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The 2021 European financial services legislative and policy outlook
Mondial | Publication | février 2021
Following the unprecedented events of 2020, which forced the European Commission (the Commission) to reprioritise the European Union (EU) legislative agenda for the year, 2021 is expected to bring a bit more stability into the law-making process. With a number of major legislative initiatives being re-scheduled from last year – such as the MiFID II review and the finalisation of Basel III implementation – 2021 is likely to be full of relevant developments for the European financial services sector. It will also be the first year following the Brexit transitional period, with a debate about formalising future EU-UK relations in financial services being high on the agenda in Brussels over the months to come.
While inevitably not exhaustive, this quarter-by-quarter guide provides an overview of the key developments that practitioners should be aware of over the next 12 months.
Q1 2021
| Markets | Preparations for the broader review of the revised Markets in Financial Instruments Directive and Regulation (MiFID II / MiFIR) are well underway. Following completion of a public consultation late last year, the European Securities and Markets Authority (ESMA) is expected to publish its two outstanding review reports on transaction reporting and on the functioning of Organised Trading Facilities (OTFs). In addition, stakeholders have the opportunity to provide input to ESMA’s consultation on algorithmic trading. ESMA also awaits stakeholders’ views on its draft guidelines on the MiFID II / MiFIR obligation on market data – and the issue of market data regulation is expected to capture increasingly more attention in the run up to the upcoming review. Finally, the July 2020 MiFID “quick fix” amendments are expected to be formally approved and published in the EU Official Journal (OJ), therefore starting the nine-month clock for Member States to transpose the amendments – focusing on investor protection and reform of the commodity derivatives regime – to their national legal frameworks. |
| Benchmarks | Following the compromise reached by the European co-legislators – the European Parliament and the Council – late last year on the targeted amendments to the European Benchmarks Regulation (BMR), the text is expected to be formally approved and published in the OJ. With significant new provisions concerning cessation and replacement of certain critical benchmarks, as well as provisions extending the application of the transitional period for third country benchmarks, the updated legislation brings about changes relevant to benchmark users and benchmark administrators. Separately, the Commission is expected to formally publish updated BMR regulatory technical standards (RTS) on benchmark governance, methodologies and reporting of infringements. |
| Banks and prudential regulation | Following the delay caused by the COVID-19 pandemic, the Commission is expected to publish its long-awaited proposal implementing the final Basel III reforms in European law. With some of the most controversial elements of the reforms being the introduction of a new output floor and the overhaul of the current Credit Valuation Adjustment (CVA) regime, the impact of the pandemic on banks is likely to fuel arguments in favour of allowing more divergence in the European law from the Basel III standard. In addition, within the context of completing the Banking Union, the Commission is expected to launch a public consultation on the review of the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD). |
| Asset management | In January, the Commission still awaits stakeholders’ comments on its consultation on the review of the Alternative Investment Fund Managers Directive (AIFMD). The long-awaited review is expected to address a broad spectrum of issues, ranging from the overall functioning of the AIFMD framework to more contentious – in particular in the post-Brexit context – issues of third-country passport regime and cross-border delegation. In addition, the European Supervisory Authorities (ESAs) are expected to publish draft RTS on cost and performance scenario disclosures under the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs), that will then be subject to review and formal approval by the Commission. |
| FinTech and digital financial services | Legislative review of the September 2020 Digital Financial Services package proposals, i.e. proposed regulation on markets in crypto-assets (MiCA), proposed regulation on digital operational resilience in financial services (DORA) and proposed regulation on market infrastructure based on distributed ledger technology (DLT), will continue. With an initial phase of MiCA and DORA reviews by the Council taking place late last year – and focusing on article-by-article considerations and identification of key issues – Member States are expected to continue a substantive and more in-depth debate on some of the most contentious topics. In parallel, the European Parliament’s lead legislators are expected to present their draft reports with initial suggested amendments. |
| Sustainable finance | The European Banking Authority (EBA) runs, until early February, a public consultation on its discussion paper on the management and supervision of environmental, social and governance (ESG) risks for credit institutions and investment firms. This focuses on issues such as the identification of common definitions of ESG risks, based on the EU sustainable finance taxonomy, and recommendations for the incorporation of ESG risks into business strategies, governance and risk management, as well as related supervision. Separately, until the end of February ESMA awaits stakeholder comments on its consultation paper setting out its draft technical advice to the Commission on Article 8 of the Taxonomy Regulation. This focuses on the content, methodology and presentation of the key performance indicators (KPIs) that non-financial undertakings and asset managers are required to disclose. In addition, the Commission intends to publish its non-legislative Renewed Sustainable Finance Strategy, focusing on real economy and corporates, and including measures to further contribute to “greening finance” – albeit this initiative might get delayed to Q2. Finally, the Commission is expected to publish its draft delegated directives on sustainability requirements for – among other – investment firms and alternative investment fund managers (AIFMs). |
Q2 2021
| Markets | Investment firms will become subject to a bespoke prudential regime as set out by the Investment Firms Regulation and Directive (IFR/IFD) that will become applicable on June 26, 2021. On the same date the amended MiFIR third country regime will become applicable, providing the Commission and ESMA with a revised framework for the adoption of equivalence decisions in respect of non-EEA jurisdictions and setting out additional requirements for third-country firms benefitting from access to EU markets based on the said regime. Finally, following its public consultation concluded in Q1 2021, ESMA is expected to publish its guidelines on MiFID II/MiFIR market data obligations. |
| Benchmarks | It is expected that scrutiny of the draft updated BMR RTS on benchmark governance, methodologies and reporting of infringements will be completed – assuming that the proposed measures will be published by the Commission earlier in the year. This will allow the final RTS to be published in the OJ and enter into force. The draft RTS that ESMA published in September 2020 do not specify by when the final measures should become applicable, but European benchmark administrators that have to comply with the changes should be ready to do so on a relatively tight timeframe. |
| Banks and prudential regulation | Certain provisions of the revised Capital Requirements Regulation (CRR) that were agreed in the 2019 Banking Package will become applicable. This includes enhanced liquidity requirements, such as mandatory application of the net stable funding ratio and leverage ratio by European credit institutions. That said, the targeted amendments to the CRR framework that were agreed by the European co-legislators in June 2020 in the response to the COVID-19 pandemic provide banks with limited discretion to temporarily exclude exposures to central bank reserves in their leverage ratio calculations. In addition, the EBA is expected to conduct review of some of its guidelines – including those on the assessment of suitability of the members of the management board and key function holders, as well as those on internal governance. Finally, the EBA plans to issue its report on the treatment of third country branches. |
| Asset management | Following completion of the scrutiny period by the co-legislators of the draft Commission delegated act under the Regulation on a pan-European Personal Pension Product (PEPP), the final measure is expected to be published in the OJ and become applicable – thus starting the 12-month clock for the PEPP provisions to become applicable. The delegated act will specify the requirements on information documents, on the costs and fees included in the cost cap and on risk mitigation techniques for the PEPP. |
| FinTech and digital financial services | Following on its 2020 industry surveys on digital platforms and on regulatory technologies (RegTech) conducted in the context of the EBA FinTech Knowledge Hub, the EBA is expected to present its final reports on both topics. The report on digital platforms will seek to analyse the use of digital platforms in the banking and payments sector, and its outcome will input to any future policy discussion that might be led by the Commission in due course. Likewise, the report on RegTech will seek to analyse ongoing activity in that area and to raise awareness within the regulatory and supervisory community. In addition, the purpose of the EBA’s work is to allow the authority to facilitate the adoption and scale up of RegTech solutions across the EU whilst acknowledging and addressing the underlying risks. |
| Sustainable finance | Following the January 2020 announcement in the context of the European Green Deal Investment Plan, the Commission plans to establish an EU Green Bond Standard. To this end, and taking into account feedback received in the course of last year’s targeted consultation on the establishment of an EU Green Bond Standard, the Commission plans to publish a legislative proposal for establishment of an EU Green Bond, based on the EU sustainable finance taxonomy. In addition, it is expected – assuming publication of the delegated act by the Commission in early 2021 – that the co-legislators will be able to complete their scrutiny of the delegated act on the technical screening criteria for the first two objectives under the Taxonomy Regulation (climate change mitigation and climate change adaption). Also, assuming that the Commission publishes in Q1 its draft delegated directives on sustainability issues for investment firms and AIFMs, the scrutiny period by the co-legislators should be completed in Q2, paving a way for a publication of the final texts in the OJ. |
Q3 2021
| Markets | ESMA is expected to publish RTS that it was mandated to develop by the MiFID “quick fix” amendments to the MiFID II regime. This includes draft RTS determining a procedure for financial entities that are part of a predominantly commercial group and who may apply for a hedging exemption from the position limits regime, draft RTS determining a procedure setting out how persons may apply for an exemption for positions resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue, draft RTS specifying the agricultural commodity derivatives and create a list with critical or significant commodity derivatives and setting out methodology for national competent authorities to establish position limits and draft RTS specifying the content of position management controls. |
| Benchmarks | Following the consultation conducted by ESMA early in the year and subsequent technical advice, the Commission is expected to adopt a delegated act under the BMR specifying the rules of procedure for the exercise of the power to impose fines or periodic penalty payments to benchmark administrators, including provisions on rights of defence, temporal provisions, and the collection of fines or periodic penalty payments, and the limitation periods for the imposition and enforcement of fines and periodic penalty payments by benchmark administrators. This delegated act has to be adopted in anticipation of ESMA taking over – as of January 1, 2022 – direct supervisory roles vis-à-vis certain benchmark administrators, and notably recognising third-country benchmark administrators and European administrators of critical benchmarks. |
| Banks and prudential regulation | The EBA is expected to conduct a review of its guidelines on sound remuneration to integrate gender-neutral remuneration policies for institutions. In addition, following the planned publication earlier in the year by the Commission of the legislative proposal transposing the final Basel III standards in European law, the legislative review by co-legislators is expected to gather pace. |
| Asset management | Following a public consultation in the beginning of 2021, the Commission expects to publish a legislative proposal amending the AIFMD. In addition, the Commission is expected to adopt a proposal for a review of the European Long-Term Investment Funds (ELTIF) Regulation. This will focus on issues such as the extent to which ELTIFs are marketed in the EU, the redemption policy and lifespan of ELTIFs, the appropriateness of investment limitations for retain investors and potential updates to the list of eligible assets and investments. |
| FinTech and digital financial services | The legislative review of the MiCA, DORA and DLTR proposals is expected to continue after the summer recess under the leadership of Slovenian Presidency of the Council. At this stage, it is also expected that the review by the European Parliament’s Economic and Monetary Affairs (ECON) committee to be in a fairly advanced stage, with a possible compromise position arising on amendments tabled by members. In addition, and assuming the publication of the Commission’s proposals take place early in the year as planned, the legislative review by co-legislators of the proposal on legal and ethical requirements for Artificial Intelligence should be in its preparatory / early phase. |
| Sustainable finance | The Commission is expected to adopt its decision on the development of an EU Ecolabel for Financial Products for retail clients, defining the minimum environmental performance of a designated product group. The product group is tentatively expected to encompass undertakings for collective investment in transferable securities (UCITS), retail alternative investment funds, life insurance products and deposit accounts. |
Q4 2021
| Markets | The long-awaited amendments to the MiFID II / MiFIR regime are expected to be published, and cover issues such as access to market data and the introduction of consolidated tape for equity and equity-like financial instruments. In addition, the Commission is expected to publish a legislative proposal amending MiFID II and focusing on reducing the administrative burden and information requirements for a subset of retail investors, including review of investor categorisation (retail v professional). The Commission also intends to start its assessment of the rules applicable in the area of inducements and disclosures, and in particular aligning the potential gaps between the investor protection standards under the Insurance Distribution Directive (IDD) and MiFID II. In addition, the Commission is expected to publish targeted amendments to the Central Securities Depositories Regulation (CSDR), focusing on cross-border provision of settlement services by central securities depositories (CSDs) and based on a CSD passport, as well as well as the procedures and conditions under which CSDs have been authorised to designate credit institutions or themselves to provide banking-type ancillary activities. |
| Benchmarks | ESMA will be finalising its preparations for its new direct supervision mandates in respect of European critical benchmark administrators and recognised third-country benchmarks, which are due to become applicable on January 1, 2022. |
| Banks and prudential regulation | Following the public consultation in the first months of 2021, the Commission expects to publish a BRRD review proposal by the end of the year. In addition, the Commission plans to carry out a comprehensive review of the European securitisation framework – including a review of the Regulation on Simple, Transparent and Standardised Securitisation (STS) as well as the potential introduction of a dual-recourse instrument in the form of European Secured Notes. In addition, the EBA is expected to issue an opinion on the equivalence of regulatory and supervisory frameworks of third countries. It is also expected to publish reports on the assessment of the equivalence of regulatory and supervisory frameworks and ongoing monitoring of equivalence decisions, including the submission of an annual confidential report summarising the findings of its monitoring activities on equivalent third countries and to develop guidelines on the equivalence of third country authorities’ confidentiality requirements. |
| Asset management | Based on feedback received to its public consultation on the AIFMD review that concluded in January, the Commission may consider adjusting the rules on UCITS, including the potential introduction of supervisory reporting and rules on leverage calculation methods. This also includes possible merging of the UCITS and AIFM regulatory frameworks into a single rulebook. |
| FinTech and digital financial services | Following the pledge made in its 2020 Digital Finance Strategy, the Commission is expected to issue its first interpretative communication on the treatment of crypto-assets, complementing its relevant legislative proposals (i.e. MiCA, DORA, and DLTR). Among others, the interpretative guidance is expected to address how existing legislation on financial services is to be applied to new technologies. This is without prejudice to legislative review of the proposals, which is still expected to continue until the end of the year. |
| Sustainable finance | The Commission is expected to adopt a delegated act on technical screening criteria for four other – beyond climate change mitigation and climate change adaptation - environmental objectives under the Taxonomy Regulation. The four objectives are to include water, circular economy, pollution control and biodiversity. The Commission is also expected to publish a report describing the provisions that would be required to extend the scope of the Taxonomy Regulation beyond environmentally sustainable economic activities and describing the provisions that would be required to cover economic activities that do not have a significant impact on environmental sustainability and economic activities that significantly harm environmental sustainability. |
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