On 18 September, Scotland voted to remain part of the UK. So we’ll never know if a currency union with the remainder of the UK would have been created or how long it would have taken an independent Scotland to join the EU.
But we now have a far better idea what the new European Commission (EC) will look like. Lord Hill, a UK Conservative peer, will take up the new baton as the Commissioner for Financial Stability, Financial Services and Capital Markets Union within the new EC. Juncker’s mission statement for Hill reveals a central focus will be on creating a capital markets union in the 28 EU states aimed at ensuring small firms get better access to non-bank finance in future, essentially counter-balancing the current over-reliance on bank funding. Despite a shaky start at the first hearing in the European Parliament on 1 October, Lord Hill came back with persuasive written responses to 23 additional questions posed by the Parliament’s Economic and Monetary Affairs Committee (ECON) by 5 October and then followed up with a convincing performance at a (irregular) second hearing on 7 October. His appointment was approved in ECON by a sizeable majority vote. However, Lord Hill is not Michel Barnier’s successor: his remit and role has narrowed and he will have to operate within the more ‘collegial’ EC, with a matrix structure, working closely with Jyrki Katainen, the new Vice President for Jobs, Growth, Investment and Competitiveness, amongst others. Important questions remain as to have it will operate in practice.
But the new EC has to be approved by the Parliament in its entirety before it can become operational. Issues in respect of other candidates suggest that there may be some delay to the scheduled 1 November start date.
This was not the only big news from September. The European Banking Authority (EBA) Level 2 process on Banking Recovery and Resolution Directive (BRRD) went into in full swing with the issuance of eight consultations in quick succession at the end of the month. These provide crucial operational details for firms, supervisors and resolution authorities but no-one has much time to digest all the new requirements: BRRD goes live from 1 January 2015.
Benchmark reform is also back under the regulatory microscope. The Fair and Effective Markets Review, a joint HMT, FCA and BoE task force, consulted on bringing seven additional benchmarks into the scope of regulation. This means firms contributing to the benchmarks will face greater regulatory scrutiny to ensure they are not fixing the benchmarks. And the International Organisation of Securities Commissions (IOSCO) and the Financial Stability Board (FSB) also published updates on their own benchmarks work, with IOSCO reviewing how its principles have been implemented by the WM/Reuters benchmark and the FSB proposing a change to the fixing window for the WM/Reuters benchmark.
The European Central Bank has published its guide to supervision, setting out how the Single Supervision Mechanism will operate from 4 November 2014. The guide provides information on how direct and indirect supervision of Eurozone banks will be carried out so banks will know what to expect. The 120 banks subject to direct supervision are likely to experience the most change initially. Danièle Nouy has promised intrusive supervision going forward so banks should expect to rapidly interact with the joint supervisory teams, made up of ECB and local regulatory staff, that will be set up to oversee them. Banks subject to indirect supervision may not feel quite the same impact immediately, but as all supervisors will be required to adhere to a common supervisory manual going forward, it should not be long before they too see changes. For UK banks the FCA is working towards implementing the Mortgage Credit Directive (MCD), which it must implemented by 21 March 2016. Whilst much of MCD is already effective in the UK after the mortgage market review, there is still some process and operational changes that banks must make to get ready. The biggest change will be the regulation of second charge and some buy-to-let mortgages for the first time. The FCA plans to publish its final rules in the first quarter of 2015 so firms will have a year to prepare.
Asset managers didn’t escape attention in September. The European Securities and Markets Authority (ESMA) published two consultations that need attention. Its technical advice on depositaries under the UCITS V Directive will cause a number of strategic and operating model changes across the EU if they come into effect as proposed – but we expect push back from firms in Continental Europe, particularly in France where the proposals relating to the independence of the depositary from the management company will have the greatest impact. And for private equity and venture capital managers the consultation for European Social Entrepreneurship Funds and European Venture Capital Funds (known respectively as EuSEFs and EuVECAs) should be of interest, particularly ESMA’s proposals around how to identify appropriate social investments.This month’s feature article focuses on changes to the PRA’s approach in supervising international (non-EU) banks – in particular when the PRA will require the bank to establish a UK subsidiary rather than using a branch structure. Given the UK’s current interest in attracting new financial services entrants to the market, it is important that firms looking to enter the market know what is expected of them.