Financial Regulatory Reform in the European Union: State of Play and Prospects

The European Union (the “EU”) is in the midst of a far-reaching program of financial regulatory reform launched in the wake of the financial crisis by the European Commission’s communication of March 4, 2009.The Commission’s program was in turn based on the report of an independent high-level group chaired by the former International Monetary Fund Managing Director Jacques de Larosière.

The centralization of financial regulatory policy at the EU level represents a seismic shift in an area traditionally characterized by regulation at the national Member State level. The shift away from national authority to central EU policy-making is reflected in the creation of a new European financial supervisory framework, consisting of a macro-prudential European Systemic Risk Board (“ESRB”) and a European System of Financial Supervisors, comprising three micro-prudential sectoral European Supervisory Authorities (“ESAs”). Although these institutions were created with relatively modest powers, with every EU financial regulatory measure adopted they acquire more responsibilities.

To a large extent, EU financial regulatory developments in the last two years have followed the Commission’s March 2009 program, though political pressures have resulted in significant changes to some proposals, while certain measures, such as the Alternative Investment Fund Managers Directive (“AIFM Directive”), were not part of the Commission’s original program, but instead were the product of political initiatives by members of the European Parliament and Member State governments. While the EU has made significant progress in implementing the Commission’s program, much remains to be done. This month, the Commission published draft legislation to implement the Basel III capital requirements and to reform the governance of EU financial institutions. Draft legislation to be published by the Commission in the coming months includes the following:

• A new proposed framework for recovery and resolution of EU financial institutions;
• Amendments to the Markets in Financial Instruments Directive (“MiFID”), which came into force in November 2007 and harmonized the regulation of investment services;
• Amendments to the Market Abuse Directive (“MAD”), including the extension of MAD to cover certain derivatives;
• A regulation on central securities depositaries;
• A communication on financial sector taxation;
• A new regime for venture capital fund managers; and
• Further amendments to the EU credit rating agency regulation.

This Memorandum reviews the status of the EU’s financial regulatory reform program in seven key areas.