The European Parliament has voted to grant pan-European financial watchdogs the power to postpone incoming rules in some cases. But a leaked document from another legislative body suggests the regulators may not be able to exercise their new powers until at least November.
For financial firms, this is good news and bad news. They will welcome the major step towards a formal no-action procedure in the European Union, already long in existence in the US. They may, though, have to wait a while yet before the three European Supervisory Authorities (ESAs) can reliably delay or suspend the enforcement of potentially damaging regulation.
“The parliament’s approval of no-action letters is an important development and it means they will now definitely be on the agenda in the trilogue [legislative] negotiations,” says Pedro Pinto, a director of advocacy at the Association for Financial Markets in Europe (Afme). “The letters are needed because the current way the ESAs address these issues doesn’t provide relief nor sufficient legal certainty.”
However, the final go-ahead from all three EU law-making bodies, including the European Commission, could be delayed – because of the Council of the European Union. A January 11 note from Romania, which holds the presidency of the council this year, recommends prioritising work on other reforms over the coming two months.
This makes it unlikely the council will finalise its position on no-action relief in time for the subsequent trilogue talks to conclude before the parliament breaks in April for elections in May.
All legislative work by the EU will then be suspended until a new commission is formed, with approval from the new parliament. The multi-step process dictates that a new commission will be formed in October or November, with the first trilogue completed the following month at the earliest.
On January 10, the European Parliament approved its own version of a no-action mechanism, overcoming internal disagreements over what form it should take and whether the ESAs should even be given no-action powers in the first place.
The parliament’s text allows the watchdogs to postpone both primary and secondary legislation. Financial firms had advocated exactly such broad powers, saying that sometimes the rule from which they needed relief was contained in a level one law.
In the parliament’s iteration, the ESAs will be able to delay the enactment of a new rule in three scenarios: if doing so put market participants in breach of other EU regulatory obligations; if the authorities needed to clarify the rule; or if compliance posed a threat to market confidence, customer or investor protection, the functioning of financial or commodity markets, or the stability of the EU financial system.
The text says the European Commission, the parliament or the council may ask the authority to reconsider its decision to issue a no-action letter.
There is also a time limit on the relief: it can last up to six months and can be renewed only once for another six months.
By contrast, US regulators are not constrained by such time limits. For instance, in 2016 the US Commodity Futures Trading Commission exempted banks with less than $10 billion in assets from the clearing obligation, with no time limit. Alternatively, no-action relief in the US may be extended indefinitely: a CFTC letter exempting inter-affiliate trades from the trade execution mandate was originally issued for one year in 2013 and has been rolled over ever since.
But Benoît Gourisse, a senior director of European public policy at the International Swaps and Derivatives Association, believes the one-year limit in the EU should be sufficient in most cases: “It should be a very rare situation that relief lasting longer than a year is needed.”
The European Parliament’s approval paves the way for some form of no-action powers in the EU. Gourisse and Afme’s Pinto said in October that the council and the commission broadly supported the idea of such powers, as long as they were in line with the so-called Meroni doctrine.
“We believe that the idea of granting no-action powers to the ESAs was well-received by most member states [in the council],” Pinto reiterates.
The Meroni doctrine is a set of rulings by the European Court of Justice starting in 1958, which broadly established that the legislative power of technocratic agencies, such as the pan-EU watchdogs, must be subject to strict boundaries.
“The conditions in the parliament’s text on no-action powers pass all of the legal tests, in my opinion,” says Pinto. “It is time-limited and has conditions on the ESAs only using it in certain cases where other superior values are at stake.”
Once the council is able to focus on no-action powers, it may come up with a similar mechanism, and there is no separate European Commission proposal to contend with.
The problem is the council may not make much progress before the parliament breaks for elections.
The Romanian document, seen by Risk.net, points out there is less than two months available “under the current parliamentary legislature” to conclude a wide-ranging set of reforms known as the ESAs review.
The note proposes to effectively split off a late addition to the package that gives the European Banking Authority new anti-money laundering (AML) and anti-terrorist financing (CFT) powers and to prioritise this work over other legislation.
“The presidency proposes to proceed swiftly on trilogues on the AML/CFT component of the file, while expressing commitment to continue work at technical level on the remaining [parts] of the package,” the paper says.
Similarly, Gourisse warned back in October that the contentious ESA review was unlikely to be finalised by the council and discussed in a trilogue before April.
In that case, not only will the ESAs have to wait until at least November to get their new no-action powers but there is a risk they will not get them at all – if key new members of the European Parliament change the existing text.
A source at one of the ESAs notes in particular the success of anti-EU politicians in a number of recent national elections and says that, if such candidates also prevail in the European Parliament elections, the new assembly will probably strip away additional powers for the regulators.
Editing by Olesya Dmitracova