Has capital market regulation gone too far? - be prepared for more to come

EU regulators’ answer to the financial crisis has been wide-ranging capital market regulation and harmonisation to make the financial system more robust – having a huge impact on all market players from listed companies, financial institutions to intermediaries. How far have we come and what are the main implications? Where are we heading and at what speed? Have EU regulators gone too far? We have asked Professor Jesper Lau Hansen of the University of Copenhagen and David Moalem, partner at Bech-Bruun, to give their views on the implications of recent years’ capital market regulation and to make a guess on the future development within this area.

22.05.2017

The use of the term ”financial crisis” is gradually fading and the general perception is that we have largely put the crisis and its implications behind us. But this is not the case when it comes to capital market regulation. We are in the middle of a regulatory tsunami hitting capital markets and capital market players very hard. EU regulators aim to build a harmonised EU capital market characterised by transparency, trust, safety and efficient financial services authority. At the same time, financial market players struggle to keep pace with regulators and implement and comply with new regulation.

“Thousands of new rules have been introduced in recent years and more market segments and market players have been included in the new regulation. At the same time, directives have in many cases been replaced by regulations – implying that EU regulation replaces national regulation and that EU member states no longer have the opportunity to implement new regulation in accordance with their national models and traditions. We are moving towards a “one rule book” situation and the trend is that large member states set the rules. This is not necessarily efficient, and in my view the EU lacks some very important tools needed to organise and implement such a comprehensive complex of new capital market regulation in an optimal way. I also doubt if anyone sees the big picture and the correlation between all the new rules; increasing the risk of errors”, David Moalem says.

David Moalem continues: “Seen from the perspective of listed companies and the financial sector, the most important regulatory initiatives in recent years are the Market Abuse Regulation (MAR), which came into force on 3 July 2016, and the Markets in Financial Instruments Directive (MiFID II), which is planned to come into force in January 2018. As demanding as we may consider the implementation of MAR, MiFID II will be even more far-reaching. Also initiatives like the Shareholder Rights Directive, a new proposal for a new prospectus regulation, and new rules on money laundering are in the pipeline. Surely, we have not seen the last wave hitting the shore and both companies and the financial sector must be prepared for more to come”.

“Regulation is getting more and more detailed – both as regards market control mechanisms and management of companies. It is obvious that EU regulators believe that it is both desirable and possible to regulate in considerable detail how companies are managed. I wonder if the present approach to regulation will lead to over-regulation and transparency for transparency’s sake – in my view that’s an unfortunate direction and not optimal as one size does not fit all in a world with several governance models and traditions. I am also concerned that the boards of directors will be too focused on “tick the box” and maybe miss some of the really critical company issues”, Jesper Lau Hansen says.

“At company level, MAR and other regulatory initiatives have caused an increased workload and more complexity. The new regulatory regime demands more resources – within compliance as well as within the daily handling of disclosure rules. Under the old regime, companies for example intuitively knew how to handle inside information and when to publish it. Now it is much more complicated. Companies need to make more assessments, have more internal procedures, make more documentation and involve more people – and for many companies there is a need for more external assistance implying extra costs. The implementation of MAR is well on track but still companies feel less confident than before and are actively trying to get firm ground under their feet concurrently with the development of new best practices”, David Moalem says.

Future EU vision: The Capital Markets Union

Recent years’ implementation of new capital market regulation and harmonisation constitute important steps towards the EU vision of a single capital market with free flow of capital. The free flow of capital was one of the fundamental principles on which the EU was built. But despite the progress made over the past 50 years, Europe’s capital markets are still relatively underdeveloped and fragmented. To boost the creation of a true single market for capital across the EU the EU Commission presented the plan on the Capital Markets Union (CMU) in 2015 – aiming to get the “building blocks” of the CMU in place by 2019.

The Commission’s overall goal for the CMU is to create opportunities for investors, connect finance to the wider economy by increasing and diversifying funding sources, and foster a more resilient financial system with deeper integration and more competition. Unfortunately, conditions have changed after the UK’s Brexit, implying that the biggest stumbling block for the CMU still looms ahead – raising doubts as to the future of the CMU.

“As the EU’s largest financial centre, the City of London was expected to play a central role in the CMU project, the UK’s vote in favour of Brexit will have a range of potential impacts on the CMU. Over the last decades, the City of London has established itself as the uncontested hub of European finance and at this stage it is impossible to predict how the CMU will progress in future. Until now, the UK has been the driving force behind the CMU, and going forward the UK’s ability to influence the agenda and shape the direction of the CMU is likely to be significantly diminished and, therefore, the UK is likely to find itself in the undesirable position of having no official say on the future regulation. Whether the CMU project in its current form remains a political priority post-Brexit remains to be seen, but in any case, the UK and London are still an important future part of the CMU, Brexit or not, and it is hard to imagine that the EU will adopt a revised plan for the CMU without the UK being involved one way or the other. But to be honest, I don’t know how it will materialise in practice and how the EU will be able at the same time to handle both the complex new regulation and the complicated political landscape”, Jesper Lau Hansen says.

Where are we heading?

”After the harmonisation of EU capital market regulation during recent years the EU is heading towards a regulatory regime similar to the one in the US – which means capital market regulation is adopted on a “supranational” level and other kinds of regulation, like company law, on the national level. In the US, it seems to be a well-functioning way to handle regulatory issues and to support macroeconomic goals. And from the EU regulators’ perspective, a general consensus appears to exist that, despite its imperfections, EU financial regulation broadly provides a predictable and consistent regime which largely gives clarity and certainty for market participants”, Jesper Lau Hansen concludes.

Flemming Merring

Head of Issuer Services

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