The Future of the Euro

A change is gonna come

Graham Bishop / Jun 2014

The Governing Council of the European Central Bank. Photo: ECB

The (seventh) European parliament is dead; long live the (eighth) parliament – and the media caravan moves on. There is much to move on to. Some of the top billing goes to: agreement on the next European Commission president; what political “groups” will exist in the parliament; who will be a member of the economic and monetary affairs committee (Econ) and who will chair it; and how it will attempt to capture the next commissioner covering financial services at its nomination hearing.

But market participants should pause before jumping on the caravan too quickly. They should consider the implications that will probably flow from the legislation agreed, sometimes hastily, in recent weeks and months. These include:

Banking union: Vitor Constâncio, ECB vice-president, put it succinctly: “Banking Union is an essential complement to monetary union and a project with vast consequences for European integration.” He pointed out that Jean Monnet’s “functional method of integration” is still alive and well: after each integrationist step, others become necessary and more pressing.

In order to complete the programme of financial services integration, the next Commission should promote many changes, especially for capital markets. Constâncio’s list includes changes to company law, bankruptcy rules and procedures, and greater harmonisation in the taxation of financial products.

Herman van Rompuy, president of the European Council, and José Manuel Barroso, the European Commission president, will bow out after the summit of the EU’s heads of state and government in October. It is a safe bet that they will try to bequeath an integrationist agenda such as that contained in the 2012 “four presidents” report, Towards a Genuine Economic and Monetary Union.

Such sovereignty-sharing ideas are likely to coincide with the final stages of the ECB’s asset quality review. The banks taking part do so at the behest of their home governments. Those banks found, either in the asset quality review (AQR) or the baseline stress tests, to have a capital shortfalls will be expected to make good within six months. Those that stumble at the hurdle of the adverse stress test will have nine months to pick themselves up with additional capital. The pooling of sovereignty agreed in the final days of the seventh European parliament may, therefore, turn out to have substantial implications for some bank shareholders.

But the pain may not be limited to shareholders of eurozone banks. The European Banking Authority has published a common methodology and scenario for an EU-wide banks stress test. This will be used by all EU supervisory authorities to ensure that the main EU banks are assessed against common assumptions, definitions and approaches. The stress test will be conducted on a sample of 124 EU banks, which covers at least 50 per cent of each national banking sector.

Ucits V: The European fund managers association (EFAMA) explained that the amendments to the Undertakings for the Collective Investment in Transferable Securites (Ucits) directive will raise the already high standards of protection enjoyed by Ucits investors and reconfirm its status as the “state-of-the-art” regulator for investment funds worldwide. They should also bolster the international recognition of Ucits as the vehicle of choice for the international distribution of investment funds.

Pripps (packaged retail investment and insurance products): The European Commission justified the adoption of this regulation as Pripps offer considerable benefits to retail investors but are often complicated and opaque. “The information that is available to investors can be overly laden with jargon, complex and difficult to use for comparisons between different investment products. There are also conflicts of interest in the sales and advice process.”

EFAMA believes that “the ‘key investor document’, a synthetic, plain language document already well-known to Ucits investors, will enable them to make better informed investment decisions and will facilitate comparisons between different types of retail investment products, therefore contributing to a level playing field across competing retail products”.

Mifir/Mifid II: Much has already been written about the implications of Mifid (Markets In Financial Instruments Directive). Sharon Bowles, soon to be former chair of Econ, told a British Bankers’ Association conference about central outcomes such as investor protection, transparency rules and access provisions. But the negotiations in trialogue (between the parliament, council and commission) included potential legislation with regard to investor protection, market structure, dark trading, transparency rules, access provisions, commodities, algorithmic and highfrequency trading, and SMEs.

Relatively little attention has been given to the new rules on “inducements” whereby the cost of research may have to be unbundled from execution services. This may herald one of the biggest shakeups in the relationship between the investment management industry and the integrated investment bank model that offers investment and economic research as “part and parcel” of its broad range of services.


Graham Bishop

Graham Bishop

June 2014

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