The formal adoption of such measures as the latest version of the Undertakings for Collective Investment in Transferable Securities (UCITS V), and a wide-ranging overhaul of the EU’s Market In Financial Instruments Directive (MiFID II), had been expected, ahead of European Parliamentary elections next month.
Other initiatives waved through on Tuesday included the Packaged Retail Investment and Insurance Products (PRIIPs) initiative, with its Key Information Document requirement, which calls for the introduction of short, plainly-worded printed explanations of investment products aimed at retail investors.
The regulations are due to come into force over the next few years.
Certain elements of the new regulations – along with the fact that their implementation is to be handled by EU member countries as they see fit – came in for some criticism, particularly from those who have been arguing that the growing body of regulation is forcing the EU steadily away from its single-market ideals.
“With the final say [about how the legislation is to be implemented] in the hands of the national regulators, we will have no harmonisation, less and less of a single market, and as a result, no level playing field,” observed Vincent Derudder, president of the Fédération Européenne des Conseils et Intermédiaires (FECIF), which represents around 300,000 financial services intermediaries across the 28 EU member states.
The legislators were kinder to the funds industry than to bankers, insurance companies and intermediaries, Derudder added: “We have obviously been targeted as the villains, to be put under increased scrutiny from the regulators.”
There is however, a “cause for reasonable optimism” about the future, Derudder noted, in the form of a so-called ‘regulatory fitness programme’, or REFIT, proposed by Antonio Tajani, the European Commision’s vice president. Tajani, Derudder says, aims “to make a serious impact assessment of the tsunami of new regulation passed by the commission” on businesses operating in the EU.
Sharing Derudder’s concerns about the practical impact some of the new regulations will have on cross-border financial services businesses was Alan Morgan-Moodie, chief executive of the Association of International Life Offices.
AILO’s members will, for example, find it “very hard to comply” with the new regulations contained in the PRIIPs initiative, Morgan-Moodie said.
“It is clear that the idea of a cross-border, single market – ie, what the EU is all about, fundamentally – was the last thing on the [European Parliamentarians’] minds,” he added.
The sequence of approvals by the European lawmakers in Strasbourg, France on Tuesday marked the climax of some four years of work aimed at making Europe’s financial landscape more transparent and less vulnerable to some of the problems that afflicted it during the global financial crisis that began in 2008.
Philip Woolfson, a Brussels-based partner in Steptoe & Johnson LLP and an expert on EU financial services and tax legislation, said Tuesday’s session of the European Parliament was a “marathon plenary session”, as some 130 separate legislative texts were adopted, including important banking union texts, as well as the UCITS V, PRIPs, PRIIPs and MiFID II proposals.
“Their adoption is good news in that, pending final adoption by the Council of Ministers – and despite the additional regulatory burden – the financial services sector now has some much-awaited legislative clarity, for example on the form and content of the key information disclosures required by the PRIPs regulation,” Woolfson added.
“Although the text has been rightly criticised as unworkable, it does, at least, set out uniform requirements EU-wide, and should reduce the scope for national ‘gold-plating’. This clarity will, hopefully, create opportunities for the cross-border insurance sector, which, to date, has had to struggle with a plethora of disclosure requirements under national laws.
“Similarly, the sector can reflect on another thorny area – the finalised remuneration provisions – and adapt business models accordingly.
The sector can now look forward to some calm until after the elections and the appointment of a new European Commission.”
One of the few initiatives not approved on Tuesday was a planned revision of the Insurance Mediation Directive, IMD2, “the fate of which will now depend on whether the new Parliament wishes to proceed with its adoption in the autumn”, according to Woolfson.
Some other reactions to Tuesday's European Parliament votes:
Investment Management Association – The London-based IMA, which represents the UK's fund management industry, said in a statement that it was “broadly positive” about the agreements on MiFIR/D II, the PRIIP KIID and UCITS V”, which it noted will “deliver significant improvements to current practice that are in the interests of investors”.
However, it added that although the final text of MiFIR/D II will allow improved market stability, “it is doubtful whether it will ensure efficiency and free and fair competition”.
Elaborating on this point, Julie Patterson, the IMA’s director of regulatory affairs (investment funds and retail), said that the IMA is "concerned that the ban on inducements (ie, commissions), as provided for by MiFID, covers only independent advisers, as this will distort the market place".
“Advisers who are tied in any way to product providers, or other distributors who offer no advice – such as execution-only brokers – can continue to receive inducements," she said.
“This will favour the bank- and insurance-company dominated distribution channels over impartial independents.
“There is also a concern that the directive will discourage continental banks from moving towards a whole-of-market proposition, which would give investors greater choice.”
European Fund and Asset Management Association – The adoption of UCITS V and the PRIIPs initiative “will significantly contribute to further enhancing the protection of retail investors and to rebuilding their trust in financial markets”, EFAMA said in a statement.
“The amendments brought to the UCITS directive will raise to an even greater level the already high-standards of protection enjoyed by UCITS investors, and reconfirm its status as the ‘state-of-the-art’ regulation for investment funds worldwide. They should also bolster the international recognition of UCITS as the vehicle of choice for the international distribution of investment funds.
"In particular, the strengthening and harmonisation of the UCITS depositary regime means clients’ assets will be better protected.
“EFAMA has been in favour of the PRIIPs initiative, which brings investors’ interests to the forefront, since it was first discussed in 2006. The Key Information Document required by the PRIIPs regulation will enhance transparency and increase investor protection.
"By enabling investors to compare different packaged investment opportunities or products, [it will equip] consumers [to] be better equipped to make informed investment decisions.”
Irish Funds Industry Association – the IFIA said it welcomed the European Parliament's approval of the UCITS V directive. Pat Lardner, the IFIA's chief executive, said the enhancements to the role of the depository under UCITS V in particular – which mandate that management companies no longer will be able to act as both a management company and depositary.– were "very much in keeping with established practice in Ireland, and we will continue to serve the needs of global managers utilising the well-respected UCITS framework both within Europe and beyond".
Lardner added: “We look forward to engaging with ESMA as they prepare guidelines to identify the categories of staff that might influence the risk profile of the UCITS, bearing in mind the inherent risk mitigants that already exist within the UCITS product.
"It is also important that ESMA’s work would not limit or restrict an investor’s access to the best expertise available in a global market place.”
