European Financial Regulation

Levelling the Cross-Sectoral Playing Field

Veerle Colaert, Danny Busch, Thomas Incalza, Veerle Colaert, Danny Busch, Thomas Incalza

• Publisher: Hart Publishing
• Year: 2019
• ISBN:
  9781509926473
• Edition: 1
• Topic: Droit
• Subtopic: Droit financier

Mirroring the long-established structure of the financial industry, EU financial regulation as we know it today approaches banking, insurance and investment services separately and often divergently. In recent decades however, the clear separation between financial sectors has gradually evaporated, as business lines have converged across sectors and FinTech solutions have emerged which do not fit traditional sector boundaries. As the contours of the traditional tripartition in the financial industry have faded, the diverging regulatory and supervisory treatment of these sectors has become increasingly at odds with economic reality. This book brings together insights developed by distinguished researchers and industry professionals in a series of articles analysing the main areas of EU financial regulation from a cross-sectoral perspective. For each specific research theme – including prudential regulation, corporate governance and conduct of business rules – the similarities, as well as gaps, overlaps and unjustifiable differences between banking, securities and insurance regulation, are clearly presented and discussed. This innovative research approach is aimed at informing lawmakers and policymakers on potential improvements to EU financial regulation whilst also supporting legal and compliance professionals applying the current framework or looking to streamline compliance processes.

PART I

Conceptual Framework

1

Regulating Finance in a Post-Sectoral World: Setting the Scene

VEERLE COLAERT AND DANNY BUSCH

I.Problem Statement

Financial regulation¹ as we know it today mirrors the traditional structure of the financial industry. In most legal systems, it is thus divided into banking, insurance and investment services law.² In recent decades however, the clear separation between financial sectors has gradually evaporated, as business lines have converged across sectors.³ This evolution has been noticeable at the level of service providers, products and distribution channels. In the current environment, credit institutions, investment firms and insurance companies are typically vying for the same customers with similar products and through an identical set of distribution channels.⁴ Specific terminologies have been created to capture this phenomenon: ‘Allfinanz’-strategies and -products, ‘bancassurance’, ‘assurfinance’ and even ‘bancassurfinance’.⁵

As the contours of the traditional tripartition in the financial industry faded, the diverging regulatory and supervisory treatment of these sectors has become increasingly at odds with economic reality. This has caused certain marked inefficiencies. In a sectorally organised regulatory model the qualification of a particular institution, product or service as either a banking, investment or insurance institution, product or service is the decisive determinant to establish the applicable legal framework. Different rules may thus apply to institutions, products or services based solely on their classification in one of the traditional sectors, without each of these differences necessarily being substantiated from an economic point of view. For financial institutions offering a wide range of products or services, such a regulatory approach is not efficient as different processes will need to be implemented depending on the formal sector in which the product or service is to be classified. For retail customers, it may moreover be confusing if different standards are applicable to very similar situations. Unjustified differences between banking, investment services and insurance legislation, which do not correspond to differences in the economic characteristics of the institution, product or service, finally also create a fertile breeding ground for regulatory arbitrage, meaning that market participants exploit gaps and inconsistencies in different sets of regulation applicable to economically very similar situations, with a view to avoiding the stricter regulatory framework.⁶ In France, for instance, sales of unit-linked life insurance have increased following the implementation of the Markets in Financial Instruments Directive 2004 (MiFID), to the detriment of direct sales of units in investment funds.⁷ For the sale of units in investment funds the strict MiFID conduct of business rules applied, whereas the sale of unit-linked life insurance products was subject to the much lighter regime of the Insurance Mediation Directive.⁸ The so-called ‘shadow banking’ sector has also been cited as engaging in ‘bank-like’ credit intermediation without being subject to the strict rules that apply to banks.⁹

In addition, the financial industry is continuously developing new ways of intermediation (such as crowdfunding, P2P lending and other FinTech techniques) and new financial products and services (eg in relation to virtual currencies). Regulators are struggling to determine whether those new techniques and products are already covered by existing regulation and, if not, whether they should be, and if so, how.¹⁰ One of the problems is that such new techniques and products are not always easily qualified as banking, investment or insurance platforms, products or services, which results in gaps and inefficiencies.

It follows from the above that the current sectoral approach has some clear inefficiencies. It raises the question whether a more cross-sectoral approach to (a number of areas of) EU financial regulation would be feasible¹¹ and more efficient.¹²

II.State of the Art

A.Structure of Financial Supervision

In academic literature the question of whether financial supervision should be structured in a sectoral or cross-sectoral manner has been the topic of a heated debate. In view of the blurring lines between the traditional sectors and the gaps and overlaps resulting from sectoral supervision, pleas have been made to discard the sectoral supervisory model, ie a separate supervisor for the banking, securities and insurance sectors. Alternatives include the single supervisory model, with one supervisor for the entire financial industry, or the so-called twin peaks supervisory model with two functionally competent supervisors: one conduct of business supervisor for the entire financial industry and one prudential supervisor for the entire industry.¹³ Several Member States have indeed reformed their supervisory structure to ensure a consistent level of supervisory scrutiny across the financial sectors and to avoid supervisory arbitrage.¹⁴ The European System of Financial Supervision (ESFS), however, remains structured along sectoral lines, mimicking the sectoral nature of EU financial regulation.¹⁵ The only exception to the sectoral approach to financial supervision at EU-level, is the macro-prudential supervisor, the European Systemic Risk Board, which is competent across the entire financial industry.

Recently, there has been renewed attention for this topic in view of the EU review of the European Supervisory Authorities,¹⁶ which called for a thorough re-assessment of the structure of financial supervision. In the end this review has, however, not produced major changes, and not led to an abolishment at the EU-level of a supervisory structure organised along sectoral lines.

B.Structure of Financial Regulation

Only limited attention has been devoted to the question of whether financial regulation should be structured in a more cross-sectoral or holistic manner.¹⁷ This is surprising, as reform of the supervisory architecture can only have limited efficacy as long as financial legislation does not take the same approach.

i.The International Scene

Almost two decades ago the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervision (IAIS), undertook a cross-sectoral comparison of their Core Principles in order to identify common principles and understand differences where they arose.¹⁸ This comparison indicated an important common ground in the principles applying to the three sectors of the financial industry, alongside substantial differences. However, these international organisations did not take the next step, ie to draft joint principles for the entire financial industry. A similar exercise has not been undertaken ever since.

However, with regard to a more limited aspect of financial regulation – resolution of financial institutions – the Financial Stability Board (FSB) has taken a cross-sectoral approach. In 2011 it published 12 cross-sectoral key attributes for resolution of financial institutions of all types that would create systemic risk in case of failure.¹⁹ The initial key-attributes were further refined in 2014. While the 12 key attributes were considered to remain the umbrella-standard for resolution regimes covering financial institutions of all types, further guidance has been developed, inter alia, with a view to accommodating sector-specific considerations.²⁰

ii.The EU and its Member States

In 2002 the Netherlands was one of the first jurisdictions to introduce the so-called ‘twin peaks’ supervisory model. In 2006 the legislator aligned Dutch financial legislation with this cross-sectoral supervisory model.²¹ It introduced one financial code for the entire financial industry, applicable since 1 January 2007, and structured this code in a functional rather than a sectoral manner.²² This attempt for a more functional approach to financial regulation was, however, seriously hampered by the sectoral approach of European directives, which the Netherlands had to implement in their national financial code.²³ In 2016, after a public consultation with regard to the question of whether the Dutch financial code is futureproof the Dutch Ministry of Finance decided to leave the functional structure of the Dutch financial code unchanged.²⁴

Several other Member States took more limited cross-sectoral measures in the field of product information,²⁵ in order to tackle problems of regulatory arbitrage. The result was an un-level playing field in the EU, with different product information measures applying to similar products in different Member States. EU intervention was therefore almost inevitable.²⁶

In its reaction, the EU legislature explicitly recognised the limits of sectoral financial regulation and announced that it would take steps towards a more cross-sectoral approach in respect of (i) product information and (ii) conduct of business regulation.²⁷ With the Regulation on Packaged Retail Investment and Insurance-based Products (PRIIPs Regulation)²⁸ the EU indeed opted for a more cross-sectoral approach to product information, requiring the same key information document for structured deposits (banking product), insurance-based investment products (insurance product) and packaged financial instruments (investment product). This regulation has however been criticised for being too limited in scope.²⁹ In respect of conduct of business rules, no single cross-sectoral piece of legislation has been introduced. Although the scope of the MiFID II Directive has been widened to provide the same level of retail client protection for structured deposits (banking product) as for financial instruments (investment product),³⁰ insurance products remained out of the scope of MiFID II and are subject to a separate sectoral directive. The Insurance Distribution Directive (IDD) has, nevertheless, explicitly based its retail client protection rules for the sale of insurance products on the MiFID II standard.³¹ However, many unsubstantiated differences remain between MiFID II and IDD.³² The relevant level 2 and 3 measures diverge even further as a result of the fact that there is little cooperation between the European Supervisory Authorities (ESAs) which are principally responsible for the content of the MiFID II and IDD level 2 and 3 measures. It is questionable whether all these differences are indeed substantiated by the economic differences between the institutions, products and services covered by MiFID II and IDD respectively.³³

A second EU battlefield against regulatory arbitrage has been a range of phenomena collectively referred to as the shadow banking system. After the crisis, the European Commission described and assessed the problem in a Communication.³⁴ This has been followed up by a number of changes in existing legislation,³⁵ but has not sparked a fundamental debate on the scope and structure of EU financial regulation at large. As a result, no steps have been taken to tackle unsubstantiated differences in governance rules, prudential regulation, resolution regimes, etc.

A third EU initiative worth mentioning in this context is the European Commission’s ‘cross-sectoral study on terminology as defined in the EU financial services legislation’.³⁶ This study was very broad in scope in terms of the directives and regulations included, but only focused on a limited number of definitions. Moreover, the study is now largely outdated as it appeared prior to the avalanche of post-crisis regulation.

Fourth, in September 2015, the European Commission initiated a comprehensive review of the cumulative impact and coherence of the financial legislation adopted in response to the financial crisis. The purpose of this review was to assess the overall coherence of the existing framework.³⁷ This review, howev...

Table of contents

• Cover
• Title Page
• Preface
• Table of Contents
• List of Contributors
• List of Abbreviations
• PART I: CONCEPTUAL FRAMEWORK
• PART II: STABILITY OF THE FINANCIAL SYSTEM
• PART III: CONSUMER PROTECTION
• PART IV: SUPERVISION AND INTERNAL MARKET
• PART V: SUMMARY AND CONCLUSIONS
• Index
• Copyright Page