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EU elections unpacked: What will the future European policy-makers hold for financial services
Following our first ‘EU elections unpacked’ briefing on the future of the Green Deal, we turn our attention to the financial services sector and explore how the upcoming election could have an impact.
In the dynamic landscape of Europe’s financial services industry, marked by rigorous regulation and upcoming innovative legislation, there continues to be appetite for deeper European integration. This is crucial for unlocking the sector’s full potential, especially in bolstering the green and digital transitions. The 2024 elections will be pivotal in setting the legislative tone of the EU, particularly against the backdrop of an already dense statutory framework. Moreover, the continual cycle of updating and reviewing sectoral rules will continue to keep policymakers busy. Alongside this, firms must navigate the intricacies of implementation and anticipate engagement with secondary legislation to operationalise existing frameworks. At Freshfields, our team of financial services regulatory and public affairs specialists is increasingly advising clients on how this complex and evolving regulatory framework will impact them.
Dr. Janina Heinz, Partner
Financial services milestones: reflections on the 2019-2024 mandate
The 2019-2024 European mandate has been extremely busy on the financial services front. Initially, priorities included completion of the banking and capital markets unions, fintech, financial stability, sustainable economy and Brexit. While significant progress has been achieved, there have been some unexpected bumps along the way.
COVID-19 prompted swift emergency measures on several fronts, particularly in banking and markets, leading to ‘quick fix’ legislative changes and temporary relief amendments. The subsequent energy crisis spurred extreme political pressure leading to the highly controversial introduction of corrective measures in virtual gas trading. Brexit ushered in a complete freeze on EU-UK relations insofar as financial services policy was concerned, thawing only after the signing of the EU-UK Memorandum of Understanding in June 2023. This heralded what many hope is a new phase of cooperation and the launch of the bi-annual EU-UK Regulatory dialogues.
Despite ongoing efforts, completion of the banking and capital markets unions remains elusive. However, there have been resounding legislative successes, notably in sustainable and digital finance. Key legislation on crypto assets, operational resilience, DLT pilot regimes and instant payments underscore the mandate’s diverse achievements. Similarly, we have seen advancements in sustainable finance, witnessed the further expansion of the EU Taxonomy, finalisation of the Corporate Sustainability Reporting Directive and the preparation of the first European Sustainability Reporting Standards (ESRS) – not to mention the adoption of the ESG ratings proposal. In terms of insurance the biggest achievement was the political agreement reached on Solvency II and the Insurance Recovery and Resolution Directive, which aim at boosting the role of the insurance and reinsurance sector in providing long-term private sources of investments. Finally, significant progress was made on the supervisory front as Frankfurt was chosen in February 2024 to host the latest addition to the European Supervisory Authorities, the European Anti-Money Laundering Authority that will be charged with enforcing a brand-new Directive and Regulation, as well as directly supervising obliged entities by mid-2028.
What remains to be done? Considerations for the 2024-2029 mandate
On digital finance ambitions remain high, with anticipated final agreements on open finance and a revamp of the payments legislation by the end of 2024 on the cards. However, significant hurdles, many of them political, persist for the digital euro project – a central bank digital currency that could serve as an alternative to traditional deposits for storing value. A review of MiCA is anticipated as fundamental questions persist with respect to decentralised finance. Substantial efforts are also still required to finalise secondary legislation for both MiCA, and DORA. Heightened scrutiny is also expected regarding the implications of large technology firm’s entry into EU financial services. Policy discussions will assess the necessity of tailored measures to mitigate potential risks, most notably with respect to supervisory questions. In February 2024, the ESAs jointly published a paper examining this growing phenomenon and moves are already being made to curb technology firms’ access to data under the open finance proposal and to enhance their role in fraud prevention under the payments review.
The trajectory of sustainable finance initiatives is nuanced, amidst broader discussions around the future of the Green Deal from which this agenda stems. Commission President Ursula von der Leyen is likely to have to make concessions on some of her original ambitions as political groups consider how far they want to push this policy area. The challenging and highly politicised adoption of the Corporate Sustainability Due Diligence Directive, which largely provides the financial sector with carve-outs, will also shape how the future agenda unfolds. We do however anticipate continued focus on the sustainable finance workstream in the upcoming term. The provisional agreement on ESG ratings is expected to enter into force in the first few months of the new Commission mandate and implementing measures will need to be drawn up that will require industry’s expert input. Sector-specific ESRS, including those for non-EU companies conducting business in the EU, are due to enter into force on 30 June 2026, although delays are possible. In addition, a comprehensive review of the Sustainable Finance Disclosure Regulation could lead to major changes in its operational framework. Finally, the Commission is likely to explore more ways to incentivise transition finance, essential for bridging the substantial financing gap towards achieving the EU’s carbon neutrality goal by 2050.
On banking and insurance, we saw the finalisation of negotiations on the banking package during this mandate. These new rules are crucial for bolstering banks' resilience and positioning them for future challenges, particularly in the aftermath of the financial crisis. The implementation of the Basel III agreement stands as a cornerstone of the EU's broad banking reforms, aimed at enhancing the resilience of the EU banking sector. This package is designed to ensure that EU banks maintain adequate capital levels, enhancing their ability to withstand economic shocks and effectively manage sustainability and climate-related risks. The run-up to the implementation of the banking package will be key for the EU’s financial sector. Moreover, this package also aims to improve the competitiveness of EU banks, a key theme during the 2024 European election campaign and the forthcoming Commission mandate. When it comes to insurance, one of the likely goals of the next Commission will be to build on the work started regarding NatCat (Natural Catastrophes) risk assessment as well as the role of insurance companies in tackling cyber risks.
On capital markets there is renewed commitment to advancing the long-standing project of the capital markets union, initiated in 2016. Member States have been vocal in airing specific demands to the European Commission in the hopes that these will be taken up in the next 5-year term. These include harmonising corporate insolvency and accounting rules, pushing measures to encourage retail savers to invest through tax incentives to support the digital and green transitions. Additionally, we expect renewed emphasis on the revival of the market for asset-backed securities and streamlining reporting requirements, due diligence demands and prudential treatment. The Commission is also being asked to cast another eye at a pan-European pension product (a previously failed initiative). While the notion of heightened centralised supervision through an empowered ESMA has waned in support from some larger Member States, it cannot be ruled out entirely. Discussions are also emerging about the possibility for more willing Member States to collaborate and push the CMU project forward along the lines of a ‘two-speed Europe’ although it remains to be seen if this would garner enough political support to become a reality. Most of these initiatives have been promoted by former Italian Prime Minister Enrico Letta, in his report on the future of the Single Market, which he suggests rebranding as a ‘Savings and Investments Union’.
In broader terms, several overarching political themes and considerations are poised to shape the rationale behind a new policy playbook for financial services.
Competitiveness and de-regulation?
The Commission identifies limited cross-border activity across the EU and a concentration of market players within the EU’s financial sector as key factors impacting competitiveness. In the upcoming mandate, we anticipate a reassessment of the national characteristics of ecosystems, including market infrastructures, supervision variances, and broader legal frameworks such as accounting, taxation, and insolvency procedures. These challenges, as highlighted by Enrico Letta, underscore the need for structural reforms to enhance market integration and foster competition. Furthermore, the EU's financial landscape suffers from a dearth of new domestic entrants and consolidation predominantly at the national level. This pattern is identified as stifling effective competition and inhibiting the growth of European players, thereby impeding innovation, technological advancement, and productivity gains. Recognising the ambition of bolstering competitiveness, there is a growing inclination towards deregulation as a potential solution. Streamlining both primary and secondary legislation is viewed as a means to enhance the industry’s competitive edge. Finance ministers, in particular, have voiced concerns regarding the proliferation of legislation in the financial services ecosystem, citing unintended consequences and regulatory barriers to progress. Emphasising the Impact Assessment process could set a higher evidentiary bar for advancing new legislation, promoting informed decision-making. Nonetheless, the number of mandated reviews of existing regulations will keep policymakers and businesses busy.
Economic security and open strategic autonomy
A new focal point emerging alongside ‘open strategic autonomy’ is ‘economic security’, signalling a shift in policy discourse within the EU. While recognising the financial services sector as a globally interconnected ecosystem, policymakers are addressing the potential challenges posed by the EU’s longstanding openness. Central to this discussion is the recognition that while openness creates prospects for profitable opportunities abroad and greater domestic competition, it also risks creating excessive economic dependencies on third countries. If not adequately managed, these dependencies could jeopardise the provision of critical financial services and exacerbate financial instability in times of stress. The Commission has initiated informal consultations on the potential security risks associated with third-country investments in the EU’s critical financial entities. However, the translation of these insights into concrete policy measures remains ambiguous. Recent attempts to mandate the relocation of certain euro-denominated product clearing activities away from London and into the EU under the European Market Infrastructure Regulation highlight the political discord and lack of consensus on this matter. Navigating these complexities will require nuanced policymaking that balances the benefits of openness with safeguarding economic security.
