By Kifaya Belkaaloul, head of regulatory at NeoXam.
Over the past decade, the European Union has rolled out a host of new regulations aimed at fostering more competitive capital markets and mobilising private investment towards critical goals including the digital transition and climate emergency. One of the EU’s core levers for enacting change has been the Capital Markets Union (CMU) project, which was set up to reduce market fragmentation in the bloc.
The CMU seeks to allow funds to flow freely across borders and thus support business growth throughout Europe. Ultimately, it is hoped this will harmonise market rules, enhance transparency, and streamline processes. Yet, according to the Council of the EU, despite recent progress in the growth of EU capital markets in the past few years approaching nearly 50% relative to GDP since 2014, there remains a notable gap in their development.
In recent months, this has led to calls among several European finance ministers to significantly step-up efforts with regards to the CMU and wider markets regulations across Europe. Specifically, Europe’s policymakers believe it is critical that more regular discussions take place around which priorities are addressed for the next legislative cycle. This may well expedite the rate at which European markets regulations are implemented or amended over the coming years. Market participants must ensure they remain well informed ahead of these changes prior to implementing new products or strategies. After all, failing to remain compliant comes with a significant cost.
Packaged Retail and Insurance-based Investment Products
One of the CMU-related regulations earmarked to be evaluated by the European Securities and Markets Authority (ESMA) in 2024 is Packaged Retail and Insurance-based Investment Products
(PRIIPS), which encompasses a range of investment products that financial institutions offer retail investors. Any meaningful changes to how the EU regulates PRIIPS will undoubtedly pique the interest of market participants operating in both the EU and the UK, particularly as the UK Financial Conduct Authority (FCA) signalled its intention to depart from the EU’s regulatory approach to PRIIPS earlier this year.
The UK’s confirmation of changes to PRIIPs adds a layer of intricacy for financial institutions already grappling with stringent reporting requirements. This divergence – which may be exacerbated if the EU makes further amendments to its PRIIPS regulation in 2024 – not only introduces operational reporting headaches, but also underscores the broader ramifications of regulatory misalignment.
One of the operational challenges financial institutions are facing is the need to adhere to both the EU and UK versions of PRIIPs. This dual compliance requirement means financial entities must develop, implement, and maintain distinct reporting frameworks to meet the evolving standards on both sides of the English Channel. The divergence in PRIIPs regulation subsequently translates into heightened compliance costs for financial institutions, with the need to tailor reporting mechanisms to the nuanced requirements of both the EU and the UK creating a strain on resources.
To address this growing challenge, the prudent move for financial institutions is to invest in sophisticated systems capable of handling the intricacies of dual compliance. This will, of course, necessitate an increase in operational expenditure. From a systemic perspective, these rising costs could potentially hinder innovation and investment in other critical areas, ultimately impacting the industry’s ability to adapt and thrive.
As the financial landscape continues to evolve and the EU comes under mounting pressure to ramp up its efforts surrounding the CMU, policymakers and market watchdogs must strive for greater alignment to ease the burden on industry participants. Aside from enhancing operational efficiency, a more harmonised approach would foster a regulatory environment that puts investor protection first without imposing unnecessary burdens on financial institutions. The success of these efforts will determine the industry’s ability to thrive in a post-Brexit world, where regulatory complexities are the new norm.
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