In the years since the crisis, the financial services industry has faced a barrage of new rules – the Market in Financial Instruments Regulation (MiFIR), Securities Financing Transactions Regulation (SFTR), European Market Infrastructure Regulation (EMIR) to name a few. This is significant, not only due to the sheer number of regulations which have emanated from Brussels and the increased sophistication thereof, but due to the level of prescription. The clue is in the name – regulation, a subtle but substantial element.
According to Article 288 of the Treaty of the Function of the European Union (TFEU), regulations are generally applicable and binding in all EU member states, that is the rules are applicable in all member states without need for implementation. Previously, financial services legislation promulgated at an EU level would usually take the form of a directive, that is a European legislative instrument that is binding as to the results to be achieved upon the member state to which it is addressed, but is left to the national authorities as to the choice and form of implementation. This change of tack is motivated by several factors, not least a greater degree of harmonisation across EU members which allows the EU and its constituents to achieve greater regulatory convergence in meeting their respective G20 commitments to reform the financial industry in the wake of the financial crisis.
This also represents a meaningful concentration of rule-making powers and interpretation in the hands of the European Commission (the main law-making body in the European framework) and the European Securities and Markets Authority (ESMA), as the European single market for financial services marches ever onwards. The National Competent Authorities (NCAs), including Malta’s Financial Services Authority (MFSA) feed into the legislative process through regular engagement and dialogue with ESMA, but one might observe that the MFSA’s powers to make and interpret rules, at least insofar as they pertain to areas of competence devolved to Brussels, have been usurped, leaving it more focused on authorisation and enforcement at a local level.
This is significant because Malta’s financial services industry is increasingly regulated not at a local level, but a European one. As with all things European, the legislative process is cumbersome and unwieldy at best and unworkable at its worst. One should only look at the latest political debates surrounding MiFIR and its sister legislation, the recast Markets in Financial Instruments Directive (MiFID II) – a political drama beset by misunderstandings between stakeholders and a sometimes flawed understanding of how financial market work – that industry has managed to convince the legislators that a one year delay is the only feasible solution to ensure that the package of regulation is not a failure.
This is also significant because regulation emanating from Brussels must be fit for purpose for a behemoth investment bank in London as well as a smaller investment services firm based in Malta. In trying to harmonise regulation across all 28 EU member states, the regulations have had to be suitable to the highest common denomination. In plain English, that means that, notwithstanding there is a huge divide between said Maltese investment firm and its London-based equivalent, the rules that apply are broadly speaking, the same. Whilst a large multi-national banking group might have access to the technology, the human resources and not least the capital to deal with these changes, the burden of these very detailed regulatory packages falls disproportionately on smaller firms and on local service providers, which is much more evident in Malta where firms are insulated not only from major market infrastructure in Europe but also their respective members.
Alas, firms have no choice but to crack on or close up shop. For those firms choosing to face the new age head-on, it is imperative that firms conduct a review of their business lines and operations and consider whether (and how) they will be impacted by incoming regulation. This is not a task to be taken lightly – here are but a few of the many regulations that will be coming into force in the next few years: MiFID II / MiFIR, SFTR, Market Abuse Regulation (MAR), Benchmarks Regulations, the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulations, Capital Requirements Regulations (CRR – already in force but being phased in). Any firm considering this not insubstantial list will appreciate that the subject matter is wide and the the requisite understanding of financial market regulation should be deep in order to tackle it effectively. It is clear that the regulators will run out of acronyms for their latest regulation long after the firm has gone out of business from its printing bill, so firms must ensure that their staff and advisors keep abreast of regulatory changes and conduct detailed assessments of its impact – they cannot afford not to.