Tuesday 6 June: launch of the European Drug Report 2017

European Commission – Upcoming events The news: On 6 June 2017, Commissioner for Migration, Home Affairs and Citizenship Dimitris Avramopoulos, together with Laura d’Arrigo, Chair of the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA) …

Capital markets union: agreement reached on securitisation

On 30 May 2017, the presidency reached agreement with European Parliament representatives on proposals aimed at facilitating the development of a securitisation market in Europe. 

A framework for securitisation is one of the main elements of the EU’s 2015 plan to develop a fully functioning capital markets union by the end of 2019. Developing a securitisation market will help create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups. 

“This initiative will encourage financial market integration in Europe and make it easier to lend to households and businesses“, said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency. “Tonight’s agreement with MEPs will allow us to relaunch the securitisation market, defining a model for simple, transparent and standardised securitisations.”

The agreement will be submitted to EU ambassadors for endorsement on behalf of the Council, following technical finalisation of the text. Parliament and Council will then be called on to adopt the proposed regulation at first reading.

Securitisation is the process by which a lender – typically a bank – refinances a set of loans or assets, such as mortgages, automobile leases, consumer loans or credit card accounts, by converting them into securities. The repackaged loans are divided into different risk categories, tailored to the risk/reward appetite of investors. 

Following the US subprime cirisis of 2007-08, public authorities took steps to make securitisation transactions safer and simpler, and to ensure that incentives are in place to manage risk. As a result of these reforms, all securitisations in the EU are now strictly regulated. However, in contrast to the United States where markets have recovered, European securitisation markets have remained subdued. This despite the fact that EU securitisation markets withstood the crisis relatively well. 

Building on what has been put into place to address risk, the proposals differentiate simple, transparent and standardised (STS) products. The concept of ‘simple, transparent and standardised’ refers not to the underlying quality of the assets involved, but to the process by which the securitisation is structured. 

Issues resolved 

One of the main political issues resolved relates to a so-called risk retention requirement. This refers to the interest in the securitisation that originators, sponsors or original lenders of securitisations need to retain themselves. The requirement will ensure that securitised products are not created solely for the purpose of distribution to investors. 

The negotiators agreed to set the risk retention requirement at 5%, in accordance with existing international standards and in line with the Council’s negotiating position. 

Other elements agreed with the Parliament include: 

  • the creation of a data repository system for securitisation transactions, which will increase market transparency;
  • a light-touch authorisation process for third parties that assist in verifying compliance with STS securitisation requirements. The aim is to prevent conflicts of interest. The text makes clear that, even when a third party is involved in the STS certification process, liability for compliance with the rules remains completely with originators, sponsors, original lenders and securitisation special purpose entities.

Two regulations 

The agreement with the Parliament covers two draft regulations: 

  • one setting rules on securitisations and establishing criteria to define STS securitisation;
  • the other amending regulation 575/2013 on bank capital requirements. 

The first brings together rules that apply to all securitisations, including STS securitisation, that are currently scatttered amongst different legal acts. It thus ensures consistency and convergence across sectors (such as banking, asset management and insurance), and streamlines and simplifies existing rules. It also establishes a general and cross-sector regime to define STS securitisation. 

The text amending regulation 575/2013 sets out capital requirements for positions in securitisation. It provides for a more risk-sensitive regulatory treatment for STS securitisations.

The regulations require a qualified majority for adoption by the Council, in agreement with the European Parliament. (Legal basis: article 114 of the Treaty on the Functioning of the European Union.)

Capital markets union: Agreement on venture capital rules

EU rules on venture capital and social enterprises are to be adjusted with the aim of boosting investment in start-ups and innovation.

On 30 May 2017, representatives of the Council and the European Parliament agreed on amendments to rules governing investment funds in this sector.

The proposed regulation is part of the EU’s plan to develop a fully functioning capital markets union, diversifying funding sources for Europe’s businesses and long-term projects. It is also linked to the EU’s investment plan for Europe.

“If European SMEs are to grow and develop, it is indispensable that financing – both bank and capital market financing – is readily available”,said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency. “This regulation will help stimulate market financing and thereby boost economic growth.”

The EU has been falling behind the United States in this sector. According to the Commission, an extra €90 billion would have been available between 2009 and 2014 for financing European companies if venture capital markets had been as developed as in the US.

The proposal adjusts rules adopted in 2013 to encourage investment in European venture capital funds (Euveca) and European social entrepreneurship funds (Eusef).

Amending regulations 345/2013 and 346/2013, it makes those funds available to fund managers of all sizes and expands the range of companies that the funds can invest in. It also makes the cross-border marketing of such funds cheaper and easier.

Regulations 345/2013 and 346/2013 lay down requirements for investment in Euveca and Eusef funds, which relate respectively to:

  • young and innovative companies;
  • enterprises whose aim is to achieve a positive social impact.

Presidency and Parliament representatives agreed on the following amendments:

  • larger fund managers, i.e. those with assets under management of more than €500 million, will henceforth be able to market and manage Euveca and Eusef funds;
  • the range of companies in which Euveca funds can invest is expanded to include unlisted companies with up to 499 employees (small mid-caps) and SMEs listed on SME growth markets.

Next steps

The agreement will be submitted to EU ambassadors in the coming days for endorsement on behalf of the Council. The Parliament and the Council will then be called on to adopt the regulation without further discussion.

The regulation will start to apply three months after its entry into force.

Services package: Council agrees conditions to ease provision of services and mobility of professionals

The Council agreed on general approaches on two proposals of the “Services Package” to make the internal market more effective:

– a draft directive laying down rules on notification for authorisation requirements in the services sector, and

– a draft directive aimed at carrying out a proportionality test before adoption of new regulation of professions.

A Council general approach allows starting negotiations with the European Parliament.

“Businesses and professionals are still confronted with disproportionate regulation to provide services across borders. The Services Package is an essential tool to facilitate the movement of people and services. Companies, professionals and consumers will benefit greatly from better access to different professional activities and services”, said Chris Cardona, Minister for the Economy, Investment and Small Business of Malta.

Notification procedure in the services sector

The draft directive seeks to ensure that new national measures approved in member states fulfil the necessary conditions to facilitate the competitiveness and integration of the single market in the services sector.

More specifically, it aims at improving the current notification procedure of the Services Directive (2006/123/EC). This procedure provides that member states must notify to the Commission new or changed authorisation schemes or requirements falling under the scope of the Services Directive in order to guarantee its correct implementation.

The Council’s text takes into account the need to enhance the existing notification procedure and the need to respect the principles of proportionality and of subsidiarity, in particular the prerogatives of national parliaments and administrative authorities.

The objective of the Services Directive is to remove barriers to the establishment of service providers and the temporary provision of cross-border services.

Professions: tests before adoption of new national rules

The draft directive seeks to improve transparency on the way certain professions are regulated in the member states.

More specifically, it aims at ensuring that national measures are proportionate and do not unduly restrict access to professions or create unjustified burdens in the internal market.

When regulating professions, member states will have to make an assessment as to whether the new or amended rules are justified so as to appreciate their effect on stakeholders and businesses. The future directive will therefore harmonise the way in which these proportionality tests are carried out and the criteria that have to be applied, in accordance with the European Court of Justice rulings.

The obligation to carry out a proportionality test before introducing new regulation of professions will supplement provisions of the Professional Qualifications Directive (2013/55/EU).

The Services Package

The “Services Package”, released on 10 January 2017, contains the following legislative proposals:

  • Proposal for a services e-card
  • Proposal for a services notification procedure
  • Proposal for a proportionality test before adoption of new regulation of professions

It also includes guidance on reform recommendations for regulation in professional services.

Promoting the competitiveness of services markets is essential for the creation of jobs and growth in the EU, with the services sector accounting for around 70% of the EU’s GDP.