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Digital finance
As technological innovation continues to define the contours of financial services, European policymakers are keen to get on the front foot and set standards. The idea is not only to mitigate risks and protect consumers but also to provide the necessary regulatory confidence and clarity for industry to invest and innovate in new technologies.
On Artificial Intelligence (AI), EU policymakers look set to finalize a comprehensive framework to establish legal certainty and foster innovation by approximately mid-2023. Similarly, the EU hopes to become a standard-setter on cybersecurity through the Cyber Resiliency Act, which will be debated next year.
The turbulence throughout 2022 in the crypto markets has underlined the need for greater regulatory clarity and supervision. The EU is widely perceived to be a “first mover” in its work to build a comprehensive crypto regulatory framework and the bloc could well set global standards for other jurisdictions to follow. The recent downfall of FTX is likely to increase momentum for globally consistent regulation.
A political deal was reached in summer of 2022 on the Markets in Crypto-Assets (MiCA) legislation, which is designed to bring crypto-related assets, issuers, and service providers under a comprehensive regulatory framework, and introduce requirements on stablecoin issuers. The final MiCA text is expected to formally become law in early 2023 with provisions beginning to take effect in the first half of 2024, after a one-year implementation period.
Operational risk management is high on the regulatory agenda and the deal reached this summer by policymakers on the Digital Operational Resilience Act (DORA) sets the stage for formal approval early next year. DORA will set out an operational risk management framework for regulated financial entities and will create a new oversight regime for third-party technology service providers deemed ‘critical’. The requirements will begin to apply two years after the legislation is finalized and published in law.
Green agenda
The sustainable finance regulatory agenda continues to be a major priority for firms and regulators alike. Moreover, Russia’s invasion of Ukraine has pushed energy security to the top of the European policy agenda and reinvigorated the need to find energy alternatives to Russian gas and accelerate the green transition.
Following considerable controversy and debate, this summer EU lawmakers approved the inclusion of some gas and nuclear activities as transitional activities in the EU’s Taxonomy framework. These changes will start to apply from January 2023. The EU continues to take lead on implementing mandatory sustainability and climate disclosures, with reporting under the Corporate Sustainability Reporting Directive (CSRD) set to begin in 2024 for larger companies, while non-EU and smaller companies will have more time.
EU lawmakers have also developed and finalized the detailed rules under the Sustainable Finance Disclosure Regulation (SFDR), set to apply from January 2023. This will specify the granular requirements for product-level disclosures around principal adverse impacts (PAIs) and Taxonomy alignment of Article 8 and 9 funds under the SFDR regime. In the same vein, lawmakers are close to approving proposals for a European Green Bond Standard (EU GBS) that will introduce requirements for any issuer that uses the label “European green bond”.
The EU institutions are thus getting close to putting in place the key building blocks of the sustainable finance strategy, a comprehensive policy agenda launched in 2018 to channel capital into the climate transition. Since its launch, the EU has become a leading regulatory voice globally on sustainable finance policy.
Financial stability and prudential regulation
The Russian invasion of Ukraine handed the EU’s banking, fund, and insurance regulators another challenge, just as Europe was beginning its recovery from the pandemic. Nonetheless, 2022 has seen important progress in the effort to refresh Europe’s prudential rulebook for bank capital, insurance, and investment funds.
As one of the first global jurisdictions to kickstart the process of implementing the Basel III banking standards, the EU co-legislators are expected to reach a final agreement on the revised Capital Requirements Regulation (CRR) by mid-2023. The expectation is that many of the provisions, including the capital element of the Fundamental Review of the Trading Book (FRTB), will apply from January 2025 and will closely follow the Basel standards.
Furthermore, a revised set of rules for Europe’s insurance market are also expected to come into focus next year, as the co-legislators seek to sign off on changes to the Solvency II legislation. These reforms are designed to reduce administrative burdens on insurers and mandate the European Insurance and Occupational Pensions Authority (EIOPA) to define consistent guidelines.
Finally, global regulators continue to monitor the market’s transition away from LIBOR. In conjunction with US authorities, the EU will continue to push market participants to move onto alternative rates as the cessation of all remaining USD LIBOR rates comes into view in June 2023.
Read the full report, Global Regulatory Forum 2022: Forging a resilient recovery, covering key developments across UK, EU, USA & APAC markets, including digital finance, the green agenda, and financial stability.
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Bloomberg
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