRR,28 and differentiation is 
already reflected in many rules (e.g. exemption on calculating market risk requirements 
for  banks  with  small  trading  books).  The  framework  as  a  whole  is  formulated  in  a 
modular  manner,  such  that  institutions  must  only  apply  those  requirements  which  are 
relevant  to  the  risks  they  incur.  Furthermore,  the  framework  provides  for  specific 
exemptions  and  preferential  treatments  for  various  purposes  (e.g.  own  funds,  liquidity, 
covered  bonds),  thus  reflecting the  relative complexity  and riskiness  of institutions  and 
the activities they undertake.  

Nevertheless, a large number of respondents called for a more proportionate application 
of banking rules arguing that these do not sufficiently differentiate between the very large 
systemic institutions and very small local  institutions. Some stakeholders, whilst seeing 
problems  in  specific  requirements,  argued  against  potential  changes,  as  this  would 
require putting in place new systems, thereby imposing additional costs on companies or 
because it would create an un-level playing field between institutions that compete with 
each  other  in  the  same  markets.  Respondents  questioned  the  proportionality  principle 
with regards to: 

28 Recital 46: “The provisions of this Regulation respect the principle of proportionality, having regard in 

particular to the diversity in size and scale of operations and to the range of activities of institutions     
[…]  Member  States  should  ensure  that  the  requirements  laid  down  in  this  Regulation  apply  in  a 
manner proportionate to the nature, scale and complexity of the risks associated with an institution’s 
business model and activities”. 29 COM(2016) 710 final 

29 

 
 
                                                 
  Prudential, reporting and disclosure requirements 
  Remuneration 
 
Investment firms 
  Bail-in requirements 
  CCPs holding banking licences 

A) Prudential, reporting and disclosure requirements 

On  reporting  and  disclosure  requirements,  respondents  highlighted  the  difficulty  for 
smaller and less complex banks to comply with them. There were further concerns that 
EU  reporting  requirements  were  topped-up  by  supervisors  with  additional  recurrent 
reporting requirements. Stakeholders argued that banks of less complexity and/or smaller 
balance sheet size usually pose less of a risk to the economy, and that supervisors should 
seek  to  obtain  the  information  they  need  without  enforcing  a  disproportionate  cost  on 
such institutions. They also argued that such banks should be subject to lighter prudential 
requirements.  However,  other  respondents,  while  acknowledging  the  principle  of 
proportionality, argued that the principle needs to be applied with care and that it should 
relate  to  bank  riskiness  (rather  than  size).  They  put  forward  the  case  that  relaxing 
requirements  for  some  institutions  would  be  more  appropriate  in  relation  to  only 
reporting and disclosure requirements as opposed to also including the actual prudential 
requirements. 

In  the  CRR2  package,  the  Commission  proposes  to  address  concerns  related  to 
disproportionate compliance and administrative burden for smaller banks as follows: 

-  

- 

- 

by  mandating  EBA  to  develop  tailored  reporting  requirements  involving  less 
frequent and less detailed reporting; 

by  amending  the  CRR  to  provide  for  differentiated  disclosure  requirements 
involving less frequent and less detailed disclosure; 

by mandating EBA to develop an IT tool that would help small banks to distinguish 
the  rules  which  are  relevant  to  their  size  and  activities  from  those  rules  which 
should apply only to larger and more complex banks.  

The  Commission  also  proposes  to  further  tailor  prudential  requirements  in  selected 
areas. This is for example the case for: 

- 

- 

the  trading  book  (e.g.  extension  of  the  de-minimis  threshold  and  keeping  the 
current  standardised  approach  for  calculating  market  risk  for  certain  types  of 
banks); 

counterparty  credit  risk  (e.g.  keeping  the  original  exposure  method  for  certain 
types of banks); 

30 

 
 
- 

- 

the leverage ratio (lower leverage ratio or partial exclusion of the leverage ratio 
for certain business models or activities such as promotional banks); 

 the NSFR (e.g. preferential treatment of certain activities such as trade finance, 
CCPs, promotional loans, etc.).  

Tailored requirements take into account a variety of metrics, which includes size or type 
of activity. 

B) Remuneration 

The  CRR/CRD  contain  a  number  of  requirements  regarding  the  remuneration  policies 
and  practices  of  credit  institutions  and  investment  firms.  These  requirements  were 
introduced  in  the  aftermath  of  the  2008  financial  crisis  to  ensure  that  remuneration 
policies  do  not  encourage  excessive  risk-taking  behaviour  which  was  one  of  the 
contributing  factors  to  the  crisis.  Remuneration  practices  in  the  financial  services 
industry  meant  that  those  incentives  were  not  in  line  with  the  long-term  objectives  of 
firms  and  the  need  for  responsible  risk-taking.  The  first  remuneration  rules,  adopted  in 
2010, were further extended, mainly with the 'maximum ratio rule' between variable and 
fixed  remuneration,  following  the  adoption  of  CRD  IV  in  2013  (with  the  new  rules 
applicable as of 2014). 

Numerous  responses  suggested  that  a  more  proportionate  approach  (i.e.  allowing  some 
exemptions) should be reflected in the application of these remuneration rules, especially 
concerning deferral and pay-out in instruments (applicable since 2011). Arguments have 
been advanced that these requirements entail compliance costs that tend to outweigh their 
prudential benefits in case of smaller and non-complex firms or staff with relatively low 
levels  of  variable  remuneration.  Finally,  concerns  have  been  raised  that  the  maximum 
ratio  rule  would  reduce  institutions’  competitiveness,  inter  alia  by  negatively  affecting 
their  ability  to  attract  and  retain  talented  staff  in  comparison  with  non-regulated  firms 
(either  within  the  financial  industry  sector  or  in  other  sectors  to  which  skills  are 
transferable). 

The Commission carried out a consultation on the impact of the maximum remuneration 
ratio  and  the  overall  efficiency  of  CRD  IV  remuneration  rules:  a  feedback  report  was 
issued in July 2016 summarising the responses. The responses to that consultation and to 
the  call  for  evidence,  together  with  input  from  EBA  and  from  an  external  study,  have 
been taken into account in the Commission’s review of the CRD IV remuneration rules, 
reflected  in  the  Commission  report  COM(2016)  510  of  28  July  2016.  Following-up  on 
the conclusions of this report, the Commission proposes in the CRR2 package to exempt 
small  and  non-complex  institutions  and  staff  with  low  levels  of  variable  remuneration 
from the deferral and pay-out in instruments remuneration requirements. Regarding the 
maximum ratio, the Commission report found that for the time being there is insufficient 
evidence  to  draw  final  conclusions  on  the  impact  of  the  rule,  which  has  been  in  force 
only since 2014. 

31 

 
 
C) Investment firms 

Investment  firms  argued  that  the  application  of  some  rules  under  CRR/  CRD  IV  are 
disproportionate  if  they  are  not  tailored  to  their  business  models.  In  particular,  it  was 
argued that the CRR/CRDIV should better distinguish between the capital requirements 
imposed on large, bank-like investment firms and those imposed on smaller investment 
firms.  

As announced in the Commission Work Programme 201729, the Commission services will 
carry  out  an  evaluation  of  the  CRR  treatment  of  investment  firms,  in  the  framework  of 
REFIT.  This  exercise  will  take  into  account  the  EBA  advice  and  discussion  paper 
delivered  in  October  201630  where  it  is  recommended  that  only  those  investment  firms 
that  are  currently  identified  as  Other  Systemically  Important  Institutions  (OSIIs)  or 
Globally  Systemically  Important  Institutions  (GSIIs)  remain  subject  to  the  full 
CRR/CRDIV  regime  while  a  more  proportionate  regime  could  be  developed  for  firms 
which are not in this category. As an interim proportionality measure, the Commission 
proposes  to  "freeze"  requirements  in  the  CRR2  package  for  non  systemic  investment 
firms: this will allow the majority of investment firms to remain on the CRD IV rules until 
the investment firm review is completed, thereby reducing the regulatory burden on these 
firms.  

D) Bail-in requirements  

Banks  questioned  the  proportionality  of  minimum  requirements  for  own  funds  and 
eligible  liabilities  (MREL)  under  the  BRRD,  in  particular  as  regards  certain  bank 
business models. Often these claims were referring to the total amount of total liabilities 
minimum MREL requirement included in the draft EBA RTS. Deposit-funded retail and 
commercial  banks  that  do  not  rely  on  wholesale  funding  claimed  they  would  have  to 
raise additional wholesale funds, which would have to be reinvested. This could mean an 
artificial expansion of these bank´s balance sheet and consequently increase of leverage 
and  deterioration  of  their  risk  profile.  This  could  have  an  influence  on  the  riskiness  of 
assets and profitability. In case the investor base in the local market would be missing, 
these banks could be forced to raise funding abroad in foreign currencies, which would 
bring  foreign  exchange  risk.  Respondents  also  raised  concerns  about  inconsistencies 
between MREL and total loss absorbing capacity (TLAC) measures.    

 29 COM(2016) 710 final 

30  https://www.eba.europa.eu/-/eba-recommends-that-only-investment-firms-identified-as-gsiis-and-osiis-

be-subject-to-the-full-crdiv-crr 

32 

 
 
                                                 
 
In  the  delegated  act,  the  EBA  RTS  has  been  amended  by  the  Commission  to  address 
inconsistencies between the RTS and the BRRD. Residual concerns have been addressed 
in  the TLAC/MREL proposal31 which recommends  to  implement TLAC for  G-SIBs  only 
and  maintain  the  case-by-case  setting  of  MREL  for  other  banks.  Furthermore,  the 
proposal  is  also  to  modify  the  BRRD  in  order  to  promote  the  technical  consistency 
between the TLAC and the MREL framework.   

E) CCPs holding banking licences 

A  few  respondents  argued  that  the  BRRD  is  inappropriately  calibrated  or  applied  to 
CCPs  that  hold  banking  licences.  Moreover,  they  argued  that  the  resolution  (winding 
down)  of  CCPs  is  already  partially  covered  by  EMIR  and  level  2  texts  (via  a  default 
waterfall  including  a  default  fund  and  a  loss-sharing  mechanism)  and  that  standard 
business  relations  of  financial  market  infrastructures  do  not  lead  to  "bailinable" 
liabilities. Finally, it was argued that if deposits placed with such institutions were made 
subject  to  potential  bail-in,  settlement  efficiency  would  decline  substantially  and 
participants would rather use pre-financing by the financial market infrastructure.  

The  Commission  proposes  to  amend  the  BRRD  as  to  ensure  that  CCPs  with  banking 
licenses  currently  subject  to  the  BRRD  will  be  carved  out  from  its  scope  and  brought 
exclusively under that of the proposed CCP Recovery and Resolution Regulation 32. 

3.2. 

Proportionality in derivatives markets  

Some respondents argued that the impact of EMIR on non-financial corporations (NFCs) 
is disproportionate. Respondents noted that NFCs face significant challenges in meeting 
EMIR  requirements  due  to  limited  resources  and  experience,  especially  as  regards  the 
reporting  requirements.  For  example,  NFCs  may  be  finding  the  hedging  exemption 
difficult  to  monitor  and  apply  in  practice,  which  could  result  in  inconsistent  regulatory 
treatment  of  NFCs  across  the  EU.  Many  respondents  questioned  whether  such 
counterparties pose systemic risk to a degree that justifies continued application of EMIR 
requirements.  In  addition  to  NFCs,  several  respondents  suggested  that  certain  small 
financial  counterparties  (such  as  small  pension  funds,  small  investment  funds,  small 
insurers and small banks) undertake such limited OTC derivatives activity that it is not 
commercially viable for them to establish clearing solutions. 

31 Adopted on the same date as the call for evidence Communication 

32 Adopted on the same date as the call for evidence Communication 

33 

 
 
 
                                                 
As part of the EMIR review scheduled in 2017 and as set out in the EMIR Report33, the 
Commission  services  will  consider  adjustments  to  the  scope  of  EMIR  clearing  and 
margin  requirements  in  order  to  address  the  diverse  challenges  faced  by  NFCs,  small 
financials  and  pension  funds.  In  particular  with  respect  to  pension  funds,  the  EMIR 
review will consider whether to extend the current temporary exemption from the EMIR 
clearing obligation or whether to make this exemption permanent.   

3.3. 

Proportionality in insurance 

Solvency II replaced 28 national regimes by a single risk based framework. According to 
Article  29(4)  of  the  Solvency  II  Directive,  the  delegated  acts  and  the  regulatory  and 
implementing technical standards adopted by the Commission shall take into account the 
principle of proportionality, thus ensuring the proportionate application of this Directive, 
in  particular  in  relation  to  small  insurance  undertakings.  Even  though  Commission 
Delegated  Regulation  (EU)  2015/35  sets  out  numerous  provisions  on  proportionality, 
stakeholders complained that the application of the proportionality principle is impaired 
in  practice,  resulting  in  excessive  and  disproportionate  burden  on  small  and  medium-
sized insurers. However, it was also underlined that, given its recent entry into force, the 
true  impact and  application  of  the  principle  of  proportionality  can  only  be  judged  once 
Solvency  II  has  had  a  chance  to  “bed  down”.  For  example,  under  Solvency  II,  small 
insurers can benefit from lighter reporting requirements (waivers of quarterly reporting or 
item-by-item reporting are possible). However, these reliefs are subject to the discretion 
of  the  supervisory  authorities  (and  hence  vary  in  different  jurisdictions).  The 
implementation  of  these  options  is  currently  being  monitored  by  EIOPA  which  is 
expected to report on this by the end of 2016 (see also section 4.1.C). 

Stakeholders  also  underlined  in  their  responses  that  Solvency  II  is  a  highly  complex 
system consisting of numerous provisions which are specified in several regulatory levels 
(the set of Solvency II rules amounts to over 6,500 pages, most of which are guidelines 
and  supervisory  material  issued  by  EIOPA).  As  a  consequence,  it  was  argued  that  it  is 
very  onerous  for  small  and  medium-sized  insurance  companies  to  keep  track  of  all 
requirements  and  their  interdependencies.  In  addition,  stakeholders  argued  that  the 
excessively  restrictive  guidelines  and  interpretations  of  the  provisions  allowing  for 
proportionate flexibility limit the principles-based approach of the Directive. 

Finally, stakeholders also raised concerns about the cost of contracts insurers are obliged 
to have with credit rating agencies, given that the standard formula calculation contains 
multiple  references  to  the  ratings  provided  by  External  Credit  Assessment  Institutions 

33 Adopted on the same date as the call for evidence Communication. 

34 

 
 
 
                                                 
(ECAI).  In  specific  situations,  in  particular  scenarios  involving  small  and  medium 
undertakings,  this  information  would  only  be  collected  for  the  purposes  of  reporting, 
which would carry a non-proportional burden for those undertakings. 

The  Commission  services  believe  that  further  work  should  be  done  to  ensure  that  all 
requirements are proportionate to risks. As a first step, on 18 July 2016 the Commission 
issued a call for advice to  EIOPA on the review of  17 specific items in the Solvency II 
Delegated  Regulation.  Among  other  things,  EIOPA  is  tasked  to  work  on  simplified 
methods, assumptions and calculations of certain modules in the standard formula and to 
further develop the framework for the use of alternative credit assessments. The technical 
advice will feed into the review of the Solvency II Delegated Act where these issues are 
intended to be addressed. 

3.4. 

Proportionality in other sectors 

A) Asset management 

Many  asset  managers  raised  concerns  about  the  proportionality  and  compatibility  of 
different  remuneration  requirements  across  legislation.  Many  management  companies 
offer services and products that fall within the scope of different pieces of legislation, in 
particular the UCITS Directive, AIFMD and MiFID. As a result, they are legally required 
to  comply  with  three  different  sets  of  rules  with  regard  to  remuneration  of  their 
personnel.  Stakeholders  claimed  that  applying  all  these  rules  within  one  employment 
contract is barely possible.  

In  addition to the submissions on remuneration, many industry respondents  argued that 
the  scope  of  the  AIFMD  is  too  broad.  The  definition  of  “alternative  investment  fund” 
currently captures essentially all collective investment vehicles which are not authorised 
as  a  UCITS.    Stakeholders  suggested  that  the  rules  should  take  into  account  the 
differences  between  the  various  collective  investment  schemes  in  order  to  preserve  the 
diversity of financial products offered. 

ESMA  has  already  issued  guidelines  on  remuneration  policies  under  the  UCITS  and 
AIFM Directive. Building on the approach set out in the CRR2 package, the Commission 
will  assess  the  proportionality  of  rules  in  the  Alternative  Investment  Fund  Managers 
Directive  (AIFMD)  and  the  Undertakings  for  Collective  Investment  in  Transferable 
Securities Directive (UCITS), for example in relation to aligning remuneration regimes 
and reducing reporting burdens. 

B) Credit rating agencies (CRAs) 

In addition to concerns about the lack of competition in the credit rating market (see also 
section  4.4.A),  respondents  also  argued  that  the  implementation  of  the  EU  regulatory 

35 

 
 
 
framework  for  credit  rating  agencies  leads  to  a  disproportionate  cost  for  smaller  CRAs 
while larger CRAs seem to be able to more easily absorb the incremental expenditures. 
They also claimed that the limits for exemptions are set too low as CRAs with more than 
50  employees  have  to  cope  with  all  the  requirements  of  the  CRA  Regulation.  Even 
though  they  welcome  the  CRA  III  Regulation34  as  a  significant  step  to  rebuild  market 
confidence  in  the  quality  of  rating  agency  work,  in  their  view  the  multiple  layers  of 
compliance and governance costs primarily hinder smaller CRAs from developing their 
business  in  Europe  without  offering  tangible  benefits  from  the  mandatory  registration 
regime.  On  this  basis,  respondents  called  for  a  more  proportionate  approach  to  the 
implementation  of  the  rules.  Respondents  also  suggested  that  the  same  governance 
structure  should  not  be  required  in  each  office,  but  certain  governance  functions  could 
serve across legal entities in Europe. 

Based  on  its  mandate  in  the  CRA  Regulation,  the  Commission  adopted  a  report  in 
October  2016  on  the  state  of  the  CRA  market.  The  report  confirmed  that  overall  a 
balance has to be found between the proportionality of the standards that should apply to 
smaller CRAs and the necessity to ensure the quality and transparency of the ratings they 
produce.  Hence  the  Commission  will  continue  to  monitor  the  application  of  the  CRA 
Regulation  on  smaller  CRAs,  in  particular  the  issue  of  proportionality.  This  includes 
simplifying  reporting  requirements  in  order  to  reduce  compliance  costs  or  clarifying 
certain existing exemptions for companies up to a certain threshold in terms of turnover 
or number of employees and other proportionality measures. 

34 Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending 

Regulation (EC) No 1060/2009 on credit rating agencies. 

36 

 
 
 
 
                                                 
4. 

REDUCING UNDUE REGULATORY BURDEN  

The regulatory reforms have introduced a large number of new, sometimes complex rules 
in  order  to  make  the  financial  sector  stronger  and  more  resilient.  This  has  posed 
additional  administrative  burdens  and  costs  on  firms.    While  sound  regulation  of  the 
financial  sector  is  necessary  to  achieve  the  policy  objectives  of  preserving  market 
integrity and ensuring financial stability, it is important to make sure that the regulatory 
burden  is  commensurate  with  the  intended  objectives.  In  line  with  the  Commission's 
Better  Regulation  approach,  there  is  a  case  for  assessing  and  designing  rules  in  such  a 
way  that  they  achieve  their  objectives  at  the  lowest  possible  cost,  not  just  for  financial 
services providers but ultimately for the end-users of financial services. 

In particular, stakeholders argued for a need to further streamline, to the extent possible, 
the  existing  supervisory  reporting  and  public  disclosure  requirements  which  are  often 
perceived  as  being  inconsistent  and/or  duplicative  across  legislation,  excessively 
complex  and  not  always  fit  for  purpose  (see  sections  4.1  and  4.2).  On  top  of  specific 
sectorial follow-up actions, there is also a need for a more comprehensive Fitness check 
of  reporting  requirements.  This  is  the  reason  why  a  project  on  Financial  Data 
Standardisation  (FDS)  was  launched  in  order  to  assess  the  potential  to  report  financial 
data more efficiently (at lower cost) and  produce better data for risk assessment by the 
supervision  authorities  (more  details  can  be  found  in  the  dedicated  box  at  the  end  of 
section 4.1). 

Beyond reporting and disclosure requirements, the scale and pace of regulatory change in 
recent years have been a key source of compliance costs. The complexity of EU rules, the 
interaction between various layers of regulation, the inconsistencies of certain rules and 
the poorly aligned, tight timelines for implementation are seen as challenging in terms of 
compliance  burden  on  regulated  firms.  Significant  compliance  costs  also  result  from 
divergent  transposition  of  EU  Directives  into  national  legislation  and  from  inconsistent 
enforcement  of  EU  rules.  Moreover,  many  respondents  pointed  to  national  rules  or 
supervisory  practices  “gold-plating”  EU  rules,  thus  leading  to  additional  and/or 
overlapping requirements which are seen as unduly burdensome and can create barriers 
to the cross-border activity of financial firms (see section 4.3). 

Finally, it is important to make sure that regulation does not create any undue barriers to 
entry  in  national  markets  and  across  borders.  There  is  a  need  to  ensure  that  EU  law  is 
correctly  implemented  and  enforced  in  all  Member  States,  that  national  rules  do  not 
create unnecessary burdens or obstacles to the provisions of financial services within the 
single  market,  and  that  there  is  international  coordination  to  avoid  an  un-level  playing 
field in global markets (see section 4.4). 

37 

 
 
 
4.1 

Supervisory reporting requirements 

A) General issues 

The  reforms  introduced  new  and/or  more  stringent  supervisory  reporting  requirements 
with  the  aim  of  ensuring  better  financial  supervision  at  both  micro  and  macro  level. 
Supervisory  reporting  should  allow  supervisors  to  monitor  the  safety  and  soundness  of 
financial institutions as well as  the safety  of the  financial system as  a  whole,  to  ensure 
compliance with investor/consumer protection rules and to detect abuses that undermine 
market integrity.   

Although  the  rationale  of  the  reporting  requirements  set  out  in  EU  law  is  valid, 
respondents  from  the  financial  industry  pointed  to  a  number  of  inconsistencies  and 
duplications,  and  to  some  unduly  burdensome  requirements.    In  some  cases,  overlaps 
and/or  divergences  in  the  data  to  be  reported  to  supervisors  can  be  explained  by  the 
different objectives of such reporting (e.g. MiFIR reporting is aimed at enabling national 
competent  authorities  (NCAs)  to  monitor  market  abuse,  while  EMIR  reporting  aims  at 
introducing  greater  transparency  into  the  OTC  derivatives  markets  for  regulators  to 
monitor and for market participants to see market trends).  

However,  notwithstanding  the  different  policy  objectives,  there  are  instances  where 
requirements  can  be  streamlined  or  adjusted.  In  particular,  there  is  scope  for  further 
standardising reporting and reducing the administrative burden. This should  go hand in 
hand  with  increasing  the  quality  of  data  provided  to  supervisors  and  disclosed  to  the 
public as well as maintaining high standards of consumer protection rules. 

Such  changes  do  not  necessarily  imply  a  major  overhaul  of  existing  reporting 
requirements.  At  least  in  the  short  term,  such  changes  would  risk  further  increasing 
compliance  costs  instead  of  reducing  them.  Although  the  new  reporting  requirements 
have  generated additional compliance costs for firms, these  are often one-off costs that 
the industry has already incurred, and any adjustments would trigger new costs.35  

A general concern is the lack of sufficiently aligned formats, standardised templates, and 
common IT solutions, which may result in excessive complexity and errors. The lack of a 
central data collection point for the varying reporting requirements was also raised as a 
source of unnecessary complexity, for example in the case of AIFMD. 

Stakeholders argue that the lack of coordination among NCAs, and between NCAs  and 
the European Central Bank (ECB), generates inconsistent and burdensome requirements 
(e.g. the additional liquidity monitoring metrics where the SSM requested data, while the 

35    Respondents  have  indeed  raised  concerns  about  the  costs  of  such  possible  changes  triggering  further 

investment in IT systems.  

38 

 
 
                                                 
EBA  was  still  consulting  NCAs).  Furthermore,  banks  argue  that  the  Commission 
implementing  regulation  on  supervisory  reporting  requires  banks  to  report  financial 
information ("FINREP") which overlaps with other national reporting requirements. 

A mapping of those national requirements which go beyond those imposed at EU level 
could be useful and prepare a discussion with Member States of possible ways to address 
the identified issues. Also, monitoring national supervisory practices, in cooperation with 
the  European  Supervisory  Authorities  (ESAs),  could  be  useful  in  order  to  identify  the 
additional reporting requirements imposed in practice by supervisors on top of EU law, 
including those which may not be justified. 

In the banking sector, respondents are also concerned about the immediate impact of the 
new  European  Reporting  Framework  which  is  being  developed  by  the  ECB/SSM. 
However, they admit that it will be advantageous once completed, since its ultimate goal 
is for data to be collected once and for duplicative requirements to be avoided. 

in 

the 

framework  of  REFIT.  Morevover 

The Commission will undertake a comprehensive review of reporting requirements in the 
financial  data 
financial  sector, 
standardisation project (see the dedicated box at the end of section 4.1), supported by the 
ISA2  programme,  aims  to  develop  a  common  language  on  financial  data  that  will 
address  the  compliance  burden  at  source  and  prepare  the  ground  for  a  ‘once  for  all’ 
approach to reporting.  

the 

With regards to requirements stemming from national laws and supervisory practices: 

-  The  Commission  assesses  systematically  the  correct  implementation  of  all  financial 
services  Directives  and  where  relevant  also  of  Regulations.  If  it  identifies  national 
reporting  requirements  gold-plating  EU  rules  which  are  incompatible  with  EU  law,  it 
will challenge them via infringement proceedings if the problem is not resolved swiftly. 

- Besides the assessment of national transposition measures in terms of compliance with 
EU law, a process for mapping national requirements that go beyond those imposed at 
EU  level  could  be  envisaged  over  time,  in  view  of  discussing  with  Member  States 
possible  ways  to  address  the  issues  identified  and  sharing  best  practices,  including 
through potentially more common IT solutions. This could be done in the existing Expert 
Group  on  barriers  to  the  free  movement  of  capital36  or  in  other  specialised  expert 
groups.   

Moreover,  the  Commission  services  will  examine  the  case  for  establishing  central  data 
collection  points.  Specifically  in  relation  to  concerns  raised  regarding  the  AIFMD,  the 
Commission  services  will  consider  with  ESMA  the  stakeholder  proposal  to  establish  a 

36 http://ec.europa.eu/finance/capital/expert-group/index_en.htm 

39 

 
 
                                                 
central data collection point within ESMA for the varying reporting requirements under 
the AIFMD, which could help ensure the use of a single format with corresponding data 
requirements  and  relieve  the  necessity  for  NCAs  to  collect  this  data  and  pass  it  on  to 
ESMA.  

B) Duplicative and/or inconsistent reporting requirements  

Stakeholders provided some examples of requirements set out in EU legislation that are 
perceived as duplicative and/or inconsistent across pieces of legislation: 

  EMIR,  MiFIR,  Securities  Financing  Transactions  Regulation 

(SFTR)37, 
Regulation  on  wholesale  energy  market  integrity  and  transparency  (REMIT)38, 
UCITS  and  AIFMD  require  some  data  to  be  reported  that  is  similar  but  with 
differences  in  terms  of  reporting  details,  reporting  channels,  data  repositories’ 
requirements and processes, and applicable IT standards. Overlaps are in part due 
to the different objectives of each set of reporting. 

  MiFIR  and  SSR  have  different  reporting  requirements  for  short  sales  due  to 
different  regulatory  objectives.  On  the  one  hand,  the  SSR  establishes  an 
obligation to report net short positions on shares and sovereign debt securities to 
the  NCA  and/or  to  the  public  above  certain  thresholds.  This  is  to  ensure 
transparency  over  large  aggregated  short  positions.  The  objective  is  to  enable 
regulators  (and  the  market)  to  monitor  systemic  risk  that  an  excess  of  the  short 
selling activity may entail and take action where needed. The obligation lies with 
the investor and relates to aggregated positions at the close of business. Positions 
held by market makers are, however, exempt from this reporting requirement. In 
contrast, Article 26 of MiFIR on the transaction reporting requirement applies  – 
without exception - to all transactions in financial instruments admitted to trading 
or traded on a trading venue. The MiFIR transaction reporting requirements also 
apply  to  all  individual  transactions  and  not  to  the  aggregated  positions,  such  as 
under  SSR.    It  places  the  reporting  obligation  on  the  investment  firm  executing 
the  transaction,  not  on  the  final  investor,  and  there  is  no  exemption  for 
transactions  for  the  market  making  activities.  The  MiFIR  reporting  regime  is 
essentially  intended  as  a  monitoring  tool  to  identify  market  abuse  and 
manipulations that may be sanctioned under MAR. 

37  Regulation  (EU)  2015/2365  of  the  European  Parliament  and  of  the  Council  of  25  November  2015  on 
transparency  of  securities  financing  transactions  and  of  reuse  and  amending  Regulation  (EU)  No 
648/2012. 

38 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on 

wholesale energy market integrity and transparency 

40 

 
 
  
 
                                                 
  Solvency  II  and  EMIR  require  insurers  to  report  to  both  trade  repositories  and 
supervisors.  Different definitions and reporting deadlines are set out in Solvency 
II, EMIR, MiFID, MAR (e.g. under EMIR insurers report the "effective date" of a 
derivative  whereas  under  Solvency  II  they  report  the  "initial  date",  which  is 
defined  differently).  Whilst  each  reporting  requirement  has  been  designed  for  a 
somewhat  different  purpose,  the  potential  for  making  the  reporting  more  cost 
efficient  and  more  effective  in  terms  of  meeting  its  objectives  will  be 
investigated. 

  The fragmented reporting of net short positions as well as temporary restrictions 
on  short-selling  across  Member  States  under  SSR  was  also  raised  as  a  concern, 
with some stakeholders calling for a single reporting platform. 

With  regards  to  EMIR,  the  Commission  has  adopted  in  October  2016  a  RTS  on  the 
minimum details of the data to be reported to trade repositories and a ITS with regards 
to  the  format  and  frequency  of  trade  reports  to  trade  repositories.  Both  are  currently 
under  the  scrutiny  period  in  the  EP  and  Council.  Moreover  work  is  on-going  with 
regards  to  the  data  be  published  and  made  available  by  trade  repositories  and 
operational standards for aggregating, comparing and accessing the data. 

Finally,  with  regards  to  SSR,  the  Commission  services  will  assess  the  possibility  of 
introducing  a  single  reporting  platform  on  short-selling  to  strengthen  the  information 
provided to regulators and examine ways to reduce burdens on the reporting of net short 
positions. 

C) Disproportionate and/or excessive reporting requirements  

According  to  respondents,  some  reporting  requirements  are  disproportionate  or 
excessive/difficult to meet, for example: 

  Under Solvency II, insurers have to submit highly granular annual and quarterly 
information  on  their  risk  situation,  which  may  not  be  necessary  for  small 
companies with a simple risk profile. As noted in section 3.3, small insurers can 
benefit  from  lighter  reporting  requirements  (waivers  of  quarterly  reporting  or 
item-by-item  reporting  are  possible).  It  is  also  argued  that  the  “look-through 
approach” for reporting investment in funds creates excessive burden for insurers. 
However, the look-through approach is already applied to a minimal extent to get 
information necessary for risk management. Only the asset category, the country 
of  issue  and  the  currency  of  the  underlying  assets  must  be  reported  (no  line  by 
line reporting of underlying assets is requested). Quarterly reporting is mandatory 
only where funds represent more than 30% of total investments. 

 

It is seen as difficult for smaller and less complex banks to comply with reporting 
requirements  imposed  by  the  Implementing  Acts  adopted  under  the  CRR,  in 

41 

 
 
 
 
particular because  of the content  and frequency of the reporting. Such reporting 
requirements  may  need  to  be  reviewed  to  ensure  proportionate  reporting  for 
smaller and less complex banks.  

  Dual-sided  reporting  to  trade  repositories  under  EMIR  is  seen  as  unnecessarily 
financial 

small/non-systemic 

for  NFCs 

especially 

and 

burdensome, 
counterparties.  

  MiFID  best  execution  reporting  requirements  mandate  trading  venues  and 
systemic  internalisers  to  publish  large  volumes  of  execution  information,  which 
are seen as too complex and technical to provide added value for investors.  

  MiFID position reporting requirements are perceived as excessive as investment 
firms  are  not  in  a  position  to  control  access  to  information  about  positions  of 
clients other than the specific trades they directly enter into with their own clients.  
The reporting regime has not yet entered into application. Once the regime enters 
into  force  it  will  be  possible  to  see  which  elements  are  excessive  or  difficult  to 
comply with. The end-client reporting will have to be monitored in particular. 

  The application of the 'double volume cap' mechanism (DVC) set out in MiFID to 
limit  dark  pool  trading  is  seen  as  operationally  very  complex  and  to  require  a 
large  amount  of  data,  which  may  not  be  necessary  to  achieve  the  objective 
pursued.  The  actual  impact  of  these  requirements  needs  to  be  assessed  more  in 
depth. 

The Commission will monitor the implementation of Solvency II reporting requirements. 
Solvency II already provides lighter reporting requirements for small insurers but their 
implementation is subject to the discretion of the supervisory authorities and hence may 
vary  in  different  jurisdictions.  EIOPA  is  expected  to  report  on  the  implementation  of 
these reliefs by end 2016. If the uptake of these proportionality measures is deemed to be 
insufficient, appropriate follow-up actions could be considered. Moreover, with regards 
to  possible  further  simplification  of  the  look-through  approach  in  the  review  of  the 
Solvency II delegated act, a corresponding request for technical advice has been sent to 
EIOPA on 18 July 2016. 

In  banking,  as  part  of  measures  to  further  enhance  the  proportionality  concept  in  the 
CRR  (see  also  section  3.1),  the  CRR2  package  proposes  reducing  the  frequency  with 
which  smaller  and  less  complex  banks  are  required  to  report.  Moreover,  EBA  will 
publish a set of concrete proposals on how to further reduce the burden stemming from 
reporting  requirements  in  banking  through  aligning  supervisory,  statistical  and  macro 
prudential reporting requirements as well as enhancing consistency in  definitions used 
across different pieces of legislation. 

42 

 
 
 
 
 
  
  
With regards to reporting under EMIR, the review planned for 2017 will look at ways to 
reduce  existing  reporting  requirements  for  non-financial  corporations,  small  financial 
corporations and pension funds (see also section 3.2). The objective would be to reduce 
the compliance burden for market participants while ensuring data quality and making 
sure that regulators have the right tools to monitor risks and intervene when necessary. 

As  regards  MiFIR  reporting  requirements,  ESMA  has  to  conduct  a  review  by  2020. 
Possible follow-up actions may be envisaged based on the outcome of the review. 

Financial Data Standardisation Project  

A project on Financial Data Standardisation (FDS)39 was launched by the Commission 
services in the first half of 2016 and represents a concrete follow-up action to the call for 
evidence.  It  will  investigate  potential  overlaps,  duplications  and  inconsistencies  in 
reporting  and  disclosure  requirements  in  the  regulatory  framework  and  the  lack  of 
interoperability in data standards. 

The project's vision is that it would be possible to: report financial data more efficiently; 
monitor more effectively the financial system; produce better data for risk assessment by 
the supervision authorities; and thus contribute to the safeguarding of the stability of the 
European Union's financial system. 

Based on this vision, the project aims to: 

1)  Examine/identify  processes  and  ways  of  sharing  financial  data  more  efficiently  by 
enhancing the interoperability of (existing) data standards; 

2) Identify ways of reducing compliance costs that arise in the context of legal reporting 
requirements by applying the "once for all" principle in reporting; 

3) Explore new solutions to improve the way data can be used by (and shared between) 
authorities; 

4) Identify ways to improve the monitoring of the allocation and evolution of risk in the 
EU's financial system. 

The information received through the call for evidence is mainly of a qualitative nature 
and often lacks details. The FDS project therefore aims to provide supporting evidence 
regarding  the  perceived  overlaps,  gaps,  inconsistencies  and  redundancies  which  will 

39  Supported  and  financed  by  the  Interoperability  Solutions  for  European  public  Administrations, 
Businesses and Citizens (ISA²) Programme - http://ec.europa.eu/isa/documents/actions/2016.15_en.pdf 

43 

 
 
                                                 
 
provide a factual and objective basis for possible solutions leading to better regulation 
and cost reductions. 

The project will initially create an overview of the financial data reporting requirements 
to obtain a high-level understanding of the FDS project scope. Based on this high-level 
analysis, financial legislation will be selected for detailed analysis. 

The detailed analysis will result in: a) an inventory of data reporting requirements which 
will cover the legal requirements in terms of reporting together with the identification of 
stakeholders  involved,  data  standards  and  IT  systems  used.  Based  on  this  overview, 
areas  will  be  flagged  where  further  standardisation  could  bring  benefits  and  possible 
synergies  between  data  reporting  requirements  will  be  identified;  b)  data  dictionaries 
which  will  identify  the  different  data  elements  that  are  part  of  the  legal  reporting 
requirements  together  with  their  semantic,  metadata,  structure,  business  rules  and 
existing  standards.  In  addition,  gaps  and  inconsistencies  will  be  identified  in  terms  of 
available standards and absence of data formats/structures for legislative acts. 

Finally,  a  roadmap  for  interoperable  financial  data  reporting  standards  will  be 
developed.  The  roadmap  will  identify  priority  areas  for  financial  data  standardisation. 
This  roadmap  will  take  into  account  the  need  for  a  general  financial  data  reporting 
framework  and  specialised  reporting  in  sectors  and  must  cover  the  interdependency 
between sectors and the implementation status of ICT systems used for reporting. 

The innovative aspect of the FDS approach is that it will bring together and analyse from 
several  viewpoints  the  information  from  different  financial  sectors  (banks,  insurance 
companies, and financial markets). Per sector, information is available but has not been 
put  together.  The  project  will  therefore  cooperate  and  exchange  information  with  the 
relevant  stakeholders  in  the  public  and  private  sector  and  study  all  areas  necessary  to 
achieve  the  objectives:  financial  legislation,  standardisation,  stakeholder  requirements, 
governance, security and data protection, and innovative financial technologies. 

4.2. 

Public disclosure requirements 

The reforms have also introduced additional requirements to disclose publicly financial, 
prudential and non-financial information and data about firms, with the aim of increasing 
transparency of financial markets. Disclosure requirements should provide investors with 
any relevant financial and non-financial information about a company that may influence 
an  investment  decision.  Overall,  the  rationale  of  these  requirements  is  not  questioned. 
Yet  some  disclosure  requirements  are  seen  as  inconsistent  or  duplicative.  The  main 
examples raised by respondents are the following: 

44 

 
 
 
  The  two-tier  system  created  by  the  Transparency  Directive  (TD)40  and  the 
Prospectus  Directives  require  both  the  publication  of  financial  information  of 
issuers listed on regulated markets in the national officially appointed mechanism 
(OAM)  and  the  publication  of  prospectuses  on  the  website  of  the  issuers,  the 
financial  intermediary,  the  regulated  market,  or  the  NCA.  The  Prospectus 
proposal contains provisions which will address these concerns by requiring the 
publication of all approved prospectuses on ESMA's website (including a search 
function). 

  The  provisions  of  the  TD  would  be  inconsistent  with  other  EU  law  (e.g.  the 
Prospectus  Directive,  the  Listings  Directive41,  MAD,  etc.)  on  various  topics, 
including  e.g.:  different  scope;  similar  but  not  identical  definitions;  parallel, 
overlapping  and  redundant  reporting  requirements.  The  Prospectus  Proposal 
addresses  a  very  few  of  this  concern  and  the  forthcoming  review  of  the  TD  in 
2018 might be an opportunity to address remaining issues. 

  The  IFRS  and  the  Accounting  Directive  (AD)42  overlap  to  a  certain  extent  as 
regards  the  content  of  the  financial  statements  (accounting  principles,  layouts, 
notes,etc). The AD prevents in no way the preparation of financial statements in 
compliance  with  plain  IFRS  (EU  endorsed  IFRS  prevail  whenever  there  is  a 
conflict with the AD), but actually requires additional items, such as the audit, the 
publication,  the  preparation  of  a  management  report,  and  a  few  additional 
disclosure.  To  further  align  the  AD  with  the  IFRS,  especially  as  regards  the 
elimination  of  any  additional  disclosure  as  suggested,  would  lower  the  EU 
standards, which would lack justification. 

40  Directive  2013/50/EU  of  the  European  Parliament  and  of  the  Council  of  22  October  2013  amending 
Directive  2004/109/EC  of  the  European  Parliament  and  of  the  Council  on  the  harmonisation  of 
transparency  requirements  in  relation  to  information  about  issuers  whose  securities  are  admitted  to 
trading on a regulated market, Directive 2003/71/EC of the European Parliament and of the Council on 
the  prospectus  to  be  published  when  securities  are  offered  to  the  public  or  admitted  to  trading  and 
Commission  Directive  2007/14/EC  laying  down  detailed  rules  for  the  implementation  of  certain 
provisions of Directive 2004/109/EC. 

41 Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission 
of securities to official stock exchange listing and on information to be published on those securities. 

42  Directive  2013/34/EU  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  the  annual 
financial  statements,  consolidated  financial  statements  and  related  reports  of  certain  types  of 
undertakings,  amending  Directive  2006/43/EC  of  the  European  Parliament  and  of  the  Council  and 
repealing Council Directives 78/660/EEC and 83/349/EEC.   

45 

 
 
 
 
 
                                                 
  Requirements  to  disclose  non-financial  information  for  certain  large  companies 
are perceived by some stakeholders as unduly burdensome, although others claim 
that more ambitious requirements would be needed.  

  Requirements 

to  disclose  prudential 
disproportionate operational burden on small institutions.  

information  are  seen 

to  place  a 

  Some  respondents  point  to  the  divergent  and  inconsistent  transposition  of  the 
Transparency  Directive,  due  to  imprecise  EU  rules  (e.g.  on  the  subject  of 
notification  of  major  holdings  of  voting  rights),  thus  resulting  in  a  very 
fragmented European landscape for issuers and investors in practice.  

  Concerns  were  expressed  about  the  disclosure  requirements  in  the  Deposit 
Guarantee Schemes Directive (DGSD)43, which requires banks to make available 
to their clients a standardised disclosure sheet about the protection that applies to 
their deposits on an annual basis. 

The  Prospectus  proposal  (currently  under  negotiation  by  the  co-legislators)  addresses 
concerns  related  to  duplicative  reporting,  at  least  partly, 
  by  facilitating  the 
"incorporation by reference" of financial information in the prospectus and by the use of 
the  registration  document  to  fulfil  some  publication  requirements  under  the  TD.  The 
proposal also contains an empowerment to recalibrate the Level 2 prospectus schedules 
for companies already admitted to trading on regulated markets, so that the information 
disclosed in the prospectus takes into account the disclosures already made by the issuer 
under the TD and MAR. 

The  Commission  is  currently  assessing  the  national  transposition  measures  for  the 
Transparency  Directive  and  the  Accounting  Directive,  which  will  allow  identifying 
possible inconsistencies. This includes assessing the claim that there are divergent rules 
on the notification of major holdings of voting rights. 

Compliance  costs  related  to  the  reporting  of  non-financial  information  by  large 
companies were analysed in the impact assessment at the time of adoption (2014). They 
were considered proportionate and commensurate with the usefulness of the information.  

The  Commission  services  are  developing  a  European  Single  Electronic  Format  for  the 
preparation of annual financial reports for all issuers of securities admitted to trading on 
a European regulated market.  The draft format is prepared by ESMA and expected to be 
adopted by the Commission as a regulatory technical standard in 2020. 

43  Directive  2014/49/EU  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on  deposit 

guarantee schemes. 

46 

 
 
 
 
 
                                                 
Finally,  on  DGSD  disclosure  requirements,  information  is  an  essential  element  of 
depositor  protection  and  the  annual  disclosure  sheet  under  the  DGSD  is  neither 
excessive nor duplicative. Improved information for depositors was indeed a key concern 
of  the  Directive,  with  the  result  that  no  derogations  from  this  provision  are  envisaged.  
Nevertheless,  the  legislators  considered  that  the  administrative  costs  should  be  kept  as 
low  as  possible  and  that  depositors’  choices  regarding  the  means  of  communication 
should be respected. If, for example, a depositor uses internet banking, the information 
can be made available by electronic means. 

4.3. 

Compliance costs  

In addition to compliance costs related to reporting and disclosure requirements, industry 
respondents  raised  a  number  of  other  concerns  about  the  administrative  burdens 
stemming from regulation. While respondents often provided specific examples of where 
they perceived the compliance burden to be excessive, limited quantitative evidence was 
available on the actual compliance costs. 

A) General issues 

The complexity of EU rules, the perceived overlap between various layers of regulation, 
poorly  aligned  and  tight  timelines  for  implementation  and  transposition  are  seen  as 
challenging  in  terms  of  compliance  burden  on  regulated  firms.    As  regards  timelines, 
concerns relate to deadlines being fixed in primary legislation without leaving sufficient 
flexibility to finalise secondary legislation, which in turn can leave insufficient time for 
implementation.  

Another concern was the consecutive implementation of different rules that require firms 
to  make frequent and consecutive changes to their IT systems. Respondents also called 
for  stability  in  the  regulatory  framework  and  for  sufficient  time  to  be  allowed  to  pass 
before reviewing rules and deciding on targeted revisions.  

The financial crisis required an intense and urgent regulatory response, which has indeed 
posed  a  significant  compliance  burden  on  financial  market  players,  in  terms  of  both 
amount  of  new  rules  and  tight  implementing  deadlines.  Now  that  the  regulatory 
framework has become more stable, these issues are likely to become less relevant. The 
Commission will duly take them into account going forward.  

The  Commission  services  will  continue  to  pay  particular  attention  to  the  analysis  of 
compliance costs in impact assessments for future legislation. Compliance costs resulting 
from  existing  legislation  will  also  be  addressed  in  future  evaluations  or  reviews  of  the 
different pieces of EU law.  

B) Central repository for EU laws 

47 

 
 
 
Various  stakeholders  reported  that  the  accumulation  of  regulation  and  requirements  as 
well as complexity as regards their entry into force/implementation date make it difficult 
to identify what rules actually apply, induce high costs and risk non-compliance. Some 
stakeholders call for a portal that would provide access in a systematic and coherent way 
to all relevant requirements included in EU-legislation.   

A  central  portal  for  EU  law  (EUR-Lex)  exists  already.  In  addition,  the  Commission 
launched  a  digital  transformation  process  to  rationalise,  redefine  and  redesign  online 
communication on EU policy.  This exercise would permit presenting EU legislation in 
the  area  of  financial  services  and  markets  in  a  uniform  and  user  friendly  format, 
providing access to the relevant Legislative Acts, Implementing and Delegated Acts and 
possible guidance on their implementation. 

C) Guidelines issued by ESAs 

Many  industry  stakeholders,  in  particular  from  the  insurance  sector,  stressed  that  the 
process and the timing of issuance of ESA guidelines create legal uncertainty, as well as 
unnecessary compliance costs for the industry.  

They  argued  that  guidelines  are  increasingly  expansive  in  relation  to  their  function, 
namely to ensure the “common, uniform and consistent application of Union law”44. In 
addition,  they  asked  the  Commission  to  avoid  any  possible  overlap  between  guidelines 
and  secondary  legislation,  for  example  by  ensuring  that  ESA  guidelines  are  not  issued 
before the adoption of technical standards. 

The overall objective of guidelines is to ensure consistent and effective application of the 
regulatory framework across the Single Market.  They are very useful tools in terms of 
achieving  supervisory  convergence and  uniform  application  of  EU  legislation  and  have 
overall been very successful and added significant value to the work of supervisors and 
financial institutions.   

The  Commission  services  will  reflect  on  how  to  best  address  the  concerns  raised  in 
relation to guidelines. 

D) Divergent implementation of EU law and national gold-plating 

Significant compliance costs may result from divergent and/or inconsistent transposition 
of  EU  Directives  into  national  legislation.  When  transposing  EU  Directives,  Member 
States sometimes deviate from the text of the Directives or interpret the rules (including 
definitions) in different ways. Such divergences may undermine the single rulebook and 
the  level  playing  field  and  create  complexity  and  additional  compliance  costs  for  firms 

44 Article 16 of the Regulation (EU) No 1094/2010  

48 

 
 
                                                 
operating cross-border. This may have a negative impact on the cross-border provision of 
financial services.  

In addition, in several areas some Member States go beyond what is required by EU law 
when  they  implement  legislation  at  national  level  ("gold-plating").  Examples  of  gold-
plating  requirements  provided  by  respondents  were  among  others:  supplementary 
requirements  for  investment  funds  under  AIFMD  and  UCITS,  investor  protection  rules 
stricter than those provided in MiFID II, or specific rules protecting SME borrowers. 

Correct and consistent implementation of EU law at national level is essential to create a 
single  rulebook,  particularly  in  case  of  the  transposition  of  EU  Directives  into  national 
law. An in-depth analysis of national measures is necessary in order to identify specific 
issues and assess their impact on the functioning of the single market.   

Assessment  of  a  large  amount  of  national  measures  is  ongoing,  with  details  to  be 
assessed legislation by legislation. The analysis of any potential negative impact of gold-
plating  on  the  cross-border  provision  of  services  should  consider  also  the  level  of 
harmonisation  of  EU  legislation  (minimum  harmonisation  directives  may  lead  to  some 
extent  to  differences  in  the  way  they  are  implemented  by  the  Member  States)  and  any 
possible justifications for exceptions in the way EU rules are transposed, provided by the 
Treaty.  

The  Commission  services  are  assessing  the  national  transposition  of  all  financial 
services  Directives  focusing  on  key  provisions  and,  where  relevant,  also  the  national 
measures implementing Regulations. Currently, the Commission is assessing the national 
transposition  of  17  directives.  It  will  continue  monitoring  the  progress  of  those  to  be 
transposed  in  2017/2018.  This  will  help  identify  gold-plating  provisions  which  create 
undue  additional  compliance  costs.  When  national  measures  are  identified  as 
incompatible  with  EU  law,  the  Commission  raises  the  issue  with  the  Member  States 
concerned  and  starts  infringement  proceedings  if  the  problem  is  not  resolved. 
Information on the state of transposition and on enforcement actions by the Commission 
is  published  regularly.  For  the  Directives  which  are  still  to  be  transposed  the 
Commission  services  support  Member  States  to  facilitate  correct  and  consistent 
transposition via transposition workshops and bilateral discussions. 

As  regards  gold-plating,  the  Commission  services  are  also  reviewing,  via  the  Member 
States' expert group on barriers to free movement of capital as part of the CMU Action 
Plan, national provisions that create unjustified or disproportionate burden to the cross-
border  movement  of  capital.  The  objective  is  to  prepare  a  joint  roadmap  with  the 
Member States for possible actions to remove those national barriers.  

E) Divergences resulting from national options  

Divergent national rules potentially increasing compliance costs for firms operating cross 
border  may  also  result  from  national  options  included  in  EU  Regulations.  The  main 

49 

 
 
example highlighted by the respondents is the Audit Regulation45 which concerns audits 
of Public-Interest  Entities  (PIEs ).  Several stakeholders (including  companies  operating 
on  a  cross-border  basis,  the  audit  profession  and  trade  associations)  argued  that  the 
implementation of the Audit Regulation could result in a patchwork of diverging national 
options on pivotal aspects of the new rules, leading to inconsistencies across the EU and 
generating  extra  administrative  costs  and  complexity.  Notably,  respondents  voiced 
concerns about differing national implementations of the definition of PIEs  –as defined 
in  the  Audit  Directive46  -  the  maximum  duration  of  audit  firm  engagements,  the  list  of 
prohibited  non-audit  services,  and  the  cap  on  allowed  non-audit  services.  As  a 
consequence of these national divergences, companies operating on a cross-border basis 
would no longer be in a position to appoint one audit firm to carry out the statutory audit 
of the whole group, and would need to take into account the specific rules that apply in 
each  of  the  Member  States  where  PIEs  are  located.  Respondents  proposed  either  to 
remove provisions in the Audit Regulation granting Member States the choice to adopt 
national  options,  or  to  indicate  that  the  rules  of  the  Member  State  where  the  group  is 
headquartered  should  apply  to  all  the  entities  of  the  group,  no  matter  where  they  are 
located in the EU.  

The implementation of the 2014 reform, whereby co-legislators inserted national options 
in  the  Audit  Regulation,  became  applicable  on  17  June  2016.  Even  though  during  the 
implementation  process,  the  Commission  services  have  been  working  closely  with 
Member States, national authorities and stakeholders to reduce possible inconsistencies, 
significant  differences  are  emerging  in  the  application  of  the  key  national  options  by 
Member States. Given the limited time elapsed since the entry into force of the new rules, 
the economic impact of the national options on companies and on the audit firms needs to 
be further assessed. 

As announced in the Commission Work Programme 2017, the Commission services will 
review,  as  part  of  its  REFIT  program,  the  national  options  in  the  Audit  Regulation.  In 
particular,  the  Commission  services  intend  to  establish  an  overview  of  the  adoption  of 
national options and assess their impact as part of the market monitoring exercise. They 
will work with the new pan-EU supervisory audit body (Committee of European Auditing 
Oversight Bodies, CEAOB) on the consistent application of the new rules, with a specific 
focus on the cross-border impact of mandatory rotation and the black list of prohibited 

45  Regulation  (EU)  No  537/2014  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on 
specific  requirements  regarding  statutory  audit  of  public-interest  entities  and  repealing  Commission 
Decision 2005/909/EC. 

46  Directive  2014/56/EU  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  amending 

Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts. 

50 

 
 
                                                 
non-audit services. The Commission services will also consult on the impacts created by 
diverging national options. 

F) Divergent application of EU law by national authorities  

Respondents  voiced  concerns  that  EU  rules  are  not  always  applied  correctly  and 
consistently  by  national  authorities.  This  may  result  in  duplicative  or  inconsistent 
requirements for firms and create practical barriers to their cross-border activity. 

The  ESAs  are  entrusted  with  the  task  of  enhancing  supervisory  convergence  and  of 
monitoring implementation of EU law by national supervisors. They may take action to 
tackle breaches of EU law in the areas under their responsibility.   

In the context of the CMU Action Plan, the Commission services are working with ESMA 
to  implement  a  strategy  to  strengthen  supervisory  convergence  to  reduce  regulatory 
arbitrage and ensure a level-playing field for market participants and investors. ESMA 
as well as EIOPA and the EBA have indicated in their strategic work programmes that 
they will dedicate more focus and resources to enhancing supervisory convergence in the 
next  years.  ESMA  has  established  a  dedicated  standing  committee  on  supervisory 
convergence47  and  is  implementing  the  first  annual  work  programme  on  supervisory 
convergence48. 

The Commission services are regularly in contact with the ESAs to share information on 
enforcement matters, in order to identify possible breaches of EU law that may require 
Commission or ESAs action. 

4.4. 

Barriers to entry 

The  proper  functioning  of  the  single  market  requires  a  regulatory  framework  which 
facilitates  the  cross-border  activity  of  companies.  To  that  purpose,  the  European 
“passport”  is  intended  to  allow  financial  services  operators  legally  established  in  one 
Member  State  to  establish/provide  their  services  in  the  other  Member  States  without 
further authorisation requirements. 

Some respondents have raised concerns about the suitability and effectiveness of existing 
EU  rules  in  terms  of  access  to  the  market  in  specific  sectors  (e.g.,  the  credit  rating 
agencies and benchmarks).  

47 Terms of reference for the Supervisory Convergence Standing Committee, ESMA/2016/229, 27.01.2016   

48 ESMA Supervisory Convergence Work Programme 2016, ESMA/2016/203, 11.02.2016   

51 

 
 
 
                                                 
Moreover,  several  respondents  pointed  to  obstacles  to  the  cross-border  marketing  of 
investment funds, mainly due to divergent and inconsistent authorisation and passporting 
requirements. 

Finally, the inconsistent implementation of globally agreed rules by other jurisdictions is 
seen  as  a  source  of  additional  burden  for  firms  operating  globally,  which  may  hinder 
access to international financial markets. 

A) Access to the credit rating market  

Some  respondents  raised  concerns  that,  notwithstanding  the  amendments  to  the  CRA 
Regulation,  the  credit  rating  market  is  still  concentrated.  In  their  view,  instead  of 
establishing a level playing field, the current regulatory framework cements the barriers 
to entry by imposing disproportionate costs on smaller CRAs. The market continues to be 
dominated by the three biggest players, whereas the market shares of the smaller CRAs 
are  declining.  Respondents  in  particular  claimed  that  Article  8d  of  the  CRA  III 
Regulation49 is not sufficient to improve competition and that its implementation should 
be revisited.  

As regards the concerns about Article 8d, the provision has not been fully implemented 
and enforced at national level. The Regulation gives competence to national supervisors 
and an effort by ESMA to coordinate their approaches is currently under way.  

Based  on  its  mandate  in  the  CRA  Regulation,  the  Commission  adopted  a  report  in 
October 2016 on the state of the CRA market, focusing on four topics: alternative tools to 
external  credit  ratings,  competition  and  governance  in  the  credit  rating  industry,  the 
state  of  the  structured  finance  instruments  rating  market  and  the  feasibility  of  a 
European  Credit  Rating  Agency.  This  report  includes  a  preliminary  assessment  of  the 
concerns expressed by stakeholders on promotion of competition in the market, potential 
barriers  and  disproportionate  costs  facing  smaller  CRAs.  Given  that  Article  8d  of  the 
CRA Regulation and other related articles are still in the process of implementation, the 
Commission  services  will  continue  monitoring  the  development  of  the  market  and 
maintaining dialogue with stakeholders. 

B) Outsourcing by benchmark administrators 

Some  respondents  raised  concerns  regarding  possible  "extraterritorial"  effect  of  the 
Benchmark  Regulation  (BMR)50.  They  outlined  concerns  that  the  requirement  in  the 

49 which requires in case of double ratings to consider using at least one CRA with less than 10% market 

share and if not, to document it 

50 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices 
used as benchmarks in financial instruments and financial contracts or to measure the performance of 

52 

 
 
                                                 
 
Regulation  related  to  outsourcing  of  the  provision  of  regulated  data  by  a  benchmark 
administrator may be deemed to be "extraterritorial" and unenforceable in practice.  

The  BMR  requires  benchmark  administrators  to  ensure  the  integrity  of  data  used  in 
benchmarks, including if the data is transmitted via third parties/outsourced entities. This 
means that the administrator has to ensure that EU competent authorities can access data 
and business premises of the third country data providers.   

The  administrators  of  so-called  "regulated  data"  benchmarks  are  concerned  that  this 
requirement may create obstacles in case the provision of "regulated data" (e.g., trading 
data from regulated markets used in an index) is outsourced to entities based outside the 
EU. Third country data providers may be reluctant to commit contractually to grant the 
EU  national  competent  authority  access  to  their  business  premises  located  outside  the 
EU.  As  a  result,  this  requirement  cannot  be  enforced  and  the  data  provided  by  these 
providers  cannot  be  granted  "regulated  data"  status  under  the  BMR,  which  allows  for 
alleviated regulatory controls. Therefore, a benchmark administrator who relies on such 
outsourced  data  may  no  longer  benefit  from  the  alleviated  treatment  offered  to  a 
benchmark  administrator  using  regulated  data.  They  would,  in  consequence,  have  to 
comply  with  the  more  stringent  conditions  for  benchmark  administrators,  notably  in 
relation to the code of conduct. It is, thus, argued that this may hamper effective access 
and the use of data and data services in the EU.  

The BMR entered into force on 30 June 2016. It is still unclear how the Regulation will 
ultimately  affect  benchmark  administrators  and  whether  the  highlighted  problem 
regarding  data  outsourcing  to  entities  based  outside  the  EU  will  become  an  issue  in 
practice. The Commission services will closely monitor the developments in this area.  

C) Cross-border barriers in fund management 

Stakeholders  highlighted  that  there  are  still  several  cross-border  barriers  in  the  fund 
management  industry.  These  barriers  arise  in  part  due  to  differences  in  the  national 
interpretation of rules,  leading to  gold-plating and  other  inconsistencies  but  also due to 
the absence of harmonised rules at the European level. 

Respondents observed that funds are usually required to comply with different national 
marketing  requirements  when  passporting  into  another  Member  State.  Several  Member 
States  have  introduced  significant  gold  plating,  e.g.  by  imposing  supplementary 
requirements  in  order  to  obtain  or  exercise  EU  marketing  passports  under  the  AIFMD 
and  UCITS  Directive.  It  was  highlighted  that  the  rules  on  marketing  to  retail  investors 
vary from one Member State to another. 

investment  funds  and  amending  Directives  2008/48/EC  and  2014/17/EU  and  Regulation  (EU)  No 
596/2014. 

53 

 
 
                                                                                                                                                 
In  particular,  Member  States  have  also  often  introduced  special  administrative 
arrangements  for  retail  investors  concerning  subscription,  redemption,  processing  of 
payments and information requirements. While many of these are technically compliant 
with UCITS, these arrangements  may be seen as outdated and with little value to retail 
investors.   

There  are  also  diverging  interpretations  of  crucial  definitions  across  Member  States, 
which create further obstacles. For example, according to  the respondents  it  seems  that 
national laws transposing the AIFMD contain different definitions for important concepts 
such as "professional investor", "material change" and "marketing".  

Stakeholders  also  noted  that  EU  funds  are  subject  to  significantly  different  regulatory 
fees imposed by home and host Member States, both in terms of scale and how they are 
calculated.  National  notification  processes  and  differential  tax  treatments  were  cited  as 
representing additional barriers.   

All  of  these  divergences  undermine  the  single  rulebook  and  a  European  level  playing 
field. They create complexities and additional compliance costs for financial institutions 
operating across borders, presenting a disproportionately high burden for small funds in 
particular.  More  generally,  they  act  as  a  hurdle  for  the  cross  border  trade  of  financial 
services thereby undermining a core CMU objective.  

The Commission launched a public consultation on 2 June 2016 to gather more detailed 
evidence  on  barriers  to  the  cross-border  marketing  of  investment  funds.  Based  on  the 
results, changes may be proposed. National barriers to the distribution of funds are also 
discussed by the Member State Expert Group on barriers to free movement of capital in 
view of finding the most efficient ways to remove them, in collaboration with the Member 
States. The Commission will report on the national barriers identified shortly. 

D) Inconsistencies in authorisation and passporting requirements 

In addition to obstacles when marketing funds across borders, some stakeholders  called 
for  a  single  authorisation  and  more  harmonised  passporting  requirements  in  EU 
legislation and specifically suggested introducing a single authorisation and passport for 
investment services. Currently, passporting in the single market for investment services 
is fragmented according to areas of specialization and require several authorisations.  

In  the  past,  the  multitude  of  authorisations  and  passports  which  operate  in  parallel  has 
also  raised  complex  issues  of  their  respective  scopes.  Indeed,  both  the  UCITS  and  the 
AIFMD passport allow a UCITS manager or the manager of an ADR to provide certain 
MiFID services (individual portfolio management, investment advice, managed accounts 
or trade execution) as long as these services remain incidental or "non-core" in relation to 
the  management  of  the  UCITS  or  ADR.  The  dichotomy  between  individual  portfolio 
management  and  collective  portfolio  (fund)  management  has  spawned  a  regulatory-
driven distinction between investment firms and asset managers.  

54 

 
 
Consolidating  EU  passports  for  various  investment  and  portfolio  management  services 
would  be  consistent  with  a  simpler  single  rule  book  and  a  more  cost  efficient 
organisation  of  the  single  market  for  investment  services.  A  single  authorisation  and 
passport  would  cut  cost  and  make  it  easier  to  provide  investment  services  seamlessly 
across  the  EU.  While  a  single  investment  service  passport  could  in  principle  help 
establishing a CMU, such a proposal would require further analysis.  

As  a  complement  to  the  recent  consultation  on  cross-border  distribution  of  investment 
funds, a mapping of MiFID/UCITS/AIFMD authorisation requirements and their holders 
could be performed in order to assess the potential for administrative simplification. The 
Commission  services  will  also  explore  the  feasibility  of  simplifying  the  range  of 
authorisations needed to provide services across the single market.  

55 

 
 
 
 
 
 
5. 

MAKING  THE  REGULATORY  FRAMEWORK  MORE  CONSISTENT  AND 
FORWARD-LOOKING 

Rather  than  being  the  result  of  design  weaknesses,  unintended  consequences  of 
regulation  seem  to  arise  quite  often  from  factors  outside  the  direct  objective  of  the 
legislation. Relevant factors could be beyond the usual cause and consequence reasoning 
that  underlies  policy  debates  and  the  information  received  in  this  consultation  suggests 
that they often arise from changes elsewhere in the financial framework conditions that 
become relevant for the effectiveness of individual regulatory measures.  

Particularly  valuable  in  this  respect  has  been  evidence  that  point  to  unintended 
consequences  of  regulation  caused  by  changes  in  other  parts  of  regulation.  These  are 
discussed  below  in  section  5.1  (unintended  interactions  and  inconsistencies  between 
legislations). 

A  second  important  set  of  relevant  factors  is  related  to  the  impact  of  regulation  on  the 
end-use and specifically its inaction with consumer protection issues. The likely reason 
for insufficient regard of this factor in the design of regulation is the fact that end-users 
are underrepresented and less involved in policy dialogues (see section 5.2). 

Gaps in the regulatory framework can be considered a third important additional factor. 
Unintended consequences emerge from structural changes the new legislation induces or 
simply  from  escape  strategies.  A  straightforward  example  is  that  the  focus  of  the  EU 
financial regulation to make the banking system safer may have shifted financial activity 
to non-banks (see section 5.3). 

Finally,  technological  change  is  a  rather  obvious  factor  that  may  be  overlooked  in  the 
design  of  regulation,  though  it  is  difficult  to  tackle.  Financial  regulation  may  have  a 
different impact in a different technological environment. And that regulation may either 
foster  or  impair  technological  progress  is  also  of  relevance  in  this  context.  The  rising 
importance of the so-called FinTech sector illustrates this point (see section 5.4). 

5.1. 

Unintended interactions and inconsistencies between legislations  

A  wide  range  of  stakeholders  commented  on  the  unintended  interactions  and 
inconsistencies  between  different  legislations.  Respondents  emphasised  the  importance 
of  undertaking  regular  assessments  and  called  for  future  impact  assessments  to  take 
better account of unintended interactions and possible inconsistencies of new rules with 
existing rules.  

The following examples of inconsistencies have been highlighted by respondents: 

 
 

Inconsistencies between asset segregation rules; 
Inconsistencies between prudential banking rules and prudential insurance rules; 

56 

 
 
 
 
 
 
 

 
 

Inconsistencies between prudential banking rules and accounting rules; 
Inconsistencies between financial conglomerate rules and sectorial legislation; 
Inconsistencies within the existing EU macro-prudential policy framework; 
Inconsistencies  between  prudential  insurance  rules  and  market  infrastructure 
rules; 
Inconsistencies between sanctioning regimes across EU legislation; 
Inconsistencies in definitions across EU legislation; 

Several of these inconsistencies merit follow up, as discussed below. At the same time, 
some  perceived  inconsistencies  are  intentional  differences  between  rules  that  aim  at 
achieving  different  objectives  and/or  were  the  result  of  political  compromises  reached 
during negotiations. 

A) Inconsistencies between asset segregation rules  

Asset  segregation  rules  streamline  the  traceability  of  assets  in  the  custody  chain  and 
thereby aim to increase investor protection, i.e. to avoid situations where assets are seized 
to  pay  third  party  creditors.  Asset  segregation  rules  currently  play  a  vital  role  in  the 
protection of investors when financial institutions default.  

Some respondents claim that the wording and interpretation of asset segregation rules in 
different EU laws are inconsistent. According to CSDR, CSDs should provide segregated 
securities accounts for each participant. Furthermore, CSDs and their participants should 
offer  both  omnibus  client  segregation  and,  if  required,  individual  client  segregation. 
Clients  are  thus  given  the  possibility  to  choose  the  level  of  segregation they  need.  The 
same holds for EMIR rules that apply to CCPs.  

However, following AIFMD and UCITS rules, assets held on behalf of AIFs and UCITS 
funds  must  always  be  segregated  by  the  depositaries  on  a  client-by-client  basis  and  by 
each  (sub)custodian,  to  whom  the  depositary  has  delegated  the  safe-keeping/custody 
functions,  on  a  depositary-by-depositary  basis  with  two  omnibus  accounts  for  all  AIFs 
and  all  UCITS  assets.  The  AIFMD  and  UCITS  asset  segregation  requirements  are 
accompanied by further safeguards such as rules on re-use.  

The  segregation  requirement  as  regards  (sub)custodians  is  the  main  bone  of  contention 
raised  by  respondents.  According  to  some  respondents,  the  (sub)custodian  industry 
practice has arguably been to use a single omnibus account to pool all AIFs' and UCITS 
funds'  assets  of  all  depositaries  together.  They  argue  that  the  AIFMD  and  UCITS 
requirements only increase operational complexity, potentially leading to more errors due 
to  the  multiplication  of  accounts,  without  bringing  any  additional  benefits  in  terms  of 
client asset protection. Some respondents also mentioned that enforcement of segregation 
requirements  varies  across  the  EU,  whereby  the  AIFMD  and  UCITS  requirements  are 
clearly enforced in some Member States, whilst the industry still operates legacy single 
omnibus accounts in others. In this context, respondents called upon the Commission to 
ensure supervisory convergence. 

57 

 
 
Consistent  interpretation  of  asset  segregation  rules  under  AIFMD  and  UCITS  should 
foster legal certainty and ensure supervisory convergence. 

In  June  2016,  ESMA  published  a  call  for  evidence  on  asset  segregation  and  custody 
services  under  AIFMD  and  UCITS  Directives,  which  closed  on  September  23.    ESMA 
had already consulted on asset segregation under the AIFMD in December 2014, but the 
2016  call  for  evidence  had  a  broader  scope,  as  it  also  covered  asset  segregation  rules 
under  the  UCITS  Directive  and  any  residual  uncertainty  on  how  the  depositary 
delegation  rules  should  apply  to  CSDs.  ESMA  is  particularly  interested  in  gathering 
views  on  other  potential  asset  segregation  regimes  that  ensure  clear  identification  of 
assets  as  belonging  to  a  specific  AIF  or  UCITS,  and  that  provide  investors  with 
appropriate protection through clear attribution of the assets in the event of insolvency.  

B) Inconsistencies between Solvency II and CRR/CRDIV 

Stakeholders  provided  a  number  of  examples  of  possible  inconsistencies  between 
CRR/CRDIV and Solvency II. 

A first difference between the two regimes relates to the treatment of the guarantees from 
non-central governments.  Whereas  the  CRR/CRD  IV  allows  for  a  specific  treatment  of 
credit  exposures  to  unrated  regional  governments  and  local  authorities  subject  to 
supervisory  discretion,  Solvency  II  does  not.  According  to  Solvency  II,  when  an 
investment  benefits  from  a  public  authority  guarantee,  a  zero  risk  weight  would  only 
apply to central government guarantees, and not to local and regional authorities, which 
could present a constraint for the financing of the health sector, education, etc. This also 
negatively  affects  regional  promotional  banks  whose  bonds  issuance  typically  benefits 
from such guarantees. 

A  second  inconsistency  highlighted  by  respondents  relates  to  the  detailed  eligibility 
condition  of  certain  own  fund  instruments  (e.g.  capital  hybrids),  which  may  receive 
significantly  different  treatment  for  insurers  and  credit  institutions,  even  though  their 
actual financial loss absorbency may be similar.  

The Commission services consider that the rules should be assessed for their consistency 
across  sectors,  taking  into  account  the  unavoidable  differences  between  the  business 
models  of  the  financial  institutions.  As  a  first  step,  on  18  July  2016  the  Commission 
issued a call for advice to  EIOPA on the review of  17 specific items in the Solvency II 
delegated  regulation.  Among  other  things,  EIOPA  is  indeed  tasked  to  analyse  the 
differences  between  the  banking  and  insurance  framework  in  the  treatment  of  regional 
governments and local authorities and in the treatment of exposure guaranteed by a third 
party and to assess whether these are justified by differences in the business model of the 
two  sectors.  EIOPA  is  also  asked  to  also  follow  the  same  approach  with  regards  to 
inconsistencies in the treatment of certain features of own funds items (e.g. certain debt 
instrument) within the insurance and banking framework. The technical advice will feed 

58 

 
 
into  the  review  of  the  Solvency  II  delegated  act  where  these  issues  are  intended  to  be 
addressed. 

C) Interaction between IFRS9 and CRD4/CRR  

The interactions between accounting standards and prudential and supervisory rules are 
perceived  by  stakeholders  as  burdensome,  overlapping  and  sometimes  in  contradiction. 
Respondents  generally  complain  about  divergences  of  criteria  and  definitions  between 
banking legislation (CRR/CRDIV) and IFRS 9 requirements, in particular in relation to 
loan loss provisioning and the calculation of capital. They also raise concerns about the 
outcome  of  the  ongoing  consultations  on  guidelines  in  the  Basel  committee  and  EBA, 
which add uncertainty to how IFRS 9 should be applied. Also, respondents worry about 
the  different  dates  of  entry  into  force  of  legislations  and  guidelines,  which  in  their 
opinion could create uneven effects between banks. 

The  application  of  the  expected  credit  loss  provisioning  introduced  by  the  revised 
international  accounting  standards  on  financial  instruments  "IFRS9",  may  lead  to  a 
sudden  decrease  in  the  capital  ratios  of  institutions.  The  results  of  the  first  impact 
assement published by the EBA in November 201651 show for example that the estimated 
impact  of  IFRS  9  is  mainly  driven  by  IFRS  9  impairment  requirements.  The  estimated 
increase  of  provisions  is  on  average  18%  compared  to  the  current  levels  of  provisions 
under IAS 39 with an average decrease of 56bps for common equity tier 1 (CET1) ratios. 
Discussions on possible prudential treatments on the impact of increased expected credit 
losses  are  still  ongoing.  In  light  of  this,  the  incremental  provisioning  for  credit  risk  of 
IFRS 9 is being phased-in in the CRR2 package so as to prevent an unwarranted impact 
on lending by banks.  

D) Interaction between FICOD and sectoral legislation 

Financial conglomerates are large financial groups which provide services and products 
in  at  least  banking/investment  and  insurance.  The  Financial  Conglomerates  Directive 
(FICOD)52 aims at identifying and managing risks that are inherent to these groups that 
are  active  in  several  financial  sectors  to  ensure  financial  stability.  FICOD  therefore 
focuses  on  the  so-called  "group  risks"  -  i.e.,  potential  risks  of  multiple  gearing  and 

51https://www.eba.europa.eu/documents/10180/1360107/EBA+Final+draft+report+on+impact+assessment

+of+IFRS9.pdf  

52  Directive  2002/87/EC  of  the  European  Parliament  and  of  the  Council  of  16  December  2002  on  the 
supplementary  supervision  of  credit  institutions,  insurance  undertakings  and  investment  firms  in  a 
financial  conglomerate  and  amending  Council  Directives  73/239/EEC,  79/267/EEC,  92/49/EEC, 
92/96/EEC,  93/6/EEC  and  93/22/EEC,  and  Directives  98/78/EC  and  2000/12/EC  of  the  European 
Parliament and of the Council. 

59 

 
 
                                                 
excessive  leveraging  of  capital,  risks  of  contagion,  risks  related  to  management 
complexity, risk concentration, and conflicts of interest.  

the  relevance  for 

Some respondents argue that FICOD should be reviewed in light of changes to sectoral 
legislation.  Other  respondents  call  for  reconsidering  the  merits  of  supplementary 
supervision  when  sectorial  requirements  already  cover  all  risk,  in  particular  because 
Solvency  II's  enhanced  group  regime  reduces 
insurance-led 
conglomerates. Some stakeholders argued that certain market operators (e.g. exchanges, 
central  counterparties)  owned  by  conglomerates  should  be  clearly  excluded  from 
consolidated  supervision  although  settlement  systems  (CSDs)  could  be  included.  Some 
respondents  also  argue  that  the  application  of  CRR  consolidated  supervision  to  mixed 
financial  holding  companies  with  a  primary 
insurance  nature  has  unintended 
consequences.  Financial  conglomerates,  as  identified  under  the  Directive,  which  are 
predominantly  insurance  in  nature  but  with  significant  banking  activities  in  the  group 
may, for example, need to comply with all the CRR capital, own funds, large exposure, 
liquidity  and  leverage  requirements  on  a  consolidated  basis  (which  are  developed  and 
tested  by  impact  studies  on  credit  institutions).  This  is  deemed  excessive,  since  the 
comprehensive Solvency II group requirements already apply. 

As  part  of  the  evaluations  carried  out  under  its  2016  Regulatory  Fitness  and 
Performance  Programme  ("REFIT"),  the  Commission  launched  in  June  2016  a 
consultation to gather evidence on whether the current FICOD regulatory framework is 
proportionate and fit for purpose, and delivering on its objective to identify and manage 
group  risks.  In  line  with  better  regulation  principles,  the  evaluation  will  assess  the 
relevance, effectiveness, efficiency, coherence and EU added value of the legislation. The 
consultation closed in September 2016 and the issues identified in the call for evidence 
have  fed  into  the  evaluation  exercise  (including  the  issue  of  the  application  of  CRR 
consolidated supervision to mixed financial holding companies with a primary insurance 
nature). 

E) Inconsistencies in the macro-prudential toolkit 

Several  respondents  consider  that  the  EU  macro-prudential  framework  is  unduly 
complex, hindering its efficiency, effectiveness and predictability of supervisory action. 
The  existing  overlaps  between  different  macro-prudential  instruments,  their  varying 
complexity and their diverse activation procedures are seen as blurring the transparency 
of  the  framework.  There  is  also  a  perceived  lack  of  clarity  in  the  context  of  legal 
sanctions in the case of breaches of capital requirements and the role of different macro-
prudential  capital  buffers  therein.  They  thus  consider  it  important  that  the  macro-
prudential toolset be further streamlined at EU level. Others call for specific revisions in 
the  rules  and  procedures  governing  specific  macro-prudential  instruments,  for  instance, 
the "cumulation" rules governing buffers for systemically important institutions and the 
systemic  risk  buffer  (SRB),  as  well  as  the  indicators  used  in  calibrating  institution-
specific capital buffers. 

60 

 
 
Banks  and  industry  associations  claim  that  the  design  of  systemic  risk  regulation,  in 
particular  in  terms  of  the  calibration  of  the  buffers  for  global  systemically  important 
institutions (G-SIIs) and for domestic/other systemically important institutions (O-SIIs), 
presents inconsistencies and can create misaligned incentives, while also unduly raising 
regulatory  costs.  They  are  concerned  that  macro-prudential  buffers  are  currently  not 
applied consistently in all Member States which exacerbates uncertainty and complicates 
appropriately  estimating  the  impacts  of  the  whole  capital  framework.  In  addition,  they 
argue  that  the  "cumulation"  of  Pillar  1  and  Pillar  2  capital  requirements  and  macro-
prudential  measures  may  entail  unnecessary  regulatory  burdens  as  they  simultaneously 
target the same risks (duplication of risk targeting, for example, in terms of requirements 
for real estate credit risk).  

Some  industry  respondents  also  point  to  a  disproportionate  burden  for  particular 
segments  of  the  EU  banking  sector  following  the  activation  of  some  macro-prudential 
instruments,  in  particular  the  SRB  and  the  O-SII  buffer,  especially  as  compared  to  the 
overall  lower  requirements  for  some  globally  systemic  banks.  In  this  regard,  the 
complexity  of  the  framework  and  the  possible  duplication  in  risk  targeting  associated 
with different macro-prudential instruments are seen as unduly increasing the regulatory 
burden, in particular on small institutions with simple business models.   

The  Commission  services  are  currently  undertaking  a  comprehensive  review  of  the EU 
macro-prudential policy framework. The review seeks to address potential deficiencies in 
the  capacity  of  the  EU  macro-prudential  framework  to  tackle  systemic  risks,  while 
preserving an adequate balance between national flexibility to deal with country-specific 
vulnerabilities,  and  appropriate  coordination  and  common  control  mechanisms  to 
safeguard  the  single  market  and  manage  cross-border  spill-overs  of  national  policies. 
Addressing  concerns  expressed  by  respondents,  key  objectives  of  the  review  include 
increasing  the  efficiency  and  effectiveness  of  the  macro-prudential  toolset  for  banks  by 
reducing  the  scope  for  duplication  in  risk  targeting,  circumvention  of  control 
mechanisms envisaged in the framework, undue 'stacking'/cumulation of capital buffers 
and disproportionate increases in the regulatory burden. A public consultation on these 
matters ended on 24 October 201653. 

F) Inconsistencies between Solvency II and EMIR 

EMIR  introduced  several  requirements  for  financial  counterparties  of  OTC  derivatives 
contracts. This Regulation applies also to insurers, which are allowed under Solvency II 
to  use  derivatives  instruments  insofar  as  they  contribute  to  a  reduction  of  risks  or 
facilitate  efficient  portfolio  management54.  In  their  responses,  insurers  pointed  out  that 

53 http://ec.europa.eu/finance/consultations/2016/macroprudential-framework/index_en.htm  

54 Article 132(4) of the Solvency II Directive. 

61 

 
 
                                                 
while EMIR considerably reduced counterparty risks related to derivatives, Solvency II 
does  not  take  this  improvement  into  account  in  its  capital  requirements.  In  particular, 
stakeholders raised two issues: 

  Consistency  of  haircuts  to  collateral  applied  in  Solvency II  with  haircuts 

introduced by EMIR, depending on the related market risk55; 

  EMIR requires to clear derivatives through central CCPs or to exchange margin 
for bilateral contracts56, thus significantly reducing the counterparty default risk, 
while Solvency II does not explicitly take this into account. 

Solvency II includes capital requirements for derivatives in order to address the related 
counterparty  default  risk  .These  capital  requirements  have  been  set  out  in  a  pre-EMIR 
context and do not yet account for potential counterparty risk reduction through clearing 
requirements, and do not discriminate between CCP and OTC derivatives. In addition, no 
specific approach has been set out to value CCP exposures.  

On 18 July 2016 the Commission issued a call for Advice to EIOPA on the review of 17 
specific  items  in  the  Solvency  II  delegated  regulation.  Among  other  things,  EIOPA  is 
indeed tasked to suggest how the Solvency II framework could be updated in its approach 
to  cleared  derivatives  to  take  account  of  the  reduced  counterparty  risk  introduced  by 
EMIR. Moreover EIOPA is asked to develop a new approach, on exposures to qualifying 
central counterparties. The technical advice will feed into the review of the Solvency II 
Delegated Act where these issues are intended to be addressed. 

G) Inconsistent sanction regimes 

Several  stakeholders,  in  particular  public  authorities,  claimed  that  the  provisions  on 
administrative  penalties  included  in  different  EU  legal  acts  are  inconsistent.  This 
complicates  the  application  of  penalties  and  increases  the  administrative  burden  for 
competent  authorities.  Stakeholders  highlighted  inconsistencies  especially  in  the 
following areas: 

• 

• 

Divergent level of fines – this includes both differences in the calculation of 
the fines as well as differences in fines for natural and legal persons;  

Publication of sanctions – this concerns factors such as the timing, the object 
of publication and conditions for exemption or anonymous publications;  

55 Article 46(1) of EMIR 

56 Article 4 of EMIR (clearing obligation), and Article 11(3) of EMIR (bilateral exchange of margin) 

62 

 
 
 
                                                 
• 

Reporting  of  sanctions  to  the  European  authorities  –  the  scope  of  the 
information to be reported differs across different legal acts; 

Various  industry  respondents  furthermore  claimed  that  sanctions  are  sometimes 
disproportionate  to  the  seriousness  of  the  breach.  These  concerns  were  raised  in 
particular with regard to the TD. It was stated that: different amounts do not reflect the 
importance of the duties breached; that sanctions for failure to notify major holdings are 
sometimes  excessive;  that  setting  out  maximum  fines  only  is  insufficient  to  ensure 
proportionality; and that sanctions should be applied to companies/managers rather than 
employees  who  follow  instructions.  Furthermore,  it  was  stressed  that  suspension  of 
trading  under  the  TD  can  only  last  for  a  maximum  of  10  days,  even  if  the  reason  for 
suspension  is  still  valid.  This  implies  that  suspension  has  to  be  re-published  every  10 
days, which is burdensome. 

Sanctioning  powers,  like  the  level  of  fines,  are  sometimes  deliberately  different  in 
different pieces of EU rules to tailor the sanctioning powers to the specifics of the sectors 
or breaches concerned. The large majority of inconsistencies highlighted, however, arise 
due to the outcome of the negotiations between the co-legislators. Given that the setting 
of  sanctions,  especially  criminal  ones,  is  traditionally  a  competence  of  Member  States, 
only minimum harmonisation agreements have been possible to date.  

The  Commission  services  will  monitor  the  application  of  sanctions  and  encourage  the 
ESAs  to  focus  on  enforcement  issues,  also  in  order  to  evaluate  the  actual  effectiveness 
and proportionality of sanctions. 

H) Inconsistent or unclear definitions 

A frequent issue raised by stakeholders relates to the need for further clarification and/or 
consistency of definitions. The definitions that have been raised a significant number of 
times are: 

  market-making definition; 

  definition of financial instruments; 

  professional client definition; and  

  safekeeping/custody definition. 

In  general,  there  are  no  specific  indications  that  the  inconsistencies  identified  by 
stakeholders would cause important problems and there are only limited indications that 
changing the definitions would bring added value. 

The Commission does not control the legislative process, so it cannot impose consistency 
of definitions, also because legislation may already exist and changing this might impose 
significant  costs  on  market  participants.  However,  the  Commission  can  propose 

63 

 
 
definitions that are as consistent as possible with the existing ones. The Commission can 
also explain why it cannot use the existing definitions in specific cases. 

The  Commission  services  will  aim  at  providing  definitions  that  are  as  consistent  as 
possible with the existing ones and, if applicable, explain why it cannot use the existing 
definitions in specific cases. 

A  recent  example  is  the  definition  of  commodity  derivatives  and  foreign  exchange  spot 
and forward  contracts  under  MiFID II which have  been  clarified further in  the MiFID 
delegated regulation adopted by the Commission on 25 April 2016. Articles 5-8 specify 
which commodity contracts are deemed financial instruments.  Furthermore, Article 10 
of  the same Regulation describes which foreign exchange contracts are in the scope  of 
MiFID II. 

Going  forward  Commission  services  will  look  in  particular  at  the  definitions  of 
professional investor, safekeeping and custody. 

5.2. 

Retail investor and consumer protection  

Consumer associations highlighted that consumers' trust in financial service providers is 
still  low.  They  believed  that  proper  and  efficient  enforcement  of  EU  law  is  crucial  in 
order  to  enhance  consumer  confidence  in  financial  services,  particularly  in  light  of  the 
CMU and the single market for retail financial services. 

However  it  is  worth  noting,  as  recognised  by  consumer  representatives,  that  most  of 
those new or revised laws have only recently entered into force, or are about to enter into 
force (e.g. MiFID II, Packaged retail and insurance-based investment products "PRIIPs" 
Regulation57  and  Payment  Services  Directive  "PSD2"58)  while  some  are  still  in  a 
transposition  phase  (e.g.  Insurance  Distribution  Directive  "IDD"59,  Payments  Account 

57 Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on 
key information documents for packaged retail and insurance-based investment products (PRIIPs). 

58  Directive  (EU)  2015/2366  of  the  European  Parliament  and  of  the  Council  of  25  November  2015  on 
payment  services  in  the  internal  market,  amending  Directives  2002/65/EC,  2009/110/EC  and 
2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC. 

59 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance 

distribution (recast). 

64 

 
 
 
                                                 
Directive "PAD"60 and Mortgage Credit Directive "MCD"61). As a result, it is too early to 
assess  their  impact  on  consumers,  and  the  focus  should  now  be  predominantly  on  the 
implementation and enforcement of these new rules. 

Nevertheless, while acknowledging that recent EU legislation is to benefit consumers and 
competition in the market62, some consumer representatives have continued to point to a 
few  issues  that,  in  their  opinion,  still  need  to  be  addressed.  One  such  issue  is  the 
incomplete  or  uneven  enforcement  of  EU  consumer  protection  rules,  hindering  the 
emergence of a truly single market for financial services: consumer representatives claim 
that national supervisors are not always equipped to ensure proper consumer protection 
supervision  (lack  of  sufficient  resources  and  effective  sanctioning  powers),  especially 
cross-border (lack of supervisory cooperation). In addition, national out-of-court redress 
procedures do not consistently ensure efficient settlement of disputes between consumers 
and financial services providers, thus creating non-tariff barriers in the internal market.  

Moreover, a number of respondents from the financial industry raised the issue that pre-
sale  information  requirements  to  retail  clients  are  excessive  and  duplicative  across 
different  pieces  of  legislation  (e.g.  PRIIPs  regulation,  IDD,  Prospectus  Directive, 
Solvency  II,  MiFID/R,  and  UCITS).  Many  submissions  in  this  context  challenged  the 
effectiveness  of  information  provided  to  retail  clients.  The  format  of  disclosure63  is 
presented  as  burdensome  and  confusing  for  the  end  user.  On  the  other  hand,  consumer 
representatives  are  more  concerned  about  inconsistencies  in  the  rules  applicable  to  the 
distribution of financial products (e.g. inducement payments, commissions). 

It should be noted that many of the submissions received were also made in the responses 
to  the  public  consultation  on  the  Green  Paper  on  Retail  Financial  Services.  In  the  first 
months of 2017, the Commission services will publish an Action Plan setting out steps it 
plans  to  take  to  build  a  deeper  single  market  for  retail  financial  services.  Among  other 
things,  these  steps  will  include  actions  to  improve  awareness  around  out-of  court 

60  Directive  2014/92/EU  of  the  European  Parliament  and  of  the  Council  of  23  July  2014  on  the 
comparability of fees related to payment accounts, payment account switching and access to payment 
accounts with basic features.   

61  Directive  2014/17/EU  of  the  European  Parliament  and  of  the  Council  of  4  February  2014  on  credit 
agreements  for  consumers  relating  to  residential  immovable  property  and  amending  Directives 
2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010. 

62    Some examples are: enhanced transparency on financial advice provided to consumers under MiFID II, 
key  information  document  "KID"  under  the  PRIIPs  regulation  to  counter  the  increasingly  complex 
information accompanying financial retail products, the legal right to a basic payments account under 
the PAD, responsible lending obligations, right to conversion into an alternative currency, as well as to 
early repayment under the MCD 

63 Not to be confused with the medium of disclosure; see section on technological developments.  

65 

 
 
                                                 
settlement  options  for  cross-border  disputes  and  to  look  further  into  disclosure 
requirements and assess whether these are fit for purpose in the digital world. Finally, in 
the  context  of  the  CMU  Action  Plan,  the  Commission  services  will  undertake  a 
comprehensive  assessment  of  European  markets  for  retail  investment  products;  the 
assessment  will  include  the  efficiency  of  distribution  channels  and  the  effectiveness  of 
investment advice in ensuring retail investors find their way to products and services that 
suit their needs.  

A) Improved out-of-court complaint and redress procedures 

Consumer  associations  are  concerned  about  the  lack  of  effective  enforcement  and 
sufficiently dissuasive sanctions in the retail financial services. They argued that out-of-
court  complaint  and  redress  procedures  may  be  ineffective  in  terms  of  improving 
consumers'  protection  since  financial  services  providers  are  not  obliged  to  subscribe  to 
them. 

Out-of-court procedures may facilitate private enforcement of consumer/investor rights. 
Under  the Directive  of  2013  on  Alternative  Dispute  Resolution (ADR),  Member States 
are  required  to  ensure  that  such  procedures  are  available  to  consumers.  In  the  retail 
financial sector, the FIN-NET network is available to facilitate settlement of cross-border 
disputes between consumers and financial services providers. These mechanisms can be 
used on a voluntary basis. Making participation mandatory for financial firms is already 
envisaged  in  the  Mortgage  Credit  Directive.  The  Commission  services  will  verify  how 
Member  States  transpose  that  compulsory  participation  into  national  law  to  assess  to 
what extent the issue is addressed. 

The Commission services established an informal network tool to share information with 
the ESAs on enforcement matters. The Retail Financial Services Action Plan will look at 
issues  around  consumer  awareness  regarding  FIN-NET  and  the  divergence  of  powers 
between different ADR regimes. 

B) Pre-sale disclosure requirements across different pieces of legislation  

Respondents  from  the  financial  industry  raised  the  issue  that  pre-sale  information 
requirements  to  retail  clients  are  of  a  duplicative  nature.  Many  submissions  in  this 
context  challenge  the  effectiveness  of  information  provided  to  retail  clients.  The 
information is presented as burdensome and confusing for the end user. Another aspect is 
the  increase  in  the  absolute  number  of  information  items  required;  criticism  of  the 
increased  amount  of  required  information  has  come  in  particular  from  the  insurance 
sector. 

66 

 
 
For  example,  according  to  several  responses  from  the  insurance  sector,  consumers  are 
overwhelmed  by  the  increasing  number  of  pre-sale  information  items  to  be  disclosed 
respectively under PRIIPs, IDD, and Solvency II64. They also claimed that  the pre-sale 
information requirements are duplicative across these legislations65. 

The  Commission  services  analysis  finds  that  IDD  requirements  rather  than  being 
duplicative  in  fact  complement  PRIIPs  requirements66.  As  regards  PRIIPs-Solvency  II 
duplication concerns, it is important to clarify that Solvency II provision on "Information 
for  policy  holders"  is  contract-specific,  entailing  a  disclosure  obligation  before  and 
during  the  contract,  whereas  the  PRIIPs  Key  Information  Document  (KID)  is  product-
specific. 

Moreover,  respondents  from  the  industry  (predominantly  from  the  banking  sector) 
acknowledged the objective of enhancing investor protection via the additional MiFID II 
requirements on disclosing all relevant costs attached to a product or service. Having said 
that,  they  are  concerned  that  the  overall  positive  effect  might  be  reduced  where  clients 
are  provided  with  an  additional  document.  Respondents  called  for  further  aligning 
MiFID II  rules  such  that  an  investment  firm,  acting  as  a  distributor,  can  fulfil  its 
disclosure  obligations  under  MiFID  II  through  the  KID  (PRIIPs),  or  Key  Investor 
Information Document "KIID" (UCITS). 

However, MiFID II requires investment firms to disclose all costs and charges relating to 
the  service  and  the  product  being  offered.  The  investment  firm  can  rely  on  the  PRIIPs 
KID to disclose information on the product. It must, however, additionally inform clients 
about the costs and  charges  related to the distribution of PRIIPs, as such cost elements 
may  not  be  included  in  the  PRIIPs  KID.  As  the  UCITS  KIID  does  not  disclose  all  the 
costs  as  required  by  MiFID II  (e.g.  transaction  costs),  MiFID II  intermediaries  cannot 
fully rely on the UCITS KIID. They have to liaise with the UCITS management company 

64 In particular, the number of pre-contractual information increases from twenty under the Life Insurance 
Directive (Directive from 1979, recast in 2002) to sixty-six under Solvency II (Directive from 2009) 
and  PRIIPs  Regulation  (Regulation  from  2014),  while  the  disclosure  requirements  for  sales  rules 
would  rise  from  nine  under  IMD  (Directive  from  2002)  to  thirty-five  under  IDD  (Directive  from 
2016). 

65  Stakeholders  stressed  that  PRIIPs  and  IDD  contain  similar  provisions  on  the  disclosure  of  costs  and 
charges with no acknowledgment in either piece of legislation for the requirements to be met by the 
other.  On  the  other  hand,  they  also  stressed  that  both  PRIIPs  and  Solvency  II  require  equivalent 
information to be disclosed on the insurer's identity, the duration of the contract and the existence of 
complaints procedures.  

66  Whereas  the  PRIIPs  KID  is  to  be  produced  by  the  product  manufacturer,  IDD  requires  additional 
information to be disclosed by the insurance distributor on the specific cost of distribution relating to 
that product 

67 

 
 
                                                 
to  obtain  additional  information  on  transaction  costs  as  well  as  costs  related  to 
distribution. Therefore, pre-contractual disclosure requirements complement one another 
rather than overlap. 

Finally,  a  number  of  industry  representatives  pointed  that  while  the  PRIIPs  regulation 
stipulates a temporary exemption67 (until 31 December 2019) from its scope for UCITS68 
it  does  not  include  a  similar  exemption  for  insurers  providing  unit-linked  insurance 
contracts  offering  switching  between  different,  often  multiple,  UCITS  options.  They 
argued  that  in  order  to  fulfil  their  obligations  under  the  PRIIPs  regulation,  the  insurers 
will need to disclose PRIIPs relevant information for each underlying investment option. 
The claim points to a practical difficulty when underlying instruments are numerous and 
varying,  and  as  a  result  a  detailed  description  of  individual  instruments  would  render 
disclosure highly complex. 

In  general,  the  different  pieces  of  pre-sale  information  are  designed  to  meet  different 
objectives  related  to  investor  protection.  Nonetheless,  potential  inconsistencies  can  be 
assessed  and  addressed  in  the  relevant  reviews  as  well  as  in  the  context  of  the  wider 
assessment of retail investment markets under the CMU Action Plan.  

Moreover, the Retail Financial Services Action plan will look at how to monitor different 
disclosure requirements in the digital world and collect evidence of the risks and benefits 
with  a  view  to  address  some  issues  later,  possibly  through  legislative  action  (see  also 
"financial information and disclosure and digital technology" under 5.4.B). 

C) Transparency of distribution costs 

Whereas  the  submissions  from  the  financial industry  focused  on  highlighting excessive 
the 
pre-sale 
inconsistencies  in  the  rules  applicable  to  the  distribution  of  financial  products  (e.g. 
inducement payments, commissions).  

the  consumer  associations  pointed  at 

requirements, 

information 

A  number  of  consumer  representatives  argued  about  the  misalignment  of  the  various 
regulations addressing the transparency of distribution costs (e.g. inducement payments, 
commissions).  As  a  result,  similar retail  financial  products  and  services  may  be  less  or 
more transparent depending  on the type of distribution channel. Such differences could 
also be responsible for the lack of competition in some of these markets. Consumers may 
be presented with a biased and reduced choice of products and fail to 'shop around' for 
the product that satisfies their needs best.  

67 See Article 32 PRIIPs. 

68 This also applies to AIFs obliged to provide the UCITS KIID under national law. 

68 

 
 
                                                 
For example, IDD requires that a fee, commission or a non-monetary benefit “does not 
have  a  detrimental  impact  on  the  quality  of  the  relevant  service  to  the  customer”.  In 
contrast,  MiFID  II  provides  that  inducements  are  allowed  as  long  as  they  enhance  the 
quality of the relevant service to the client. As a result the consumer may be presented 
with a different level of investor protection, depending on the type of product it acquires. 

In general, the IDD aligns the consumer protection rules to the investor protection rules 
of MiFID II in order to avoid any gap. However, as regards the issue of inducements, the 
organisation  and  the  size  of  the  insurance  distribution  sector  is  typically  different  from 
investment  firms,  and  the  activity  itself  is  of  a  different  nature.  Also,  insurance 
distribution  structures  can  be  very  different  across  Member  States.  The  IDD  –  unlike 
MiFID II – is a minimum harmonisation instrument acknowledging these differences and 
giving  flexibility to  Member  States  in  organising  their  respective  insurance  distribution 
structures.  

Consequently, there is no overall ban on commissions under IDD, leaving Member States 
the choice to impose such a ban or not. Furthermore, there is no "independent advice" in 
the sense of MiFID II under IDD, due to the nature of the market. Importantly, however, 
both  legislative  texts  are  similar  in  their  objective  to  restrict  the  acceptance  of 
inducements. The inducement provisions in IDD differ slightly from MiFID II (to reflect 
the  distribution  specificities  described  above)  in  providing  a  negative  test  for 
inducements instead of a positive one in MiFID II.  The co-legislators explicitly included 
a different wording under IDD establishing this difference in approach.  

Notwithstanding  the  difference  in  approach,  the  scope  of  possible  alignment  between 
IDD and MiFID II is currently the subject of a thorough analysis. A public consultation 
was  launched  by  EIOPA  on  4  July  2016.  EIOPA  Technical  Advice  on  IDD  level  2 
measures is expected to be delivered to the Commission in 2017. 

With  regards  to  the  provision  of  advice  (which  is  currently  regulated  product  by 
product),  the  Retail  Financial  Services  Action  Plan  will  examine  the  possibility  to 
encourage  provision  of  independent,  holistic  advice  empowering  consumers  to  take 
informed decision meeting their needs. 

D) Investor compensation scheme 

The  Investor  Compensation  Scheme  Directive  (ICSD)69  provides  the  last  resort 
protection in the event of failure of an investment firm. A number of public authorities 
and consumer representatives called for the Commission to update it as it was considered 
outdated (given its adoption in 1997).  

69  Directive  97/9/EC  of  the  European  Parliament  and  of  the  Council  of  3  March  1997  on  investor-

compensation schemes. 

69 

 
 
                                                 
In particular, some stakeholders called for the Directive to be updated in order to clarify 
the services it covers, to reflect modern investment methods, inflation, the higher values 
(on average) of investments than under the current compensation level of €20.000, and to 
reassure  investors  across  borders  about  applicable  levels.  Moreover,  the  Directive  does 
not take into account the progress made with the adoption of MiFID I (and more recently 
MiFID  II),  meaning  that  it  does  not  offer  protection  in  relation  to  some  investment 
services and products under MiFID. It also does not reflect parallel developments in the 
DGSD.    The  minimum  harmonisation  nature  of  the  ICSD  has  led  to  different  levels  of 
compensation across the EU, with consequences not just for investor protection but also 
the  functioning  of  the  single  market  for  investment  services.  Finally,  there  are  also 
concerns about the level-playing field between providers of investment services (covered 
by the ICSD) and banks given that the DGSD covers banking products and term deposits. 

The Commission services will give further consideration to this point. It should be noted 
that in 2010, the Commission had already adopted a proposal to amend the ICSD. This 
proposal  was  withdrawn  in  2015  within  the  Refit  framework  to  reduce  the  number  of 
legislative proposals.  

5.3. 

Gaps and remaining risks in the regulatory system  

The regulatory debate is paying increasingly attention to systemic risks that can emerge 
in  the  financial  sector  outside  the  banking  system,  considering  a  potential  shift  of 
activities to non-bank entities that are subject to less stringent regulation than banks and 
that are supervised without a systemic risk perspective. The replies received gave various 
examples  of  where  a  shift  of  risks  from  banking  to  less  or  non-regulated  parts  of  the 
financial  system  has  been  taken  place  or  is  expected  to  take  place.  Several  flagged  the 
increasing  importance  of  CCPs,  while  others  reported  on  various  parts  of  the  so-called 
shadow banking sector. 

A) CCP recovery and resolution framework 

As  a  result  of  the  EMIR  requirements  for  the  central  clearing  of  standardised  OTC 
derivatives, CCPs have grown in importance. A shift of financial activity towards CCPs 
is  warranted  and  expected  to  reduce  counterparty  risk,  even  if  the  concentration  of 
business in CCPs may imply concentration of risks and higher costs for those actors that 
request tailor-made OTC products for hedging their exposure. While the CCPs' business 
model is not particularly risky, their size and central role gives rise to new vulnerabilities 
in the form of risk concentration, complex interdependencies with clearing members and 
collateral scarcity 

While being a low-probability event, the failure of a CCP could, via its central position in 
the markets and notably its direct links to banks, cause widespread contagion within the 
financial  system,  unless  managed  in  an  orderly  manner.  Moreover,  authorised  CCPs 

70 

 
 
 
provide their services across borders and, accordingly, the failure of a CCP would imply 
spillover  effects  between  Member  States.  The  fragmentation  of  the  EU  Single  Market 
during  the  recent  crisis  clearly  demonstrates  the  danger  of  relying  exclusively  on 
divergent  national  regimes  to  manage  the  failure  of  financial  institutions  with  cross-
border reach.  

It is widely acknowledged that an EU-wide recovery and resolution framework is most 
urgently required for CCPs. A legislative framework is required that empowers relevant 
authorities to address this financial-stability risk by rapidly restructuring and winding-up 
the  operations  of  a  CCP  in  an  orderly  way  in  case  of  threatened  systemic  failure.  In 
addition,  legislative  measures  should  provide  incentives  for  sound  risk  management  of 
CCPs and protect the clients of the large banks which use the CCPs clearing services, and 
taxpayers from large losses in the event of resolution. 

A European framework for recovery and resolution of CCPs would ensure more effective 
crisis  management  and  less  market  fragmentation.  It  would  foster  a  coordinated 
execution  of  actions  across  Member  States,  a  level  playing-field  for  the  institutions 
concerned and an equal treatment of their owners, creditors and customers. In this way, 
the existing EU and national prudential rules would also be enhanced by the EU recovery 
and resolution framework. 

One of the Commission's stated priorities was to complete the financial reform agenda by 
addressing  remaining  risks,  notably  linked  to  entities  that  are  systemically  important, 
including  CCPs.  The  Commission's  proposal  for  a  recovery  and  resolution  framework 
for CCPs is in line with this priority. 

B) Macro-prudential framework beyond banking 

There is an international consensus that systemic risks in the financial system as a whole, 
and not just banks, should be carefully monitored and addressed.  The recent crisis has 
shown  that  any  public  intervention  to  address  risks  in  financial  institutions  should  be 
swift  and  with  minimum  recourse  to  taxpayer  funds.  The  Financial  Stability  Board 
(FSB),  a  top-level  international  grouping  of  regulators  working  under  the  aegis  of  the 
G20,  has  also  prioritised  this  work.  This  priority  is  also  reflected  in  the  views  the 
Commission received. Some respondents argued that in part as a consequence of stricter 
regulation  on  banks,  but  also  driven  by  other  factors  such  as  the  low  interest  rate 
environment  and  a  search  for  yield  by  investors,  the  potential  for  risks  shifting  to 
financial institutions in the non-bank sector has increased.  

A  shift  towards  market-based  finance  does  not  necessarily  mean  higher  systemic  risk. 
Activities without any maturity transformation involved, and where the entities involved 
exhibit low leverage and limited liquidity risk, typically do not threaten financial stability 
as they are less prone to spreading contagion across the financial system. Yet, there are 
historical  cases  when  non-bank  financial institutions  contributed  to  systemic  risk,  often 

71 

 
 
because of their key role in some markets, and their interconnectedness with the banking 
sector.  

Analyses by the ESRB, ESMA and other financial institutions have carefully looked into 
how different non-bank actors could spur systemic risk, including for example insurance, 
investment funds and ETFs. They identified data gaps in some parts of non-banking and 
are establishing risk metrics that are crucial for the monitoring of systemic risks in non-
bank entities and activities. They also noted a lack of a macro-prudential toolkit for the 
non-bank sector, for example instruments that target insurers or allow authorities the use 
of margins and haircuts as macro-prudential instruments. 

In the EU, non-banking financial entities are already subject to a number of rules such as 
those contained in the AIFMD, UCITS, SFTR, EMIR, as well as the CRR/CRDIV that 
should  make  them  resistant  to  financial  stress.  The  existing  regulatory  toolkit  allows 
supervisory authorities to take a wide range of actions to mitigate potential vulnerabilities 
from the shift of activity to non-banks. As some of the new rules are still to be phased in, 
their  effectiveness  is  still  largely  untested.  There  is  therefore  a  valid  concern  that  the 
existing rules may not be effective in preventing the built up of excess leverage in good 
times or of sufficiently containing adverse effects in times of systemic risk. 

At this stage, available evidence does not indicate that potential risks from more market-
based  finance  –  including  from  non-bank  entities  and  activities  –  are  of  systemic 
dimension.  A  number  of  measures  in  both  sectorial  and  market  legislation  have  been 
agreed and are about to be implemented. In order to assess their effectiveness and spot 
potential gaps, as well as to anticipate possible sources and transmission channels of new 
risks,  intensive  monitoring  is  warranted  and  is  carried  out  by  the  Commission  and  in 
European  (ESRB)  and  international  fora  (FSB).  At  this  stage,  it  is  important  that 
supervisors  continue  their  analysis  and  integrate  into  their  monitoring  process 
information from the new data sources as soon as they become available. Once the full 
effects of existing measures tackling both current risks and possible new emerging risks 
related  to  certain  non-banking  entities  and  activities  are  evaluated,  steps  towards  the 
development of a macro-prudential framework beyond banking in the medium term can 
be considered.  

The Commission launched a public consultation between 1 August and 24 October 2016 
to  obtain evidence  and feedback on the functioning and necessary improvements of the 
EU  macro-prudential  framework.  The  consultation  also  sought  views  and  evidence  on 
financial stability risks stemming from non-bank entities and their activities, and on the 
need  to  expand  the  macro-prudential  framework  beyond  banking.  The  ongoing  macro-
prudential  review  is  assessing  possible  stability  risks  from  growing  market-based 
finance. It's also assessing the need for enhanced risk monitoring (supported by targeted 
revisions to certain ESRB governance arrangements), mandatory coordination and data 
sharing among national non-bank supervisors, the ESAs and the ESRB. This approach is 
consistent  with  the  Commission's  objective  to  strengthen  the  supervisory  framework  in 

72 

 
 
order to ensure the solidity of all financial actors and further supervisory convergence to 
reap the full potential of CMU.  

C) European deposit guarantee scheme 

A  few  responses  were  received  on  the  creation  of  a  pan-European  deposit  guarantee 
scheme.  While  recognising  that  a  European  scheme  completes  the  Banking  Union  and 
contributes  to  breaking  the  sovereign-bank  nexus,  some  raised  concerns  about  moral 
hazard risk and the need to protect local Institutional Protection Schemes (IPS). Measures 
should ensure that more solid banks would not be used to compensate depositors of ailing 
banks (e.g. risk-based contributions). 

The DGSD has been recently amended to further harmonise coverage levels and pay-out 
procedures of national deposit guarantee schemes. Those amendments entered into force 
in June 2014. Given the integration of the euro area banking system, in November 2015, 
the Commission tabled a proposal for a "European Deposit Insurance Scheme" (EDIS) to 
strengthen  the  Banking  Union,  buttress  bank  depositor  protection,  reinforce  financial 
stability and further reduce the link between banks and their sovereigns, building on the 
existing  system  composed  of  national  deposit  guarantee  schemes.  The  EDIS  proposal 
includes  actions  to  deal  with  most  of  the  respondents'  key  concerns.  The  proposal  is 
currently under negotiation in the Council and Parliament. 

The  Commission  services  have  undertaken  further  analysis  on  benefits  and  costs  of  a 
pan-EDIS  to  complement  the  November  2015  proposal.  This  non-paper70  published  by 
the  Commission  services  in  October  2016  provides  additional  data  and  analysis  to 
support the current negotiations.  

D) EU personal pension product 

Some  stakeholders  highlighted  the  need  to  develop  pan-European  personal  pensions 
arguing that this would support a more mobile EU workforce (which will also help EU 
employers).  Moreover,  certain  efficiencies  in  cost,  management  and  administration  can 
be achieved by pooling assets on a cross-border basis, benefitting EU savers and the EU 
capital markets. The advantages of pan-European personal pensions have also  been  put 
forward by many respondents to the CMU green paper. 

As  part  of  the  CMU  action  plan,  the  Commission  is  exploring  through  a  public 
consultation71  and  a  study  what  can  be  done  to  support  cross  border  provision  of 

70http://ec.europa.eu/finance/general-policy/docs/banking-union/european-deposit-insurance-

scheme/161011-edis-effect-analysis_en.pdf 

71  Consultation  on  Capital  Markets  Union:  Action  on  a  potential  EU  personal  pension  framework, 

27.7.2016 

73 

 
 
                                                 
personal pension products so that consumers can benefit from a wider range of products, 
competing  across  borders.  Options  under  consideration  include  an  EU  legislative 
initiative  to  boost  the  development  of  private  pensions  as  a  way  to  build  additional 
retirement saving to complement state and occupational pensions.  

E) Crowd-funding 

Some stakeholders call for minimum EU regulation on crowd-funding to ensure investor 
protection  while  enabling  this  funding  channel  to  develop.  In  contrast,  others  state  that 
the Commission should not intervene with legislation but continue to work with Member 
States  to  gather  evidence  on  the  performance  of  crowd-funding  and  consider  what 
lessons can be learnt and applied to help foster the growth of crowd-funding across the 
EU. 

The crowd-funding report published by the Commission in May 2016 takes the view that, 
given that markets are still local and under development, there is no strong case for an 
EU  intervention.  Yet,  divergences  among  national  regulatory  frameworks  and  diverse 
interpretations of EU rules applying to crowd-funding activities could create obstacles to 
the  development  of  cross-border  business  and  may  lead  to  market  fragmentation. 
Furthermore,  the  need  to  comply  with  different  requirements  may  be  too  costly  and 
prevent  smaller  platforms  from  achieving  the  scale  necessary  to  operate  cross-border. 
Divergences  in  regulatory  regimes  may  also  pose  challenges  to  cross-border  investor 
protection.  Therefore,  the  Commission  services  will  continue  to  monitor  market  and 
regulatory  developments  and  maintain  a  regular  dialogue  with  regulators  and  the 
industry. 

F) Harmonisation of insolvency frameworks 

Stakeholders repeated concerns about the lack of harmonised insolvency frameworks in 
the  EU.  The  emergence  of  a  pan-European  capital  market  would  require  more 
transparency  and  clarity  as  to  the  rules  that  apply  in  different  jurisdictions  in  cases  of 
insolvency.  Greater  clarity  and  more  harmonised  rules  would  allow  investors  to  assess 
better the risks to their portfolios, and thus enhance their decision-making in particular as 
regards to cross-border investment. Concerns were raised at the general level, as well as 
with reference to specific markets, sectors or instruments. 

As part of the CMU action plan, the Commission services are currently working on three 
work streams on different aspects of the pre-insolvency/insolvency system.  

-  First, the Commission will table a proposal for a minimum harmonisation Directive on 
business  restructuring  and  second  chance,  key  elements  of  an  appropriate  insolvency 
framework.  The  proposal  will  also  include  provisions  establishing  common  reporting 
requirements regarding the outcome of restructuring and insolvency procedures, as well 
as some elements to enhance their efficiency. 

74 

 
 
-  Second,  the  Commission  services  are  setting  up  a  benchmarking  review  of  loan 
enforcement (including insolvency) regimes. This will provide a detailed comparison of 
outcomes that banks experience under the different national systems in terms of delays, 
costs and recovery value when managing defaulting loans. 

-  Third,  the  Commission  is  undertaking  further  harmonisation  of  the  BRRD  "creditor 
hierarchy" in bank resolution, as integral part of the Banking Union agenda.  

G) Developing sustainable finance 

Promoting sustainable  finance  is  a  key  EU  issue  in  the  light  of  EU  (and  G20) 
commitments  towards  climate  change  and  transformation  to  a  low-carbon  economy. 
Stakeholders  called  on  the  Commission  to  help  shaping  definitions,  promote  best 
practices  and  develop  the  market  in  sustainable  finance  (such  as  green  bonds).  While 
some provided strong support for setting standards and developing the green bond market 
through quality-labelled issuance, stakeholders did not see the need for legislative action 
at this stage. 

The  Commission  supports  alignment  of  private  investments  with  climate,  resource-
efficiency and other environmental objectives, both through policy measures and public 
investment. 

The  Commission  is  working  to  increase  the  availability  of  green  funds  through  the 
European  Fund  for  Strategic  Investment,  by  earmarking  at  least  20%  of  the  EU  2014-
2020 budget available for climate action, and by setting up a platform for financing the 
circular economy. Moreover, as highlighted in the CMU Action Plan, there is a need to 
support EU green bond standards. The Commission has established a high level expert 
group to develop a comprehensive European strategy on sustainable finance. 

5.4. 

Technological developments  

Against  the  background  of  rapid  technological  change,  it  is  a  permanent  challenge  to 
ensure that regulation remains fit for purpose; at the same time it is a central concern for 
policy  makers  that  regulation  is  not  impairing  techniconogical  progress.  Some 
respondents  have  raised  concerns,  albeit  of  a  very  general  nature,  that  the  current 
financial legislative framework does not take sufficiently account of new and emerging 
technologies.  Also,  the  possibility  that  interplay  between  financial  services  legislation 
and  other  horizontal  legislation  could  give  rise  to  inconsistencies  was  raised.  Other 
respondents  have  pointed  to  more  specific  issues.  For  example,  some  members  of  the 
banking  industry  have  highlighted  possible  issues  as  regards  the  prudential  and/or 
accounting  treatment  of  investment  in  software.  Many  stakeholders  stressed  problems 
with  distance  identification  and  know  your  customer  (KYC)  requirements.  Concerns 
were also raised regarding gaps, overlaps and inconsistencies in the field of cybersecurity 

75 

 
 
 
for  financial  services  (e.g.  triple  notifications  of  breaches;  need  for  a  mechanism 
allowing better cooperation and information-sharing; importance of creating a framework 
for  cyber  security  monitoring).  Several  submissions  have  referred  to  transformative 
technologies and business models in financial services. The stakeholders have referred, in 
particular, to the impact that distributed ledger technology (DLT) could have in the way 
clearing and settlement services operate, and that new regulation would have to consider 
any more widespread uses of DLT. Finally, respondents have asked the Commission to 
ensure  a  level-playing  field  between  incumbent  regulated  entities  and  new  market 
entrants (FinTechs). 

A) Prudential and accounting treatment of investment in software 

Certain  stakeholders  have  claimed  that  the  EU  treatment  of  software  as  an  intangible 
asset under IFRS would require European banks to deduct the software from their capital, 
whereas US banks would be allowed not to deduct. This would un-level the playing field 
and would provide disincentives for IT/software investment by banks. The stakeholders 
assumed  that  in  the  EU  internally  developed  software  is  treated  as  intangible  both  for 
accounting  and  prudential  purposes  while  in  the  US  they  are  in  practice  treated  as 
tangible and not deducted for prudential calculation. 

In principle, software is, in accounting terms, treated as intangible assets. With regards to 
accounting principles, there are no meaningful differences in the recognition of software 
in US GAAP and IFRS. If software was considered to be immaterial in accounting terms 
however,  the  accounting  provisions  do  not  apply  and  assets  may  be  aggregated  with 
another category of fixed assets. The materiality principle applies in both accounting sets 
and  is  based  on  professional  judgement.  It  seems  that  the  same  flexibility  would  be 
available  to  banks  reporting  both  under  US  GAAP  or  IFRS.  Under  prudential 
requirements,  intangible  assets  must  be  deducted  from  capital  that  counts  toward 
regulatory  capital  requirements.  The  prudential  rules  rely  on  financial  accounts  and are 
consistent  between  EU  and  US.  The  software  as  intangible  asset  used  for  internal 
purposes is likely to have little market value. Therefore, to the extent the software is not 
considered  an  intangible  asset  accounting  wise,  which  seems  to  be  the  case  for  some 
banks, this ultimately leads to different prudential treatment and could be a source of un-
level playing field.  

The  Commission  services  will  engage  in  a  dialogue  with  stakeholders  to  gain  a  better 
understanding  of  the  interaction  between  accounting  and  prudential  treatment  of 
software. 

If  clear  evidence  emerges  that  there  is  a  difference  in  capital  treatment  of  software 
between  the  EU  and  the  US,  the  Commission  services  will  consider  the  appropriate 
action  to  be  taken  in  order  to  ensure  a  level  playing  field  and  strike  the  right  balance 
between financial stability and promoting financial innovation. 

76 

 
 
 
B) Financial information and disclosure and digital technology   

that 

Stakeholders  claim 
information,  contracting, 
requirements  on  disclosure, 
authorisation  and  reporting  are  not  always  well  adapted  to  recent  technological 
developments.  Rules  on  the  disclosure  of  (pre)contractual  information  should  be 
technology-neutral,  and  as  a  result  they  should  not  require  or  discard  a  particular 
technological solution for making such information available. For example, the notion of 
'durable  medium'  creates  room  for  interpretation  which  can  result  in  problems  with 
national  implementation.  Moreover,  stakeholders  from  the  financial  services  industry 
have  raised  the  issue  that,  consumers  can  become  easily  overloaded  with  information. 
Such  information  overload72  can  be  to  the  detriment  of  consumers'  understanding  and 
thus reduce the effectiveness of disclosure as consumer protection tool.  

The relevant provisions on forms or carriers of disclosures/reporting enshrined in several 
pieces  of  legislation  (e.g.  PRIIPs,  MiFID  II,  UCITS,  PD,  the  Distance  marketing  of 
consumer financial services Directive73 etc.) typically allow for a broad range of options.  
Relevant  provisions  prescribe  the  alternative  or  combined  uses  of  paper,  other  durable 
media, or internet websites as possibilities for disclosing (pre)contractual information to 
consumers. In the end the choice of the preferred medium of disclosure is very much left 
to the consumer: the PRIIPs regulation prescribes the paper format by default in case of 
face-to-face distribution unless the consumer requests otherwise74. The UCITS regulation 
provides that a key investor information document (KIID) can be provided on a "durable 
medium" (other than paper) or a website, if the consumer chooses so.75  

The notion of 'durable medium' which encompasses any medium that allows the recipient 
of  the  information  to  safeguard  and  (re-)produce  an  exact  copy  of  the  information/data 
that  was  provided  for  the  duration  of  the  contract  and  any  time  after  that,  as  may  be 
required for legal or regulatory requirements, was intended to provide flexibility. Efforts 
should focus on closing the remaining legal and technological gaps vis-à-vis the use of a 
durable medium to ensure an appropriate level of legal certainty about the substance of 
the  contract,  the  identity  of  the  contracting  parties,  the  precise  date  of  the  exchange  of 

72 In the case where information and communication technologies (ICT) strongly reduce the production of 
(automated) information, ICT may very well favour  an excessive provision of such information as it 
may be relatively cheaper to provide overlapping and duplicative information.  

73 Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning 
the  distance  marketing  of  consumer  financial  services  and  amending  Council  Directive  90/619/EEC 
and Directives 97/7/EC and 98/27/EC. 

74 Article 14 (2) of the Regulation (EU) No 1286/2014 (PRIIPs) 

75  Article  38  of  the  Commission  regulation  (EU)  No  583/2010    implementing  Directive  2009/65/EC 

(UCITS) 

77 

 
 
                                                 
consent between the parties, and the duration of the validity of the contract. For example, 
fiduciary time stamps for documents provided on the internet remain, at this juncture, a 
topic of ongoing research.    

In the context of the comprehensive assessment of European markets for retail investment 
products  (including  distribution  channels  and  investment  advice),  the  Commission 
services will investigate how the policy framework should evolve to benefit from the new 
possibilities  offered  by  internet-based  services  or  any  other  financial  technology 
(FinTech).  The  same  assessment  will  serve  to  identify  ways  to  improve  the  policy 
framework  and  intermediation  channels  so  that  retail  investors  can  access  suitable 
products on cost-effective and fair terms. 

C) Distance identification and Know Your Customer (KYC) requirements 

Regulation  equates  face-to-face  identification  and/or  identification  based  on  official 
documents  (such  as  national  ID  cards)  with  a  more  authentic  and  safer  way  to  identify 
customers  to  the  detriment  of  distance  and  other  technology-based  means  of 
identification.  In  this  context,  respondents  have  pointed  at  inconsistencies  between  the 
Electronic  identification  for  electronic  transactions  in  the  internal  market  (e-IDAS) 
Regulation76 and anti-money laundering directive (AMLD4)77. They have criticized that, 
while  e-IDAS  opens  up  new  opportunities  for  business  relations  at  a  distance,  these 
relationships are considered as high-risk transactions under AMLD4. At the same time, 
respondents have stressed that consumers increasingly expect to be able to carry out all 
kinds of financial transactions online using various forms of distance identification.  

Stakeholders  welcomed  the  Commission’s  work  on  the  e-IDAS  regulation  and  were 
positive about its high potential in the area of retail financial services, e.g., easier access 
to  services  at  a  distance  and  the  verification  of  customer  identity;  however,  e-ID  is 
currently not available on a broad scale, and it focuses on public services. Respondents 
have suggested extending the digital framework for national e-IDs valid across the EU to 
enable their use in the private sector, i.e. to allow customers to identify themselves and 
sign up for services in other Member States by using their national e-ID. 

76  Regulation  (EU)  No  910/2014  of  the  European  Parliament  and  of  the  Council  of  23  July  2014  on 
electronic  identification  and  trust  services  for  electronic  transactions  in  the  internal  market  and 
repealing Directive 1999/93/EC. 

77  Directive  (EU)  2015/849  of  the  European  Parliament  and  of  the  Council  of  20  May  2015  on  the 
prevention  of  the  use  of  the  financial  system  for  the  purposes  of  money  laundering  or  terrorist 
financing,  amending  Regulation  (EU)  No  648/2012  of  the  European  Parliament  and  of  the  Council, 
and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission 
Directive 2006/70/EC. 

78 

 
 
                                                 
To  address  the  above  concern,  the  Commission  proposed  on  5  July  2016,  that  the 
AMLD4  should  be  updated  to  take  account  of  the  new  legal  framework  on  the  mutual 
recognition  of  notified  e-ID  schemes  and  means, 
to  eliminate  any  potential 
incompatibilities between the legal texts. In view of this, the Commission proposed that 
references to electronic means of identifications set out by the e-IDAS Regulation should 
be included in Article 13(1), Article 27(2), Article 40(1)(a) and (b) as well as in Annex III 
to the 4AMLD. 

Moreover,  the  follow-up  work  to  the  Retail  Financial  Services  Green  Paper  will  also 
explore solutions to encourage remote ID recognition and signature of contract. 

D) Cyber-security for financial services 

Many  respondents  have  noticed  some  inconsistencies  and  gaps  in  the  field  of 
cybersecurity.  Some  have  pointed  to  provisions  in  the  General  Data  Protection 
Regulation  (GDPR)78  that  could  constitute  real  obstacles  for  building  and  developing 
efficient  cybersecurity  regime(s)  in  Europe  and  internationally.  For  example,  it  is  not 
possible to share information about cyber-attacks that may involve customer data or other 
data  such  as  IP  addresses  (which  are  considered  personal  data).  A  further  issue  raised 
concerned  the  need  of  a  regulatory  assessment  of  the  potential  IT/cyber  incidents  and 
risks.  In  this  context  a  wide  range  of  stakeholders  stressed  that  legislative  acts 
(NIS/PSD/GDPR) impose on financial institutions obligations to report security breaches 
to  three  different  authorities  causing  undue  burdens  without  any  benefits  in  terms  of 
security.   

In  order  to  fight  against  global  cyber  threats,  a  way  forward  could  be  to  put  in  place 
mechanisms  that  allow  for  cooperation  and  information-sharing  for  cybersecurity 
purposes.  As  regards  the  incident  notification  process,  it  seems  straightforward  that  it 
should be consistent, simple and effective. 

The  Commission  services  will  exchange  views  with  stakeholders  on  how  to  share 
information on cyber threats. 

E)  Level-playing  field  between  incumbent  financial  institutions  and  new  market 
entrants (FinTechs)79 

78  Regulation  (EU)  2016/679  of  the  European  Parliament  and  of  the  Council  of  27  April  2016  on  the 
protection of natural persons with regard to the processing of personal data and on the free movement 
of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) 

79 Including models based on digital currencies, or digital assets derived from digital currencies.  

79 

 
 
                                                 
Financial institutions asserted that services they provide are subject to prudential, market 
and  other  types  of  regulations,  whereas  new  market  entrants  or  alternative  providers 
offering  comparable  services  are  not  subject  to  the  same  regulations,  which  could 
undermine the level-playing field. At the same time respondents expressed the view that 
technology in this area is progressing at a rapid pace. As a result, premature regulation 
could  run  the  risk  of  stifling  innovation  (not  being  technology  neutral)  given  the 
differences in speed between technological and legislative innovations.  

At  this  stage  it is  difficult  to  make  an  overall  assessment  on  whether  digitalisation and 
the  arrival  of  new  services,  business  models  or  market  entrants  undermine  the  level-
playing  field,  given  the  diversity  and  novelty  of  some  business  models  and  the  rapid 
development of new market entrants, as well as the uncertainty about the viability of such 
business models. There are clear advantages associated with being a regulated financial 
institution, such as access to central bank liquidity and deposit guarantees. Accordingly, 
level-playing field arguments must be looked at in a holistic way. The nature of the entity 
and the risk of its business, including its size and interconnectedness, may also determine 
the set of applicable rules. Finally, a choice has to be made between a 'same risk, same 
regulation/different  risk,  different  regulation'  approach  and  a  'same  activity  –  same 
regulation' approach.  

Work  on  this  subject  is  ongoing  at  the  ECB,  the  ESAs  (EBA,  ESMA),  other  public 
institutions  in  Member  States,  as  well  as  in  private  sector  and  academia.  The 
Commission services have also set up a Task Force to look into digital innovations with 
implications  for  financial  products  and  services.  An  international  conference  on 
financial  technology  will  be  organized  by  the  Task  Force  in  the  first  half  of  2017.  The 
Commission services also contribute to the on-going work within the Fintech/DLT Task 
Force established by Committee on Payments and Market Infrastructures- International 
Organization of Securities Commissions "CPMI-IOSCO". 

80 

 
 
 
 
 
Annex 1: Acronyms 

AD 

ADR 

AIF 

AIFMD 

AMLD 

ASF 

AT1 

BCBS 

BIS 

BRRD 

BSR 

CCD 

CCPs 

CCyB 

CLOs 

Accounting Directive 

Alternative dispute resolution 

Alternative investment fund 

Alternative Investment Fund Managers Directive 

Anti-money Laundering Directive 

Available stable funding 

Additional Tier 1 

Basel Committee on Banking Supervision 

Bank of International Settlements 

Bank recovery and resolution Directive 

Bank Structural Reform  

Consumer Credit Directive 

Central counterparty clearing houses 

Countercyclical capital buffer 

Collateralised loan obligations 

CEAOB 

Committee of European Auditing Oversight Bodies 

CEM 

CMBS 

CMU 

COM 

CPMI 

CRA 

Current exposure method 

Commercial mortgage-backed securities 

Capital Markets Union 

European Commission 

Committee on Payments and Market Infrastructures 

Credit rating agency 

CRR /CRD IV  Capital Requirements Regulation/Directive 

CSDR 

Central Securities Depositories Regulation  

DG JUST 

European Commission Directorate-General for Justice and Consumers 

DGSD 

Deposit Guarantee Scheme Directive 

DLT 

DVC 

EBA 

ECAI 

ECB 

Distributed ledger technology 

Double volume cap mechanism 

European Banking Authority 

External credit assessment institutions 

European Central Bank 

81 

 
 
 
EDIS 

e-IDAS 

EIOPA 

ELTIF 

EMIR 

EPTF 

ESAs 

ESMA 

ESRB 

EU 

European Deposit Insurance Scheme 

Electronic identification for electronic transactions in the internal market 

European Insurance and Occupational Pensions Authority 

European long-term Investment Fund  

Regulation on OTC derivatives, central counterparties and trade repositories 

European Post Trading Forum 

European Supervisory Authorities 

European Securities and Markets Authority 

European Systemic Risk Board 

European Union 

EuSEF 

European Social Entrepreneurship Funds 

EuVECA 

European Venture Capital Fund 

FICOD 

Fintech 

FMI 

FSB 

FTT 

FRTB 

GDPR 

GHOS 

G-SIB 

G-SII 

HQLA 

IASB 

IDD 

IFRS 

IM 

IMD 

IMF 

IPS 

IORP 

IOSCO 

IRB 

Financial Conglomerates Directive 

Financial technology 

Financial market infrastructure 

Financial Stability Board 

Financial Transaction Tax  

Fundamental Review of the Trading Book 

General Data Protection Regulation 

Group of Central Bank Governors and Heads of Supervision 

Global systemically important bank 

Global systemically important institution 

High quality liquid assets 

International Accounting Standards Board 

Insurance Distribution Directive 

International Financial Reporting Standards 

Initial margin 

Insurance Mediation Directive 

International Monetary Fund 

Institutional Protection Scheme 

Institutions of Occupational Retirement Pensions 

International Organization of Securities Commissions 

Internal ratings-based  

82 

 
 
IT 

KID 

KIID 

KYC 

LCR 

LR 

Information technology 

Key information document 

Key investor information document 

Know your customer 

Liquidity coverage ratio 

Leverage ratio 

MAD/R 

Market Abuse Regulation and Criminal Sanctions Directive 

MCD 

MDA 

Mortgage Credit Directive 

Maximum distributable amount 

MiFID II/R 

Markets in Financial Instruments Directive and Regulation 

MMF 

MREL 

MS 

MTF 

NAV 

NCA 

Money Market Fund 

Minimum requirement for own funds and eligible liabilities 

Member State 

Multilateral trading facility 

Net asset value 

National competent authority 

NCWO 

No-creditor-worse-off 

NFC 

NIS 

NPL 

NSFR 

OAM 

OTC 

O-SII 

PAD 

PD 

PIE 

PRIIPs 

PSD 

REFIT 

REMIT 

RSF 

RTS 

Non-financial corporation 

Network and information system 

Non-performing loan 

Net stable funding ratio 

Official appointed mechanism 

Over-the-counter 

Other systemically important institution 

Payments Account Directive 

Prospectus Directive 

Public-interest entity 

Packaged retail and insurance-based investment products 

Payment Services Directive 

Regulatory Fitness and Performance Programme 

Regulation on wholesale energy market integrity and transparency 

Required stable funding 

Regulatory technical standards 

83 

 
 
SA 

SF 

SFTR 

SMEs 

SRB 

SSM 

SSR 

STS 

TD 

TLAC 

UCITS 

VM 

Standardised Approach 

Supporting factor 

Securities Financing Transactions Regulation 

Small and medium-sized enterprises 

Single Resolution Board 

Single Supervisory Mechanism 

Short Selling Regulation 

Standardised and transparent securitisation 

Transparency Directive 

Total loss-absorbing capacity 

Undertakings for collective investment in transferable securities 

Variation margin 

* * * 

84