In the wake of the financial crisis, more than 40 new pieces of EU legislation were adopted to restore financial stability and market confidence. These reforms have made the financial system more stable and resilient. However, it is important to monitor the continuing development, early implementation and functioning of the new rules to check that they are delivering as intended. Developments in the financial sector and the economy more broadly, including rapid technological developments, also need to be taken into account when checking that the rules are still fit for purpose.

This is why the Commission launched the Call for Evidence, a public consultation on the overall financial services regulatory framework. All interested parties were invited to provide feedback and empirical evidence on the benefits, unintended effects, consistency and coherence of the financial legislation adopted in response to the financial crisis.

The Call for Evidence is in line with the European Parliament's Resolution "Stocktaking and challenges of the EU Financial Services Regulation: impact and the way forward towards a more efficient and effective EU framework for Financial Regulation and a Capital Markets Union", which asked the Commission to provide a holistic review of EU financial legislation.

The Call for Evidence is the first example globally of such a comprehensive exercise. Global standard-setters, including the Basel Committee on Banking Supervision and the Financial Stability Board, are now also beginning to assess the overall coherence of global financial reforms.

The consultation period closed on 31 January 2016. More than 300 stakeholders – including consumer organisations, regulators and public authorities and the industry submitted responses and evidence. The Communication and accompanying Staff Working Document summarise the results of the Commission's detailed review and analysis of the consultation responses, as well as the discussions at the public hearing, held in May 2016.

How does the Call for Evidence promote the Commission's Better Regulation Agenda?

The Call for Evidence is a fundamental piece of the broader Commission agenda for Better Regulation. The Commission is committed to legislating less and better. With this exercise the Commission has looked across all policy areas to see where existing measures are still fit for purpose and whether there is a need for improvement. The Call for Evidence is also a key contribution to the Commission's Regulatory Fitness and Performance (REFIT) programme, which ensures that EU legislation delivers results for citizens and businesses effectively, efficiently and at minimum cost.

How did the Commission review and assess the submissions received?

The responses to the Call for Evidence were assessed against the following objectives:

• Promoting economic and financial stability in the EU;

• Maximising the benefits of the financial system to the economy, jobs and sustainable growth, and promoting better access to finance, notably for SMEs;

• Completing the EU Single Rulebook and strengthening the single market;

• Restoring trust in the financial system and ensuring a high level of consumer and investor protection;

• Ensuring that EU rules are as simple and clear as possible while keeping the regulatory burden to the minimum necessary; and

• Promoting competitiveness of the EU economy.

The submissions were also assessed relative to the quality of the evidence provided.

What are the main findings?

Overall, the majority of respondents signalled support for the financial reforms undertaken in response to the crisis. However, stakeholders also identified examples of possible frictions, overlaps and other unintended interactions between different regulations.

Based on a thorough review of all the consultation responses and the evidence provided, we will take work forward in the following four areas:

1. Greater attention will be paid to areas where the rules may be impeding the flow of finance to the economy. As investment, growth and jobs are key drivers of the European economy, there is a need to ask whether the same prudential objectives can be achieved in a more growth-friendly way.

2. Enhancing proportionality in the regulatory framework as part of the wider aim to better balance financial stability and growth objectives. EU financial rules should not create unintended barriers to new market players and recognise the diversity of financial institutions in the EU.

3. Reducing red-tape and designing rules that achieve their objectives at minimum cost for firms and, ultimately, their clients.

4. Ensuring consistency of the overall framework, address the remaining risks in the financial system, further enhance investor and consumer protection and keep the regulatory framework up to speed with technological developments.

What are the next steps?

As a follow-up to the Call for Evidence, the Commission will take a number of specific actions, detailed in the Communication. These range from legislative reviews to ongoing policy work, e.g. to refine measures under the CMU Action Plan. Going forward, the Commission will monitor progress in the implementation of the respective policy commitments and will publish its findings and next steps before the end of 2017.

The Call for Evidence should not be seen as a one-off exercise. The Better Regulation principles will continue to be applied rigorously in the development of the Commission's legislative proposals, especially as regards assessing their economic impacts, minimising compliance costs and ensuring proportionality. The Commission will continue to engage early on with all relevant stakeholders through its various consultation mechanisms, giving them the opportunity to provide further evidence and contribute to policy development.

What are the actions proposed by the Commission to remove unnecessary regulatory constraints on financing the economy?

Bank finance

In Capital Requirement Regulation and Directive (CRR/CRD IV), which resulted in "CRR2 package", the Commission is proposing adjustments in key areas to safeguard banks' capacity to finance the economy:

• The leverage ratio will be adjusted to reflect the diversity in the EU financial sector and safeguard access to clearing and public development funding. The leverage ratio will continue to serve as a back-stop against excessive leverage;

• A phase-in will be introduced for the fundamental review of the trading book to avoid sudden and disproportionate capital increases for some banks; and

• The net stable funding ratio will also be phased in and fine-tuned to ensure the proper functioning of EU trade finance activities, derivative markets and markets in repurchase agreements.

SME financing

Currently, bank loans to SMEs below EUR 1.5 million are subject to lower capital requirements than loans to larger companies. In the CRR2 package, the Commission proposes to extend the ‘SME supporting factor' to all SME loans, including those larger than EUR 1.5 million.

As part of the broader work on SME financing and listing, the Commission will assess the implementation the Markets in Financial Instruments Directive (MiFID II) on investment research rules in relation to SMEs.  While the changes overall are expected to reduce conflicts of interest and improve the functioning of the market, the effect of the rules on the provision SME research needs to be monitored closely. The Commission will also monitor the implementation of the regime for SME growth market issuers under the Market Abuse Regulation (MAR)to ensure it strikes the right balance between supporting SMEs to list and protecting investors.

Long-term investment

The Commission will extend lower risk charges for insurers under Solvency II for qualifying infrastructure projects to infrastructure corporates to better reflect the lower risk of these investments. As part of the CRR2 package, the Commission will also lower credit risk capital requirements for banks' investments in infrastructure projects.

Future reviews of Solvency II will provide an opportunity to assess the long-term guarantees package in order to further explore incentives for long-term investment by insurers and to assess the appropriateness of the prudential treatment of private equity and privately-placed debt.

Market liquidity

The Commission has already taken a cautious approach to new rules affecting liquidity of markets for example by proposing that the new pre-trade transparency regime for MiFID II be phased in for non-equity instruments, ensuring that only the most liquid instruments are initially covered, and with more proportionate rules for less liquid instruments in the Central Securities Depositories Regulation (CSDR). The Commission will also assess the functioning of the exemption for ‘market making activities' from the Short Selling Regulation (SSR).

The Commission is currently comprehensively reviewing corporate bond markets as part of the CMU Action Plan, and will extend this analysis to also include the functioning of markets in repurchase agreements (‘repo markets').

Access to clearing

In addition to the adjustments to the leverage ratio proposed today, the Commission will assess concerns about access to clearing services and consider whether and how corporates and small financials should be covered by clearing and margining requirements as part of the EMIR review.

How will the Commission enhance the proportionality of rules?

Banks and investment firms

As part of the CRR2 package,the Commission is proposing to:

• Ease reporting requirements and provide for differentiated disclosure requirements for small and non-complex credit institutions;

• In light of the experience with the application of the current rules, exempt small and non-complex institutions and staff with low levels of variable remuneration from the deferral and pay-out in instruments remuneration requirements;

• Eliminate unnecessary complexity as regards the treatment of trading book market risk and counterparty credit risk.

  In 2017, the Commission will carry out a REFIT revision of the prudential treatment of investment firms, taking into account the EBA recommendations on developing a prudential regime for smaller investment firms that pose no systemic threat. In November 2016, the EBA launched a consultation in response to the Commission's call for technical advice on the design of a new prudential regime for investment firms.

Derivatives

As part of the EMIR review, the Commission will consider adjusting the scope of EMIR clearing and margin requirements to address the diverse challenges faced by non-financial corporations, pension funds and small financial counterparties.

Pension funds currently benefit from a temporary exemption from the EMIR clearing obligation, and the EMIR review will assess how to deal with this matter in the most appropriate way to provide certainty.

Insurance

In July 2016the Commission issued a call for technical advice to the European Insurance and Occupational Pensions Authority (EIOPA) on thereview of 17 specific items in the Solvency II Delegated Regulation. The aim is to simplify the methods, assumptions and calculations of certain modules in the standard formula and develop the framework for the use of alternative credit assessments. The technical advice will feed into the future review of the Solvency II Delegated Act.

Asset management

Building on the approach set out in the CRR2 package, the Commission will assess the proportionality of rules in the Alternative Investment Fund Managers Directive (AIFMD)[1] and the Undertakings for Collective Investment in Transferable Securities Directive(UCITS), for example in relation to aligning remuneration regimes and reducing reporting burdens and other areas.

Credit rating sector

The Commission will assess the extent to which the Credit Rating Agencies (CRA) Regulation could be applied to small CRAs in a more proportionate way so as to enhance competition in the sector. This includes clarifying certain existing exemptions for smaller firms and exploring simplified reporting requirements and other proportionality measures.

What will the Commission do to reduce undue regulatory burdens?

Reduce reporting burdens and overlaps

The Commission will undertake a comprehensive review of reporting requirements in the financial sector. In addition, supported by the ISA2programme, the Commission has launched a financial data standardisation project which maps reporting requirements in 20 key pieces of financial legislation, aims to develop a common language on financial data. The project will address the compliance burden at source and prepare the ground for a ‘once for all' approach to reporting.

The CRR2 package today proposes a reduction of the frequency with which smaller and less complex banks are required to report. Before the end of 2016, the EBA will consult on a set of concrete proposals for further reducing the burden stemming from reporting requirements in banking

In 2017, the EMIR review will look at ways to reduce, as appropriate, existing reporting requirements for non-financial corporations, small financial corporations and pension funds given their lower systemic risk.

EIOPA is expected to report on the implementation of the proportionate reporting requirements for small insurers under Solvency II by the end of 2016.

The Commission will assess the possibility of introducing a single reporting platform on short-selling to strengthen the information provided to regulators and examine ways to reduce burdens on the reporting of net short positions.

How will the Commission make the rules more consistent and forward-looking?

Addressing interactions and inconsistencies

In order to safeguard banks' ability to provide client clearing services under EMIR, in the CRR2 package the Commission proposes adjusting the leverage ratio to allow banks to offset the potential future exposure of the relevant derivative transactions by initial margin.

The Commission will review the counterparty credit risk mitigation framework of Solvency II to account for adoption of EMIR in the future review of the Solvency II Delegated Act. The Commission has asked EIOPA to propose an update tothe Solvency II delegated actto take account of the reduced counterparty risk introduced by EMIR.

The Commission proposes, as part of the CRR2 package, to gradually phase in the prudential capital effects arising from the new impairment model into the revised International Financial Reporting Standards (IFRS 9) to prevent a sudden impact on lending by banks.

The Commission has asked ESMA to analyse the evidence submitted on UCITS restrictions as regards the use of Over-The-Counter (OTC) derivatives.

Enhancing investor and consumer protection

As a follow-up to the Retail Financial Services Green Paper, in early 2017 the Commission will publish an Action Plan setting out steps to build a deeper single market for retail financial services. The Retail Financial Services Action Plan will, among other things, consider ways to:

• Improve consumer protection when buying financial services cross-border and online. In particular, it will increase awareness of possibilities to settle cross-border disputes out of court;

• Reduce the legal and regulatory obstacles that firms face when providing financial services abroad, including when taking advantage of the growing digitalisation of retail financial services; and

• Make disclosure requirements fit for purpose in the digital world.

  As part of the CMU Action Plan, the Commission is launching a comprehensive assessment of European markets for retail investment products that will look at distribution channels and costs, investment advice and the possibilities offered by technological innovation.

Addressing gaps in the regulatory framework

As part of the Retail Financial Services Action Plan the Commission will consider merits of improved protections under theInvestor Compensation Scheme Directive.

The Commission will shortly present a proposal for a recovery and resolution framework for CCPs.

The forthcoming review of the EU macro-prudential framework will assess any inconsistencies in the macro-prudential toolset, and where instruments overlap. As reflected in the consultation document, the review will also assess the meritsof expanding the macro-prudential framework beyond banking.

Taking account of technological developments

A FinTech task force has been set up to monitor technological developments affecting the financial sector and to develop appropriate responses where necessary.

 

[1]Directive 2011/61/EU. Article 69 states that "By 22 July 2017, the Commission shall, on the basis of public consultation and in the light of the discussions with competent authorities, start a review on the application and the scope of this Directive".