Thought Magazine

The Regulatory View: Unfinished Business

More than four years on from the collapse of Lehman, the regulatory revolution is in full swing and shows no sign of easing. The sheer scale of reform is daunting for all market participants. While the G20 took the lead in mandating reforms, the EU and U.S. took on a timeline for implementing such reform that could be described as somewhat ambitious. However, activity in response to the financial crisis has not just been confined to Europe and the U.S., nor have mandates for reform only been initiated by the G20. IOSCO, for example, responded to the financial crisis by setting out principles for the regulation of short-selling and hedge fund oversight, as well as reporting on the impact on emerging markets and their policy responses. IOSCO also launched a Strategic Direction Task Force to ensure it maintained its pivotal role in setting the international standard for securities regulation. The FSB, established in the wake of the crisis, has also played a critical role.

Dodd-Frank – Deadlines and Delays

In the U.S., the Dodd-Frank Act was introduced in July 2010 with primary focus on the safety and soundness of the financial system. It is quite a broad piece of legislation, and it implements changes that, among other things, affect the oversight and supervision of financial institutions, introduce more stringent regulatory capital requirements, affect significant changes in the regulation of over-the-counter derivatives, implement changes to corporate governance and require registration of advisers to certain private funds. Two years on and the detailed rules are being churned out by the relevant regulatory agencies. As of January 2, 2013, a total of 237 Dodd-Frank rulemaking requirement deadlines had passed. Of these 237 passed deadlines, 142 (59.9%) have been missed and 95 (40.1%) have been met with finalized rules. In addition, 136 (34.2%) of the 398 total required rulemakings have been finalized, while 129 (32.4%) rulemaking requirements have not yet been proposed. As noted by SEC Commissioner Daniel Gallagher last September: “It is not an exaggeration to say that the Commission is handling ten times the normal rulemaking volume.... Any one of the rules we promulgated in the last three months would have been considered the ‘rule of the year’ just five or six years ago. The pace is unrelenting, and the substance is critically important to the U.S. capital markets. We need to get a lot done fast—no question about it— but it’s even more important that we get it right.”1 The only areas where the rules are complete and final are those relating to investment advisers and private funds, where seven rulemakings have been finalised, and the Collins amendment, where six rules have been finalised.2

Europe’s Programme of Reforms

In Europe, the post-crisis reform programme has been approached in a different way. Rather than one allencompassing piece of legislation, a number of specific measures have been proposed by the EC, including AIFMD (Level 1 had been completed and Level 2 was adopted by the Commission at the end of December 2012 but still needs to be reviewed by the co-legislators, the Council and the Parliament); MiFID 2, (the final MiFID 2 text remains to be agreed at the time of writing); EMIR, Level 1 came into force on August 16, 2012 and the regulatory technical rules remain incomplete at the time of writing.

For European asset managers, a new revision to the UCITS directive has been on the cards for some time as AIFMD began to take shape. On July 3, 2012, the EC published three proposals as part of a consumer protection package: PRIPs; a revision of the Insurance Mediation Directive (IMD II); and UCITS V. These measures are designed to rebuild consumer trust in financial markets. UCITS V focuses on a depositary’s duties and harmonisation of the minimum administrative sanctions, as well as introducing rules on remuneration policies.

Three weeks later, and the day after ESMA had issued its “Guidelines on ETFs and other UCITS issues,”3 the EC published a consultation paper on what is being dubbed “UCITS VI.” The consultation paper is broad and seeks the views of industry stakeholders on matters such as the use of derivatives and strategies being adopted, use of efficient portfolio management techniques (also covered in ESMA’s guidelines referred to above), depositary passport, counterparty risk and counterparty risk mitigation in the context of OTC derivatives transactions, liquidity management and money market funds. The EC also solicits views on the impact of preventing exposure to non-eligible assets by, for example, adopting a look-through approach for investment in transferable securities, financial indices or closed-ended funds.

The EC is also using this consultation to solicit views on changes to UCITS IV (mergers and the notification procedure) as well as long-term investment. The latter echoes some of the thoughts offered in the paper, “Rethinking Asset Management,” produced earlier this year by CEPS and ECMI,4 where the authors urged the EC to introduce a new long-term vehicle to give retail investors access to “relatively illiquid asset classes to channel part of their long-term savings including part of their retirement savings.” UCITS VI certainly seeks further harmonisation in the UCITS space and the questions for the industry are fundamental: has the UCITS label been stretched too far vis-a-vis its principal target market, the retail investor? Should there be more tightening of the rules? Asset managers also have concerns around the impact that MiFID 2 could have on their distribution models with the EC’s proposals, including a ban on monetary inducements where advice is given on an independent basis.

Regulatory Shorthand

AIFMD Alternative Investment Fund Managers Directive
CEPS Centre for European Policy Studies
ECMI European Capital Markets Institute
EIOPA European Insurance and Occupational Pensions Authority
EMIR European Market Infrastructure Regulation
ESMA European Securities Markets Authority
FSB Financial Stability Board
IORP Institutions for Occupational Retirement Provision
IOSCO International Organization of Securities Commissions
MiFID Markets in Financial Instruments Directive
PRIPs Packaged retail investment products
SEC Securities and Exchange Commission
UCITS Undertakings for Collective Investment in Transferable Securities

Impact on Insurers and Pension Funds

Insurers and pension funds have not been left out of European policymakers and regulators’ sights. Solvency 2, a pre-crisis initiative for insurers, is still wending its way through to finalisation. At present, the EC has suspended negotiations on this dossier pending a study as to whether there should be a distinction between the capital set for bonds to be held for the long-term versus those bonds that are intended to be traded. The study will not be concluded until March 2013, so there may be further delay to the introduction of Solvency 2.

Meanwhile, in October EIOPA launched its Quantitative Impact Study (QIS) on the impact of the holistic balance sheet (HBS) on IORPs. Many in the pensions’ community have serious concerns about the introduction of HBS for pension funds; the action is similar to Solvency 2 and many funds in Europe believe it could have negative consequences for the European economy and for the ability of employers to maintain their commitment to workplace pensions. Compagnie Financière du Groupe Michelin responding to EIOPA’s consultation ahead of the launch of the QIS said “...even assuming there was such an issue as systemic risk of pensions not being paid out, we do not see how a capital requirement would be helping towards resolution. In fact, the cure would be worse than the illness in this case: the more money companies have to tie up to pay pensions, the more their financial viability will be threatened.”5

Impact on Banks

The regulation of banks has been a critical element of the post-crisis reforms, with more stringent bank capital and liquidity standards set through the Basel Accord process and strengthened resolution regimes and resolution planning for global systemically important banks (G-SIBs), ending what is termed “too big to fail.” In its report to G20 leaders in June 2012,6 the FSB noted that encouraging progress had been made by leading jurisdictions including the U.S., U.K. and EU to put in place or propose effective resolution regimes; however, the FSB also stated that much further work was required to develop resolution strategies and plans, and cross-border co-operation agreements needed to ensure the resolvability of the G-SIBs.

One of the concerns often voiced when major reform is introduced is that there may be unintended consequences, and with a globalised world the impact on developing economies can be substantial. To this end the FSB, in conjunction with the World Bank and IMF, released a report to G20 finance ministers and central bank governors on the impact of the current reform programme on such markets.7 The report indicates that most markets outside the G20 have only recently begun the process of implementing or considering the implementation of internationally agreed reforms. This is not surprising given that certain of the reforms are more relevant and critical to advanced economies than to developing markets, for example, policy measures for OTC derivatives or G-SIBs. Also, the report notes that there is widespread support for the reform objectives with a number of countries that are less financially developed or internationally integrated markets reporting that they do not expect there to be a significant impact from the implementation of these reforms. On the contrary, some countries had concerns about spillovers and/ or extra-territorial effects from, for example, higher capital requirements for large banks in the EU.

Whilst the reforms heralded by G20 may be on their way to completion, there are more to come, and not just in the guise of UCITS VI or IORPs 2. In a speech entitled, “Making financial centres contribute to the wider economy,” given on 6 September 2012,8 Commissioner Barnier described his vision for the role that European financial centres should play. Acknowledging that the reform programme instigated at G20 was nearing completion, the Commissioner signalled a further round of regulatory action to come, with focus on what he termed sustainable growth. He addressed the serious inadequacies that were exposed by the financial crisis, such as regulatory gaps, inadequate supervision, poor corporate governance and short-termism in financial institutions, opaque markets, and overly complex products, particularly derivatives. The Commissioner believes bringing Europe back to the path of sustainable growth requires taking on some challenges which include building modern digital, energy and transport infrastructures; supporting the development of innovative technologies; tackling climate change and population ageing. The Commissioner recognises that meeting these challenges will require long-term financing and, given the severe fiscal constraints, he believes that financial centres have a key role to play in this regard.

ENCOURAGING PROGRESS has been made by leading jurisdictions including the U.S., U.K. and EU to put in place or propose effective resolution regimes,
… but much further work is required to develop resolution strategies and plans and cross-border co-operation agreements.

The Commissioner sets out three tasks that financial centres should undertake:

  • Provide a stable platform for institutional investors, such as pension funds and insurers, to match their long-term liabilities with long-term assets
  • Offer safe and profitable vehicles for household savings
  • Support sustainable, green and socially-responsible economic growth

The EC is now examining how to ensure the financial sector is playing its part and will consult on this soon. This indicates that the current round of regulatory change will not be followed by any lessening of the pace; indeed this may be only the beginning. For industry stakeholders, in particular pension funds and asset managers that play such a vital role, it will be vital to understand exactly what is intended and to engage early in the debate and influence formulation of policy.

In the U.S. too, the regulatory agenda is moving beyond just Dodd-Frank with money market reform, updating regulation of transfer agents and other initiatives signalled for action. It will be essential of course to ensure that there is coherence amongst rules made in the U.S., Europe and other parts of the world—and the work of G20, FSB, IOSCO and others play a vital role in this context.


  1. Commissioner Daniel M. Gallagher, “SEC Priorities in Perspective,” SIFMA Regional Conference, Charlotte, N.C., 24 September 2012, www.sec.gov Weblinking practices
  2. Davis Polk’s “Dodd-Frank Progress Report,” September 2012, www.davispolk.com Weblinking practices
  3. ESMA Consultation Paper, ESMA/2012/44, 30 January 2012, www.esma.europa.eu
  4. “Re-thinking Asset Management: From Financial Stability to Investor Protection and Economic Growth,” by Mirzha de Manuel, CEPS-ECMI Researcher, 19 April 2012, www.ceps.eu Weblinking practices
  5. Response from Compagnie Financière du Groupe Michelin on QIS of EIOPA’s Advice on the Review of the IORP Directive, page 3, 30 September 2012, www.eiopa.europa.eu Weblinking practices
  6. “Overview of Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability,” 19 June 2012, www.financialstabilityboard.or Weblinking practices
  7. “Identifying the Effects of Regulatory Reforms on Emerging Market and Developing Economies: a Review of Potential Unintended Consequences,” 19 June 2012, www.financialstabilityboard.org Weblinking practices
  8. Commissioner Michel Barnier, “Making financial centres contribute to the wider economy,” European Financial Centre Roundtable, Brussels, 6 September 2012, http://ec.europa.euWeblinking practices
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