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18 October 2017

May’s Florence speech momentum stalled over the Brexit bill - 134th Brussels for Breakfast – CPD Notes

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The Prime Minister's golden vision of Britain after Brexit that she painted in Florence provided momentum in the separation talks as it gave a softer tone that was welcomed in the EU, but Europeans 'want their money' too and talks soon reached a blockage over the sum needed to exit the bloc.

Paula Martín/Graham Bishop


Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenterMichael Sholem (Davis Polk) and sponsored by PWC

This blog covers the key subjects since our last meeting that I hoped to cover but, as always, we ran out of time to deal with them all. As a Friend, you can watch the 26th `structured’ CPD web-cast with CISI. These Notes may be read to record a further 30 minutes of `structured CPD’, including a dipping into the links to the underlying stories.

Highlights from the “Brussels for Breakfast” meeting

“528 days until we go over the cliff” dominated the discussion… do we actually go over an economic (rather than legal) cliff or will it be more of ever-steepening slope? No-one contested the gravity of the situation and we reviewed various official warnings about the latest time when UK firms would have to hit the “re-locate” button. It will vary by a particular firm’s business profile but the consensus was that irrevocable change would have to begin by the end of 1Q 2018 if no acceptable agreement was in sight. My outline of the timetable for the legal steps to agree a “transition” – see my post-Florence speech blog - seemed to be accepted as plausible. My timeline is 9-11 years before the transition would be in force… though some shortening may be possible – unless the transition is effectively to stay as we are.

However, the regulatory framework for EU financial systems is not standing still. Indeed Brexit may even be accelerating change. The Commission’s paper on completing Banking Union by 2018 raised political issues as much as economic – would the EU agree on the November 2016 banking package fast enough to lower banking risk so that agreement on the European Deposit Insurance Scheme (EDIS) could be foreseen? A straw in the wind was the EBA’s Risk Dashboard that reported CET1 up to 14.3% with NPLs declining to 4.5% of assets.

The Commission proposal on greater integration of European financial supervision for CMU led to a heated discussion about whether this was a “power grab by ESMA” or the logical outcome of the EU’s drive for an effective CMU? For the moment, ESMA’s direct powers are planned to be extended to cover market infrastructures (such as CCPs), some prospectuses, benchmarks and co-ordinate market abuse investigations that have cross-border implications.

3 January 2018 is only 80 days away – with MiFID II, PRIIPS and the Benchmark Directive coming into force. Much remains to be done for MiFID and attention focussed on the new CPD requirements as well as research payments. There seems to be a sudden, late conversion by asset managers to paying for research from their own resources but the feeling was that – for the biggest players - these costs were not likely to be so large that they would seriously damage profitability. For smaller managers and smaller companies, the results could be quite different.

We noted the unusually strong criticisms by Accountancy Europe of the Parliament’s PANA Committee report about steps that should follow on from the Panama papers episode – they may bring little or no practical impact as auditors were not seen to have failed.


These Notes for the Friends of Graham Bishop will be supplemented by our full Workbook for our CPD clients (link) – in conjunction with the 30-minute CISI webcast. We have launched our new “CPD Weekly – 10 Minute Read ‘n Verify” (link) to comply with ESMA Guidelines

Key items in the rest of the month’s news included:

Theresa May’s hotly anticipated Florence speech was a shift from Britain’s previous tone and sought a more conciliatory approach to the withdrawal talks - now that is clear that the Europeans are willing to stick together to safeguard their interests as a bloc. May vowed to “prove the doomsayers wrong” on the final outcome of the process and called on EU leaders to make a move, saying that “the ball is in their court”.

However, good spirits and a glorious vision might not be enough: “May's speech was long on the desire for creative visions on the part of EU27 leaders but short on why they should divert from the visions they set out to achieve for themselves on the 60th anniversary of the Treaty of Rome”, in Graham Bishop’s view.

The PM’s speech failed to land Britain’s vision on precise plans but created a momentum that Brexit brokers want to capitalise on to hammer out a final deal before the impetus runs out. This might prove difficult given the Tory infighting over precise Brexit terms such as the jurisdiction of the European Court of Justice – David Davis said it would end in 2019, redrawing a red line that had been left vague in Florence’s speech.

EU’s top Brexit negotiator Michel Barnier saluted this smoother  tone that has created a "new dynamic" in the talks, but made no bones about the progress achieved to get into the second stage of negotiations: the French politician said talks have stalled over the contentious issue of the financial settlement, and won’t move on to trade talks at least before a divorce bill is agreed. This was reflected on the Parliament’s resolution on Brexit talks: MEPs agreed that “tangible progress” was still needed on withdrawal termsfor negotiating any transition period or future relationship between the EU and UK. Any deal will have to be approved by MEPs and many states are already spelling out what they consider acceptable and what their interests are: for instance, Sandro Gozi,Italy's State Secretary for European Affairs, wrote an op-ed presenting his country’s priorities for the Brexit negotiations.

Hence, it’s crunch time for Brexit talks, and the UK has floated the idea that it is getting ready for a cliff-edge separation. The European Council President hoped that "sufficient progress" is achieved by December and bemoaned the fact that planning for a ‘no deal’ scenario is “well underway”, in the UK Justice Minister’s words.

Whatever this scenario looks like, it may have to include a transition between the current status and the next one, banks have claimed, and they must have the exact details soon  - before Christmas, warned the Bank of England’s’ Woods, or by early 2018, in the Royal Bank of Scotland Chairman Howard Davies’ opinion - or they might start to move jobs out of the UK: international banks operating in England could begin relocation as early as next year, a senior Treasury official warned.

This will be a big headache for the Chancellor, Philip Hammond, as it would strip the UK of a significant source of corporate tax revenue in the future. Hammond is focused on drawing up plans for retaining The City’s crown as Europe’s main financial hub, and to allay the EU’s fears that the UK financial regulation may not remain in line with European norms after Britain severs ties with the bloc. However, London financial services’ rules will diverge from those in Europe, Davis told the industry, in an effort to secure competitive advantages.

The EU has been piling on pressure over clearing of euro-denominated derivatives in London: the lucrative business, that clears around a trillion pounds every day, might end up being subject to EU supervision under a broadly supported draft European law that is poised to step up EU supervision of euro-clearing, and after the Commission backed a petition by the ECB to add clearing systems to its monetary policy responsibilities in the EU. Clearing might also be lured away from The City by competitors such as Germany:  the Deutsche Boerse’s clearing house has announced plans to start a revenue-sharing plan with its biggest members.

One of the sectors in which Brexit might trigger upheaval is the fund industry: European regulators clashed over whether asset managers should face more stringent scrutiny on delegation post- Brexit. The warning came after the Commission put forward proposals to beef up ESMA’s powers to directly supervise critical market infrastructure including derivatives clearinghouses, data reporting services providers and financial benchmarks. Not to mention contractual certainty of deals signed before Britain’s withdrawal: ISDA analysed the ability of banks and investment firms to perform existing contractual obligations under transactions between counterparties in EU member states and the UK, while the Bank of England warned against a Brexit agreement that fails to protect the “long-term validity” of 20 trillion pounds of existing derivative contracts.  

The International Regulatory Strategy Group proposed a scheme that would work for all industries: its report presents a set of rules under a free trade agreement in which financial services suppliers in the EU and UK would have access to each other’s' markets after Brexit.

In the meantime, the EU is in the path of an internal revamp to give answers to the new realities and challenges the bloc faces: The Commission President Jean-Claude Juncker laid his vision for a more unified and politically-accountable EU after Brexit that would ultimately lead the EU to take “a democratic leap forward” in unison and at a single speed.  During his State of the Union speech, he also discussed other issues such as a new framework for non-personal data in the EU. CEPS’ Daniel Gros said Juncker’s proposals on the euro area fell short and wrote that small, concrete steps aimed at strengthening financial stability would have been more useful.  

Graham Bishop has a plan that could start a process of building “concrete steps... to achieve de facto solidarity” and is in line with the mechanism described by the European Commissioner: Bishop presented his proposal for a Temporary Eurobill Fund (TEF) at France Stratégie.  

Juncker’s speech was on the same page as a landmark speech by French President Emmanuel Macron that set out sweeping ambitions for much closer European integration after Brexit. The British departure is being presented by European leaders as an opportunity to re-found the union: Macron’s new “spirit of revival” and relocation of UK-headquartered companies to the continent will make Europe the big winner of Brexit, according to Germany’s economics minister.

Brexiteers hoped for Germany’ support to secure a sweetheart Brexit deal, but the Germans are far more interested in protecting the bloc’s integrity after the withdrawal of the second biggest EU member, and they have bigger fish to fry, anyway. Germans voted in September and chose not to give Angela Merkel their full support, and  to give a powerful boost to the far-right up to the third position in Parliament.  Among the several options for a new government, Guntram Wolff argues that a so-called Jamaica coalition of conservatives, liberals and greens is the most likely outcome, and may be good for Europe.

September saw also the eruption of a constitutional conflict in Spain that risks opening a Pandora’s box of problems in the EU, according to Tony Barber. The Catalan nationalists’ push for independence aggravated dramatically after years of enduring divisions over a secession referendum: an illegal referendum was held and the Spanish government used force to try to suppress what President Rajoy has called a ‘constitutional coup’. The real possibility of the independence of a wealthy region from one of the oldest states in the European Union put on display the nationalist challenges Europe could soon face in a domino effect if Catalonia achieved independence.

Banking Union

Ahead of the December Euro Summit, where discussions on further deepening the EMU will be the ultimate goal of the EU at 27, the European Commission called on the Parliament and member states to accelerate the completion of the missing parts of the Banking Union by 2018.  

One of the key features of the Commission Communication was the suggestion made to reduce non-performing loans, a hurdle that keeps burdening banks’ profitability. The most important European and global actors provided guidelines and analysis to tackle the problem: the ECB reinforced its NPL guidance for banks, while the EBA updated its Risk Dashboard to reflect a slight improvement of EU banks’ capital level but noting that NPLs still affect their profitability. As for the interest rate risk, the ECB found it is well managed in most European banks. The Bank for International Settlements reviewed NPL resolutions mechanisms in several countries, and found the resolution toolkit has been broadly unchanged for decades.  

EU banks’ capital leverage and liquidity ratios keep improving, according to the latest EBA CRDIV CRR Basel III monitoring exercise – the Basel Committee published itsfourth set of FAQs on the Basel III definition of capital - , but still far too undercapitalised for the comfort of relying in a safe financial system, inMartin Wolf’s words. To support a stable banking sector, the ECB’s Lautenschläger called to “finalise the global rulebook, Basel III, as quickly as possible”.

The EBA consulted on reporting for resolution plans, and inked a framework cooperation arrangement on bank resolution with US agencies. ISDA assessed the implications for EU  financial institutions of the impact on the Universal Stay Protocol of the proposed moratoria under the BRRD.

EBA and ESMA provided guidance to assess the suitability of management body members and key function holders in line with the Capital Requirements Directive and MiFID II. The EBA published its work programme for 2018, which will be affected directly by legislative reforms from the European Commission such as a review of the CRR and the consequences of the BCBS’s revision of the trading book or the implementation of TLAC.

Capital Markets Union

European firms are in full-throttle mode to get in shape for MiFID II implementation by January 2018, and the European Securities and Markets Authority keeps releasing documents to secure clarity on the new rules: ESMA finalised MiFID II’s derivatives trading obligation, issued Q&As on MiFID II implementation for post-trading issues,and published a Briefing on the Legal Entity Identifier to highlight its importance for MiFID II/MiFIR compliance.

A new rule that makes firms separate out payments for research from trading costs so that clients understand clearly what they are being charged for – the so-called unbundling – has been a source of trouble among asset managers and banks operating in Europe that receive research from the US. Forty of the world’s largest firms held an emergency meeting with the UK’s FCA to clarify how these costs would be charged, and the FCA’s Bailey said they are seeking a way of solving the problem before the year ends. Four of Europe’s biggest institutional asset managers - Schroders, Invesco, Union Investment and Janus Henderson – announced that they will absorb costs onto their balance sheets, in a U-turn from their initial inclination to pass on additional MiFID II research charges to investors.

ESMA Chair Steven Maijoor highlighted preparations for MiFID II and Brexit as key issues during his statement at the ECON hearing, and presented ESMA’s 2018 Work Programme, which revealed next year’s areas of focus: providing guidance and promoting the consistent application of MiFID II and MiFIR; contributing to the development of the revised Prospectus regime; and enhancing the effectiveness and lasting impact of supervisory activities at individual credit rating agencies (CRA) and trade repositories (TR) level.

ESMA’s powers were also reinforced in Commission proposals to improve financial supervision under the Capital Markets Union. The plan includes steps to foster the development of Fintech – which should consider some questions such as whether Europe needs a European or national market, or what rules to develop and at what level should them be supervised, according to academics at Bruegel. An ECMI paper on CMU warned against the excessive development of capital market finance, saying it has been one of the main catalysts behind the financial crisis and corruption scandals.

ESMA published the responses to its Consultation on CSDR guidelines on internalised settlement reporting and updated its EMIR and CSDR Q&As. The EBA launched a consultation on significant risk transfer in securitisation, while the ECB announced that the final migration wave of T2S had been successfully completed, which makes the securities settlement platform fully operational.ISDA published its recommendations for CCP recovery and resolution framework and called onregulators to finalise and implement CCP recovery and resolution strategies.


The chairman of EIOPA called  on the European parliament to give the Insurance and Pensions Authority a stronger mandate to intervene when it detects signals of risks of cross-border failures.   EIOPA published its guidelines on Insurance-Based Investment Products (IBIPs), where the associated risks are difficult for the customer to understand.

Asset Management

The IASB ordered more research into its project regarding defined benefit (DB) surplus accounting rules, for fears that the proposed amendments to asset-ceiling guidance under IFRIC 14 rules could lead to sponsors recognising huge additional liabilities.  

ESMA updated its Q&As document on the application of AIFMD and UCITS, while the Hedge Fund Standards Board (HFSB), changed its name to the Standards Board for Alternative Investments (SBAI). 

Corporate Governance/Accounting

The IASB’s Hoogervorst set out his views on how financial reporting will continue to provide a vital anchor for investors in their evaluation of a company.

Accountancy Europe issued a discussion paper on how to respond to assurance needs on non-financial information, and a call for action to enhance the coordination of non-financial information initiatives & frameworks.

Anti-Money Laundering/Market Abuse

The ESAs published guidance to prevent terrorist financing and money laundering in electronic fund transfers as part of its wider work on fostering a consistent approach to Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) and promote a common understanding of payment service providers' obligations in this area.  
ESMA updated its Questions & Answers document regarding the implementation of the Market Abuse Regulation.  

Accountancy Europe provided critical  comments on certain amendments tabled for the Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA) draft report and recommendations.

Financial Services Policy

The ESAs Autumn 2017 Report on risks and vulnerabilities in the European Union's financial system highlighted the risks to the stability of the European financial sector and warned that uncertainties around the terms of the UK’s withdrawal from the EU have the potential to expose both parts to economic instability and to weaken market confidence.

AFME, EFAMA, ALFI and Insurance Europe commented on the European Commission’s proposals to review the European Supervisory Authorities.

The ESAs and the Commission announced the launch of a new working group tasked with the identification and adoption of a risk-free overnight rate which can serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area.  

Economic & Financial

Ministers at the Eurogroup meeting of 9-10 October discussed possible future roles of the European Stability Mechanism and shared national best practices in financing labour tax cuts. They were also informed about the results of the sixth post-programme surveillance mission to Portugal.  The European Council confirmed the good news that Greece's finances have been stabilised, and therefore the excessive deficit procedure is closed.

European Commission proposed a far-reaching reform of the EU VAT system whichwould reduce by 80% the whopping sum of around €50 billion of VAT estimated to be lost every year due to cross-border VAT fraud.

Accountancy Europe published a position paper that summarises the accountancy profession's views on the EU Directive on business restructuring & insolvency.  

As for the European statistical data, September 2017 saw the Economic Sentiment continuing the upward trend prevailing since autumn last year in the euro area and the EU. The EU28 balance of payments recorded a surplus of €41.9 billion (1.1% of GDP) in the second quarter of 2017, while euro area annual inflation was 1.5% in August 2017, up from 1.3% in July 2017. The volume of retail trade fell by 0.5% in the euro area, while it remained stable in the EU28, and employment was up by 0.4% in both the euro area and in the EU28.


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