By the time you may have read this the European electorate will have voted in 751 MEPs (which includes the UK's 73 seats). The election held during 23-26 May 2019 comes during a time of significant political change and is expected to produce a very different European Parliament (the EP). This time around, established parties are having to contend with growing populist and vocally Eurosceptic parties amongst the EP's current eight political groups1. Moreover, the race for the top job may not necessarily end in victory for a "Spitzenkandidat".2
All of this change, assuming the eight political groups do stay in roughly the same configuration and there is a risk that they may not3 over the 2019-2024 EP session (including due to Brexit) has an impact not only on the parliamentary process but also on its 22 committees. These include the influential Economic and Monetary Affairs (ECON) which has long been coordinated by the EPP, or the Internal Market and Consumer Protection (IMCO) Committee that shapes the EU's policy on financial services and the Single Market. Other challenges ahead rest in a new EP having to agree, by a majority, the EU's multi-annual financial framework (MFF) for 2021-2027, which partly because it is expected to be the first MFF without the UK, has required careful consultation and agreement between the presidents of the Commission, the EP and the Consilium (all of whom will be newly appointed).
This Client Alert looks at the process ahead and what the EP elections might mean for financial services in the EU's Single Market and the priorities highlighted in our Navigating 2019 publication4 along with the fundamental economic transformation taking hold in core real economy industrial pillars such as coal, steel and manufacturing.
The process ahead
In parallel to the European elections, a number of EU member states are scheduled to hold local, regional, and/or national elections, adding to the uncertainty from the rise of French parties affiliated with the Yellow-Vest movement along with the far-right parties in France, Spain and Poland. In the latest twist, Austria's "Ibizagate" affair — which emerged on the eve of the European elections and acts as a stark warning of Europe's susceptibility to outside influences — has caused a snap national election to be called for the autumn. That warning comes at a time when electoral trends are, certainly amongst certain demographics, still undergoing a fundamental shift in major member states. This, in part, stems from the ripple effects from the EU's financial crisis and the migrant crisis that have put pressure on collective member state solidarity and adds further unpredictability to how this 2019 EP election may play out. One thing that is, however, certain is that this political changeover that the EP elections brings is a watershed moment – including for financial services.
So what happens when the last votes are counted and MEPs are confirmed?
Shortly following the elections:
- A new president of the European Commission (replacing Jean-Claude Juncker) and a College of Commissioners will be proposed for approval. This will potentially include a replacement for Vladis Dombrovskis as head of DG-FISMA, the legislative policymaker for financial services;
- A new president of the European Parliament (possibly replacing Antonio Tajani) is appointed;
- A new full-time president of the European Council i.e. the Consilium will be appointed potentially replacing incumbent Donald Tusk. The president of the Consilium should not be confused with the rotating "presidency of the Consilium" which rotates on a six month basis from each EU member state, currently this is Romania and from July 1, 2019 to December 31, 2019 it will be Finland.
The newly constituted EP would have its 2019 inaugural session July 2-4, 2019, with EP committees formed between then and September. From end-September to October 2019 individual Commission candidates are put forward for approval from the newly formed EP committees. As some might recall, the EP committees rejected certain candidates in 2014 (Alenka Bratusek on grounds of lack of experience) and others were subjected to a second confirmation hearing such as the UK's Lord Hill, as Commissioner for DG-FISMA.
At the latest by the end of October 2019, the new Commission president presents the priorities for the next five years in the EP's plenary session (which includes financial services and Single Market reforms) and the EP votes on approving the College of Commissioners as a whole.
By November 2019 the new College of Commissioner's takes office but the discussion on which initiatives the Commission will pursue, modify, scrap or resurrect — a process based on the "Briefing Books" from each Directorate General i.e. department — is already under-way ahead of the College being formally assembled during June 2019 by the Secretariat General of the European Commission (led by Martin Selmayr who will stay on).
The communication of priorities is then formalized through the Commission's Work Programme for 2020 and may also be supplemented by communications from DG-FISMA – notably in relation to a revised Capital Markets Union 2.0 programme and possibly advancing Banking Union 3.0. Other Directorate Generals and their Commissioners may publish their own views, given that from a formal process perspective, the influence of individual Commissioners on the agenda of "their portfolio" may be limited by the fact that the European Commission President will have decided on EU priorities prior to the Commissioners themselves having been formally appointed.
Meanwhile, in the Eurozone, the race for a new president of the European Central Bank is still very much on ahead of the October 31, 2019 deadline (concurrently the current (latest) Brexit Exit Date along with Halloween), with other senior posts still needing to be staffed.
UK's exit will reshape power amongst the 8 groups
Moreover, if and when the UK does actually deliver on its Brexit vote5, the EP will reduce down from 751 to 705 seats, with 46 of the UK's seats being reserved for future enlargement and the remaining 27 being reallocated to certain member states6. This aims to "better reflect the principle of degressive proportionality." Effectively this shrinking center and a stronger showing by populist forces in the EP elections could complicate and slow down the EU's decision-making.
Importantly, with a number of high-profile politicians having publically criticized the Spitzenkandidat selection process and with a number of smaller groupings looking to secure other roles that are rotating in the Commission or the Consilium, the formalization of the Spitzenkandidat process in 2014 and the rule that the lead candidate from the biggest party in the EP secures the Commission top job may be challenged. This could lead to deep divisions between the EP and Commission – which would cause a further roadblock to progressing reforms or at the very least a slowdown in momentum on cooperation.
So how might this impact the financial services roadmap ahead?
Even if — the centrist parties continue to dominate the presidencies of the European Commission, the EP and the Consilium, a more tribal EP may pose a challenge to the very needed progress to get a number of financial services reforms approved and over the line. This is in particular the case for a range of Capital Markets Union (CMU) priorities that were stalled due to Brexit, including some very low hanging fruit and "easier" legislation to implement. One issue which is core to the efficient functioning of the lead CMU 1.0 priority is for the European Commission and EP to approve the final Regulatory Technical Standards (RTS) i.e., secondary legislation, permitting securitization data repositories to register with the European Securities and Markets Authority (ESMA).
The hope is that whoever leads the Commission and DG-FISMA will, together with the ECB and the European Supervisory Authorities (EBA, ESMA, EIOPA) really work together to do more than the 2017 CMU update, and renew the momentum to complete the Single Market and relaunch CMU 2.0. All of that comes on top of the communicated supervisory priorities for 2019 through to 2021 – see our Navigating 2019 publication and periodic updates.
As for the Banking Union, it too is waiting for renewed momentum and specifically an EP and a new Commission that could try to break German resistance to creating the ECB's much-vaulted third-pillar of the Banking Union: the European Deposit Insurance Scheme (EDIS).
In the insurance sector, where there are some green shoots for an Insurance Union 0.5 with EIOPA beginning to become more vocal on recovery and resolution planning, as well as Solvency II compliance, coupled with a market in flux due to digitization and Brexit pressures, further change may be ahead.
Other changes on the periphery of financial services that are worth watching are whether the acceleration in the pace of reform suggested by the Commission's Briefing Book process will actually happen, including:
- pressing ahead with a post-Brexit balance of EU versus non-EU financial services, which includes revising rules but also using certain stop-gap tools such as Supervisory Principles on Relocations7 or rules on non-EU branches8 as well as revised capital charges and new concentration charges (to break the sovereign-bank doom loop);
- further legislative and institutional improvements to strengthen the resources and capability of EU anti-money laundering and terrorist financing, as well as against financial crime (incl. bribery);
- moving forward with a cross-sectorial and EU-wide legislative framework on crypto-assets and possibly a Cyber-Risk/Resilience Regulation;
- emphasizing a greater degree of transparency and conduct of business reforms in relation to "simple" financial products (equities, bonds, index ETFs and UCITS funds) to entice greater domestic and cross-border market participation and thus financialization of "retail clients";
- improving the attraction of EU listing venues vis-à-vis non-EU venues – possibly through the concept of a more harmonized single set of listing rules and common processes – much championed by commentators and certain pockets of industry but resisted by others;
- finalizing work on the EU covered bonds legislative framework as well as on European Sovereign-Bond Backed Securities also known as European "Safe Assets";
- improving financial literacy, inclusion and consumer redress;
- agreeing the scope and start of work of the European Labour Authority and how or what it might contribute to the CMU project of a portable European Pension Product (PEPP).
One major shift achieved in the 2014-2019 EP period and Juncker Commission is putting climate change as a key priority as well as continuing to get a "fair deal" for the EU and its citizens in foreign trade, tax transparency and a changing economy. Whether facilitated by legislative means as well as through investment tools, which are also a legacy of the Juncker Commission and are likely to stay, a wider, perhaps more fundamental aim for a holistic transition to the green/sustainable economy is on the election platform of all eight EP political groupings and at the heart of a majority of the European electorate's concerns.
Whichever way the EP election goes, the pace of EU financial services reform and the scale of further institutional improvements will remain things that impose very immediate pressure on firms, their counterparties and clients, as well as meriting longer-term strategic consideration. Risk mitigation is likely to be important as the new appointments and priorities take shape at the EU's various legislative and regulatory policymakers ranging from the European Commission, notably DG-FISMA, the EP and its ECON Committee as well as the work at the European Supervisory Authorities and within the Banking Union that of the ECB and the SRB.
1 Comprised of the European People's Party (EPP), the Progressive Alliance of Socialists & Democrats (S&D), European Conservatives and Reformists (ECR), Alliance of Liberals and Democrats for Europe (ALDE), the Greens/European Free Alliance (Greens/EFA), the European United Left – Nordic Green Left (GUE/NGL), the Europe of Freedom and Direct Democracy (EFDD) and the Europe of Nations and Freedom (ENF). ↩
2 See here. In summary, this is Manfred Weber for the EPP, Frans Timmermans for the S&D, Jan Zahradil for the ECR and Oriol Junqueras for the ECA. The ALDE has presented a team of candidates which are running for top jobs in the Commission and elsewhere, this includes Guy Verhofstadt, Margrethe Vestager, Nicola Beer, Katalin Cseh, Luis Caricano, Emma Bonino and Violeta Bulc. The Greens/EFA have nominated Ska Keller and Bas Eickhout as their team. The GUE/NGL have nominated Nico Cue and Violeta Tomic. ↩
3 Some changes that have been mooted are that the EFDD breaks apart and regroups or that a "United Right" is created, something that has been promoted by the US far right populist Steve Bannon. A United Right EP political grouping would be conceivable if it were to include the national-conservative ECR, the Eurosceptic EFDD, the right-wing ENF as well as the right-wing parties that are affiliated to the EPP.↩
5 With at the time of writing, the likelihood of the UK parliament passing Theresa May's "new deal" on the Withdrawal Agreement Bill proposal looking very slim and the selection prospects of the Brexit Party looking quite strong, the known map for Brexit may look very different. ↩
6 The 27 seats will be distributed to France (+5), Spain (+5), Italy (+3), Netherlands (+3), Ireland (+2), Sweden (+1), Austria (+1), Denmark (+1), Finland (+1), Slovakia (+1), Croatia (+1), Estonia (+1), Poland (+1) and Romania (+1). No member state will lose any seats.↩
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