DRAFT ANSWER TO CALL FOR EVIDENCE EC ON FINANCIAL REGULATION – 11TH December 2015
A. Rules affecting the ability of the economy to finance itself and growth
Issue 1 - Unnecessary regulatory constraints on financing
Issue 2 - Market liquidity
Issue 3 - Investor and consumer protection
Issue 4 - Proportionality / preserving diversity in the EU financial sector
Issue 1 - Unnecessary regulatory constraints on financing
The Commission launched a consultation in July on the impact of the Capital Requirements Regulation on bank financing of the economy. In addition to the feedback provided to that consultation, please identify undue obstacles to the ability of the wider financial sector to finance the economy, with a particular focus on SME financing, long-term innovation and infrastructure projects and climate finance. Where possible, please provide quantitative estimates to support your assessment.
Example 1 for Issue 1 (Unnecessary regulatory constraints on financing)
- To which Directive(s) and/or Regulation(s) do you refer in your example? (If applicable, mention also the articles referred to in your example.)
- Please provide us with an executive/succinct summary of your example:
- Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)
- If you have suggestions to remedy the issue(s) raised in your example, please make them here:
Issue 2 – Market liquidity
Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on market liquidity. Please elaborate on the relative significance of such impact in comparison with the impact caused by macroeconomic or other underlying factors.
Example 1
- To which Directive(s) and/or Regulation(s) do you refer in your example? (If applicable, mention also the articles referred to in your example.)
Please provide us with an executive/succinct summary of your example
Example 1
Prospectus Directive (directive 2003/71/EC, as amended)
In case of listing on an MTF without prospectus because the offer is addressed only to institutional investors, is should be clarified that retail cascade does not apply for securities traded on the market by retail investors. In Italy typically SMEs which aim to be listed on an MTF make an offer addressed to professional investors without prospectus; they prepare an admission document regulated by the market operator. The admission document is a subset of information required by the Prospectus Directive.
As the MTF is open to retail investors the subsequent sale should be not subject to the retail cascade.
Example 2
Prospectus Directive (directive 2003/71/EC, as amended)
According to the procedure already in place in Italy and ruled by Borsa Italiana the issuer (non financial corporation) may use directly the market for the distribution of bonds. The related contracts are concluded by an intermediary who matches buying and sell orders directly on the market. The advantages are both the costs cut because the issuer has not to appoint an intermediary in charge of the placement of the securities and a quicker procedure.
Direct offers by non financial corporations on the regulated markets should be encouraged clarifying that there is no need of an intermediary signing (and became responsible) for the prospectus.
Issue 3 – Investor and consumer protection
Please specify whether, and to what extent, the regulatory framework has had any major positive or negative impacts on investor and consumer protection and confidence.
Issue 4 – Proportionality / preserving diversity in the EU financial sector
Are EU rules adequately suited to the diversity of financial institutions in the EU? Are these rules adapted to the emergence of new business models and the participation of non-financial actors in the market place? Is further adaptation needed and justified from a risk perspective? If so, which, and how?
B. Unnecessary regulatory burdens
Issue 5 - Excessive compliance costs and complexity
Issue 6 - Reporting and disclosure obligations
Issue 7 - Contractual documentation
Issue 8 - Rules outdated due to technological change
Issue 9 - Barriers to entry
Issue 5 – Excessive compliance costs and complexity
In response to some of the practices seen in the run-up to the crisis, EU rules have necessarily become more prescriptive. This will help to ensure that firms are held to account, but it can also increase costs and complexity, and weaken a sense of individual responsibility. Please identify and justify such burdens that, in your view, do not meet the objectives set out above efficiently and effectively. Please provide quantitative estimates to support your assessment and distinguish between direct and indirect impacts, and between one-off and recurring costs. Please identify areas where they could be simplified, to achieve more efficiently the intended regulatory objective.
Example 1 for Issue 5
- To which Directive(s) and/or Regulation(s) do you refer in your example? (If applicable, mention also the articles referred to in your example.)
- Please provide us with an executive/succinct summary of your example:
- Please provide us with supporting relevant and verifiable empirical evidence for your example: (please give references to concrete examples, reports, literature references, data, etc.)
- If you have suggestions to remedy the issue(s) raised in your example, please make them here:
Example 2 for issue 5
Prospectus Directive (directive 2003/71/EC, as amended)
The problem of the disclosure regime in the prospectus for issuers already admitted to trading and SMEs is an important issue which has been tackled by the recent proposal of the European Commission which is empowered to adopt delegated acts[1]; costs for equity prospectus are now between 150.000 and 400.000 euro (representing 5% of the offer for small companies and 0,2% for big companies). According to our internal survey and in line with the ESME Report on 2007 the average number of pages in 2014 for a prospectus of an IPO is 553 (with a weight of 1,2 kilos) and for a secondary offering 303. Prospectus for an issuance of bonds is 107 pages.
We strongly wish that the Commissions will adopt delegated acts which must ensure an effective reduced disclosure regime.
Issue 6 – Reporting and disclosure obligations
The EU has put in place a range of rules designed to increase transparency and provide more information to regulators, investors and the public in general. The information contained in these requirements is necessary to improve oversight and confidence and will ultimately improve the functioning of markets.
In some areas, however, the same or similar information may be required to be reported more than once, or requirements may result in information reported in a way which is not useful to provide effective oversight or added value for investors.
Please identify the reporting provisions, either publicly or to supervisory authorities, which in your view either do not meet sufficiently the objectives above or where streamlining/clarifying the obligations would improve quality, effectiveness and coherence. If applicable, please provide specific proposals.
Specifically for investors and competent authorities, please provide an assessment whether the current reporting and disclosure obligations are fit for the purpose of public oversight and ensuring transparency. If applicable, please provide specific examples of missing reporting or disclosure obligations or existing obligations without clear added value.
Example 1 for Issue 6
Accounting directives, directive 2003/51/EC, Article 10 of the Takeover Bids
According to the Accounting directives, the statutory auditors shall also express an opinion concerning the consistency of the annual (management) report with the annual accounts for the same financial year: the requirement was introduced by directive 2003/51/EC.
Subsequent directives have modified the content of the annual management report requiring additional non-financial information. For example:
- Article 10 of the Takeover Bids directive provides that several information, like those on the structure of the capital, restrictions on the transfer of securities, etc., shall be published in the annual report;
-Article 46 (a) of the directive 2006/46/EC provides that a statement on corporate governance shall be published every year and that it may be included in the annual report
- Article 1 of directive 2014/95/EC requires certain large companies to disclose relevant non-financial and diversity information in the management report
We believe that it should be expressly provided that any extension of the content of the management report does not entail an automatic extension of the scope of statutory audit, unless it is explicitly provided. As for example, in the case of the consistency report required by directive 2006/46/EC on (a) the description of the main features of the company’s internal control and risk management and (b) some of the information required by the Takeover Bids directive, the consistency opinion should not be provided.
We believe that the consistency opinion should only concern information that for their nature and characteristic are comparable with financial data. Consequently, in case of an extension of the contents of the annual report, there should be no automatic consequence on the perimeter of the consistency opinion.
Example 3 for Issues 6
MiFID 2/MiFIR:
It is not obvious why position checks and position reporting requirements under MiFIR (Art. 59 and 60) shall apply to commodity-derivatives used for hedging the operational risks of nonfinancial companies. The same applies for real-time-reporting as under EMIR these derivatives already have to be reported to transaction registers. Additional reporting requirements do not make sense and are redundant from our point of view. Comments from DAI
Example 4 for issues 6
Regulation n. 596/2014/EU and Directive 2014/65/EU (Mifid II)
EU-Commission’s objective to promote capital market-finance for SMEs: in its green paper on long term finance of the European economy the EU-Commission among others expresses its intention to promote capital market-finance for SMEs. This objective is countered by generally extending the scope of application of MAR (Art. 2 Nr. 1, Art. 12, Art. 13, MAR), MiFIR/MiFID II (Art. 1 MiFIR) to Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF). Stock Exchanges all over Europe have created privately regulated SME markets which typically will qualify as a MTF. Extending the scope of regulatory requirements designed for regulated markets and large public interest entities also to SMEs and their market segments will create additional bureaucratic burdens for these companies and act as a severe disincentive for IPOs of smaller issuers. In addition the tendency to ever increase requirements for all listed companies (with the latest example of making country-by-country reporting mandatory in the Transparency Directive for a number of listed companies) also works in this direction. Finally, these shortcomings will be aggravated by the possible introduction of a financial transaction tax (FTT) as it will lead to a sharp drop in market liquidity which will make capital market finance significantly less attractive for SMEs. Financial Transaction Tax (FTT): The concept of FTT as presently discussed between 11 member states will harm the functioning of securities- and derivative markets, significantly raise the costs of finance for non-financial companies and seriously affect the corporates’ risk management with derivatives.
Example 5 for issue 6
Market Abuse (Directive 2003/6/EC and Regulation n. 596/2014/EU)
Under the Market Abuse regulation the same notion of inside information is applicable for the duty of disclosure and for market abuse; this coincidence of notions generated a lot of legal uncertainty, especially because market abuse was already the basis in many Member States for criminal offences. The possibility for listed companies to delay disclosure has been severely limited by the condition that such delay should not be misleading. In order to solve that uncertainty, many Member States simply did not apply the Directive or circumvented it with guidelines of their competent authorities, which proved to be valuable in front of them but worthless when dealing with criminal charges. The problem is the same in the Regulation n. 596/2014.
ESMA’s guidelines on the situations in which delay of inside information is likely to mislead the public will be therefore of paramount importance[2]; a flexible approach would be the best solution in order to ensure to issuers the possibility to delay the communication of information non sufficient mature.
Example 6 for issues 6
EMIR (Regulation n. 648/2102)
A huge number of non-financial firms are potentially subject to the Regulation. This is also due to the fact that the notion of undertaking in EMIR is wide[3] and according to its interpretation it includes “any entity engaged in an economic activity, regardless of the legal status of the entity or the way in which it is financed”. A supply of goods and services on a market is considered an economic activity[4]. The consequence is that also an entrepreneur, physical person[5], could be subject to the Regulation and, in particular, to the actual reporting obligations (in Italy the number of entrepreneurs, physical persons are 3.245.250). This extensive approach (which is burdensome and involves big efforts and costs in order to set up procedures to comply with the Regulation) together with the obligation to report any transaction in derivative contracts may determine, on one side, a huge number of data to be reported without any significant value that Trade Repositories have to process and, on the other side, difficulties for the Competent Authority to make an effective supervision. This effect is detrimental for the purpose of the Regulation itself which is to ensure maximum transparency to the use of derivative contracts. The risk is that critical positions in derivative contracts are “hidden” by the bulk of data reported.
In light of above we think that a reshape of the Regulation would be necessary; the reshape could be made or through the restriction of the perimeter of the subjects under the reporting obligations or foreseeing a sort of waiver to the reporting obligations (e.g. imposing some significant thresholds also for the notifications of the trades to be reported) in order to exclude the reporting for non material transactions which do not affect financial stability.
Example 7 for issues 6 – reference to national implementation and gold-plating (as requested by the consultation document, pag. 5)
As for Italy, the implementation process of the Directive 2013/50/UE on transparency obligation for listed companies is providing more stringent requirements as to: (i) interim report: the directive abolished the obligation to publish interim reports while providing that Member States may request the disclosure of additional information only if specific requirements are met; Italian legislation acknowledges a general power to the supervisory authority to request such information to all issuers on a general basis (even if under the conditions set forth by the Directive); (ii) as to the disclosure of major shareholdings, Italian legislation provides for a lower initial threshold: 3% instead of 5%.