European Regulatory Radar

March 2024

Welcome to the latest edition of European Regulatory Radar 

The new issue of European Regulatory Radar brings you the latest updates impacting financial services providers in the region. Complementing the UK Regulatory Radar series, European Regulatory Radar provides an overview of the wider economic and political environment, progress across the regulatory agenda and deep-dive articles on some of the most important regulatory developments.  

The EBA's annual risk assessment found that the banking sector remains resilient despite pockets of risk stemming from the change in interest rates. This sentiment was largely reiterated in its quarterly risk dashboard. 

EIOPA has published its own risk dashboard showing that exposure to market risk remains the main concern for insurers. Macro and digitalisation risks are still relevant but have decreased to medium levels compared to our last edition. 

In its January Trends, Risks and Vulnerabilities report (1.35 MB), ESMA noted that financial markets have remained 'remarkably resilient' despite the confluence of risks that prevailed throughout the year. Going forward, these risks are expected to persist. ESMA has also published a report on the EU's alternative investment funds market, highlighting potential risks in funds exposed to leverage and liquidity mismatches. 

To address heightened risks, the Commission has completed a review of the existing macroprudential framework. Based on this, it plans to focus on revising and simplifying the regime for banks, while considering more fundamental changes for non-banks (including through further consultations later this year).

Supervisory priorities continue to evolve. This quarter, the ECB updated its 2024-2026 priorities (see more in the deep dive article below) and EIOPA published its 2024 supervisory convergence plan.

At the same time, new policy initiatives are being finalised at pace ahead of the European Parliament elections in June.

In the banking sector, the Commission has published the agreed text for the final elements of Basel III implementation and confirmed that these rules will apply from 1 January 2025. The EBA simultaneously published an implementation roadmap, to clarify how it will develop the mandates underpinning the legislation. Some initial draft mandates have already been issued on operational risk, with consultation deadlines in April and May.

Provisional political agreement has also been reached on the 'Daisy Chains' proposal of targeted amendments to the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR).

The ECB has issued its revised guide (PDF 2.87) to internal models with key revisions relating to climate-related risks, detailed requirements for common definitions of default, counterparty credit risk, default risk in the trading book and how to return to a standardised approach. The ECB has also announced that in 2024 it will conduct a cyber resilience stress test on 109 directly supervised banks. This will assess how banks respond to and recover from a cyberattack, rather than their ability to prevent one.

And MEPs have adopted new rules within the Single Euro Payments Area (SEPA) to ensure transferred funds arrive in retail bank accounts within ten seconds. 

In insurance, EIOPA has launched a consultation on a proposed methodology for setting value-for-money benchmarks for unit-linked and hybrid insurance products. EIOPA is also consulting on the prudential treatment of sustainability risks. Meanwhile, the European Commission is requesting feedback on extending provisional equivalence on the solvency regime in force in the United States for a period of 10 years (from January 2026). 

The proposed Retail Investment Strategy that would impact firms in the wider retail investments ecosystem remains subject to ongoing debate and negotiation, with the shape of the final package still unclear.

In capital markets, regulation on the European Single Access Point (ESAP) came into force in January. This will consolidate access to public financial and non-financial information about EU companies and EU investment products. The ESAs have begun consulting on their associated technical standards. 

Significantly, political agreement has been reached on the European Market Infrastructure Regulation (EMIR) 3.0 package, aiming to make EU clearing safer and more attractive while mitigating risks from excessive reliance on central counterparties (CCPs) located in third countries. Although the exact detail is yet to be clarified, the threat of considerable amounts of EU clearing being forced from UK CCPs into EU CCPs has lessened. This has been welcomed by clearing members.

The MiFIR review has been published in the Official Journal. It will help establish EU-level consolidated tapes, phase out 'payment for order flow' (PFOF) by 30 June 2026 and introduce new rules on commodity derivatives.

For asset managers, after lengthy negotiations, the Council and Parliament approved revisions to the AIFMD and UCITS Directive under the AIFMD II package (see more detail in our deep dive this issue). ESMA also published draft technical standards under the revised European Long Term Investment Fund (ELTIF) regulation and submitted these to the Commission for approval. However, the Commission has responded to ESMA, stating it plans to adopt the RTS but with amendments to make some of the requirements more proportionate (e.g. around notice periods and liquidity management tools).

EU fund managers will also be interested in progress made on the FCA's Overseas Funds Regime, with the UK government announcing it had deemed the EEA to be equivalent, and the FCA concluding its consultation.

The EU Corporate Sustainability Reporting Directive (CSRD) became applicable on 1 January, with the first wave of reporting against the 12 European Sustainability Reporting Standards (ESRS) due in 2025. 

Provisional agreement has been reached over a new regulatory regime for ESG rating providers. As part of the agreement, the Sustainable Finance Disclosure Regulation (SFDR) has been amended, leaving asset managers and advisers with new disclosure obligations relating to the methodology used for ESG ratings under certain circumstances. More broadly, the future direction of the SFDR is now uncertain, given that the Commission is unlikely to adopt the ESAs' proposed changes to the more detailed standards under its current mandate, and feedback is awaited on more fundamental changes proposed by the Commission to the level one text. For asset managers, ESMA also provided an update (PDF 65.7 KB) on its proposed guidelines for fund managers. 

Despite several rounds of negotiation, Member States voted against the final proposals for the EU Corporate Sustainability Due Diligence Directive, which would establish formal requirements to adopt human rights and environmental due diligence policies and implement relevant processes in risk management systems. Given the upcoming EU elections, the current stand-off may result in significant delays to implementation of the directive. 

The Commission has adopted two delegated acts under the Digital Operational Resilience Act (DORA) and four delegated acts under the Regulation on Markets in Cryptoassets (MiCA). If no objections are raised by Parliament and the Council, the acts will start applying after the review period has elapsed. Three new regulatory technical standards (RTS) have also been adopted under DORA.

Political agreement has been reached on the AI Act. The Act will now formally pass through each legislative body (expected imminently), after which it will become the first AI law by a major jurisdiction. Political agreement has also been reached on establishing an Anti-Money Laundering Authority (AMLA) in Frankfurt.

The upcoming EU elections will result in changes to the composition of the European Parliament and Commission. EU authorities are now running out of time to finalise remaining files before activity begins to slow towards the summer months.

The articles below provide more detailed insights on some of the most significant developments. Click on the links to read more: