Speech by Commissioner Jonathan Hill at the public hearing on the 'Call for Evidence' - a review of the EU regulatory framework for financial services

Brussels, 17 May 2016
European Commission - Speech - [Check Against Delivery]

Ladies and gentlemen,
It's a great pleasure to be able to welcome you back to the afternoon session of our conference. I'm
sorry to be doing things slightly back to front, and that I could not be here this morning. But I’m really
excited to see how much interest there is in the Call for Evidence and the work we're doing to review
the regulatory framework for financial services.

This Call for Evidence is part of a much broader Commission agenda, led by Franz Timmermans, for
better regulation. As a Commission, we are committed to legislating less – 80% less this year
compared to the last Commission - and legislating better. We want to work with businesses,
supervisors and consumers to develop rules that are evidence-based. And we should have the selfconfidence
to check that our existing legislation is working as intended – and to be prepared to change
it if it is not. That is how we can regulate in a way that commands respect.
I am enthusiastic about this approach in my own area of financial services. As a response to the
financial crisis, we had to pass a whole range of legislation in recent years. It's made our financial
system stronger. It's provided more protection for consumers. But now, as we work to support
investment, as we work to support growth, it's time to take stock. Not to question the overall
architecture, but to check whether the same regulatory objectives can be achieved in a more growth
friendly way.
In launching our Call for Evidence, the Commission has not been acting in isolation. It is something
that the European Parliament, and Burkhard Balz in particular, has called for. It is supported by
governments across the EU. And it fits into the international regulatory agenda.
The G20, the Financial Stability Board and the Basel Committee, are all looking at the coherence of the
reforms that have been undertaken in recent years. Mark Carney, as chairman of the FSB, agrees that
"monitoring implementation of agreed reforms, analysing the effects of the measures, and making
adjustments to address any identified material unintended consequences, represents good regulatory
practice". But I'm glad to say that it's the Commission which is in the lead in undertaking such a
comprehensive exercise. This gives us an opportunity to shape the global approach to regulation. And I
hope it can serve as a model for similar reviews in other areas of EU legislation.
If that’s the bigger picture, let me come back to the Call for Evidence itself, and give you a snapshot of
the feedback we’ve received.
Let me start with the banking sector. What are its main concerns? Well, smaller banks have been very
clear that our banking legislation does not do enough to take their size properly into account. That’s a
concern I understand and to which I'm sympathetic. We're already looking at this as part of our review
of the Capital Requirements Regulation, CRR, and its sister directive CRD4. I want to see whether we
can extend measures already built into the system to make it more proportionate.
For instance, some smaller banks and credit unions are exempt from the CRR. Up until now these
exemptions have been decided on a case by case basis. I want to keep the exemptions that have
already been granted, but I also want to speed up the process for applications, and set some objective
criteria on which future exemptions can be decided. There must be a more efficient way of doing this
than amending primary legislation every time.
I'd also like to see more proportionate reporting and disclosure requirements for the banking sector.
Can we do more to simplify complex reporting and disclosure templates? Can we streamline what
needs to be disclosed to make it more understandable, and therefore more meaningful? I’m sure we
can, and we're working out how best to do it.
From banks of all sizes, there was a general acceptance of the fundamental architecture of our financial
framework, and for the reforms that have shaped it. But they have also identified a number of areas
where they believe the cumulative impact of legislation could be hampering their ability to finance the
wider economy.

If true, it's a concern we can't ignore. We’ve already taken action to define simple, transparent and
standardised securitisations and proposed lower capital requirements for banks that hold them. We will
keep the supporting factor for lending to SMEs. In addition, I want us to look at the case for raising the
threshold for loans that qualify. As part of the CRR review, we will consider concerns that our rules
are making it harder for banks to play their role as market makers, reducing liquidity in some
securities markets.
In the future, I'm clear that we need to be careful before implementing anything that could make the
situation more difficult. That's why we've written to ESMA to ask for a more cautious approach on
MiFID II liquidity calibrations. It's why we've asked the EBA to advise us on how to apply Basel
measures - like the Net Stable Funding Ratio liquidity rules and the leverage ratio – in way that works
for European businesses. And also to assess the impact that the Fundamental Review of the Trading
Book would have on the European banking sector. I know there is a lot of concern about how these
Basel measures will be implemented. So we'll shortly be launching targeted consultations on the NSFR
and the Trading Book Review.
Investment firms also call for a more proportionate approach. They think we need to distinguish
between the capital requirements imposed on large – bank-like - investment firms and those imposed
on smaller ones. The EBA made a similar point in recent advice to us where it recommended that a
prudential regime should be developed for smaller investment firms that pose no systemic threat. They
will follow up with recommendations next year.
Asset managers, among others, said they're being asked to report the same data in different forms to
comply with separate pieces of legislation. So I want to look at whether their reporting burden could be
lowered without affecting the quality of what's reported. They shared the concern that constraints on
banks' balance sheets are reducing liquidity, and stressed the importance of regulatory stability as
AIFMD and the recent amendments to the UCITS framework continue to bed down.
I understand this need for a period of legislative calm. So we’l l take a targeted approach. For example,
as part of CMU, we're taking a range of steps to support the asset management sector to play its role
in channelling finance to Europe's economy and businesses.
We're working to improve the EU passporting system for asset managers as it isn't working as well as
it should today. Smaller fund managers tell us they still struggle to offer their products in different
countries. That gold plating by national supervisors, additional fees, and different requirements for
marketing material too often get in the way.
Where those barriers exist, we have to knock them down. So we’ll launch a consultation this month to
identify the main barriers to funds operating in other countries. We'll use this evidence to improve
passporting and build a system where investors have more choice and enjoy lower charges, and where
investment funds can genuinely compete across borders.
We're also working on ideas to strengthen venture capital markets. We’ll begin this year by amending
existing legislation governing venture capital funds to build up scale, diversity and choice. We’ll also
look at how we can use public money to attract private investment with a pan-European venture
capital fund of funds.
If we turn to insurance, it is clearly the case that insurers are operating in a difficult environment. A
great deal of regulatory change has come on top of the challenge of low interest rates. We'll need to
see that new legislation bedding-in. But the evidence that has been provided will help us to sharpen
the focus of future reviews of legislation including Solvency II.
I'm looking carefully at claims that our rules do not distinguish sufficiently between long-term and
short-term investments, and the different levels of risk associated with them. And that this makes long
term investments disproportionately expensive.
For investments by insurers in infrastructure projects, evidence provided by EIOPA confirms that's true.
To support infrastructure investment by insurers, one of the first things we did as part of the work to
build a Capital Markets Union Action Plan was to amend Solvency II. We defined infrastructure as an
asset class and reduced associated capital requirements for this type of investment, and investments in
European Long-Term Investment Funds, by around a third.
That change has been in force since last month. It's the first CMU action to be delivered on the ground
and I hope insurers are making good use of it. I was glad to see the French financial markets authority
has just authorised the creation of two ELTIFs that definitely will. That's 1.2 billion euros in equity that
can be invested in infrastructure across the EU.
Now the question is: can we go further? Can we extend this change to a broader range of investments?
I want us to look at that. That's why we've asked EIOPA for advice, which I expect in June.
As well as these sector specific concerns, we have received many useful submissions on issues that cut right across the financial sector, and even beyond, on the way different pieces of legislation interact.
For example, financial services companies, pension funds and corporates all call for more
proportionality in the European Market Infrastructure Regulation – EMIR, and point to the way it
interacts with bank capital rules. They emphasise EMIR’s broad scope, and argue that the risk
management benefits of central clearing can still be achieved with a more proportionate approach. In a
way which lessens the burdens on smaller financial firms, corporates and pension funds; takes
business size and business models more into account; and doesn’t discourage central clearing services
being provided.
It’s vital we continue to make sure that our financial institutions can absorb losses across the financial
sector. But we need to be clear about who and what is systemic and check that our requirements are
being set accordingly. At the same time, we must make sure that the cumulative impact of bank
capital rules such as the leverage ratio and EMIR are not overly burdensome, that they don't weigh too
heavily on those that provide clearing services and don’t undermine sensible business planning and risk
management.
It should be possible to make EMIR more proportionate and continue to mitigate systemic risk in our
derivative markets. It should be possible to lower administrative reporting burdens. And all this while
ensuring supervisors have enough information to monitor risks, and intervene if necessary. I want to
use the EMIR review to do that.
Taken together, the responses we’ve received show that overall there is a lot of support for the
reforms that have been put into place, but that across the whole of the financial sector there are
concerns that legislation is not always proportionate. That in some areas it may be limiting the amount
of financing available to the wider economy. And that there's too high a compliance burden,
particularly on smaller businesses.
We’ll complete our analysis by the summer, by which time we should be clearer on what further actions
are needed. Discussions today will help us do that. But the evidence you've already provided, and the
picture that's emerging of how different pieces of legislation interact has already given us a lot of
useful intelligence.
I want to use every single one of the 100 upcoming reviews already planned to make sure we have the
best possible legislation and to address legitimate concerns. EMIR and CRR were two areas mentioned
frequently and the reviews we are undertaking of them this year are going to be particularly important.
I want to be more proportionate in the way legislation's applied, more cautious before doing anything
that might reduce liquidity, and more ambitious about reducing reporting and disclosure requirements
where it's appropriate. That's the approach I'll also be taking to implementing measures flowing out of
Basel. And that approach will shape the level 2 measures that we still need to bring forward.
Yes, financial stability is a prerequisite for growth. But at the moment the biggest threat to stability is
the lack of growth itself. It's from a financial stability point of view that we need to look at the
combined effort of our regulations and ask whether we are striking the right balance between micro
and macro prudential considerations. Working with businesses, Member States and the European
Parliament, there is a lot of support to do this. This isn't always glamorous or headline grabbing work.
But it is work that is vitally important if we are to have a framework that supports competition, jobs
and growth in Europe, and delivers rules that command respect.