1 April 2011 will go down in collective memory as the date of the reorganisation of the supervisory structure for the financial sector in Belgium, prompted by the 2008 financial crisis. The National Bank of Belgium is now entrusted with the supervision of Belgian financial institutions. Although it will take some time to get used to the new acronym FSMA, the newly organised Financial Services and Markets Authority has not wasted any time this year, quickly imposing an extended ban on short selling and a moratorium on the distribution of complex structured products. Finally, the European Commission has also been active this year, introducing several proposals for new financial legislation.
1. “Twin peaks” supervisory model for the financial sector
On 1 April 2011, the new "twin peaks" supervisory model for the financial sector entered into effect. The Royal Decree of 3 March 2011 on the evolution of the supervisory structure of the financial sector implemented the Act of 2 July 2010, which amended the existing legislation on the supervision of the financial sector and financial services.
The main features of the new "twin peaks" model are the following:
•The power to supervise financial institutions has been transferred from the CBFA to the National Bank of Belgium (the "NBB"). The NBB is now responsible for the prudential supervision of credit institutions, insurance and reinsurance companies, investment firms, settlement institutions and institutions treated as settlement institutions, and payment institutions. The NBB is also entrusted with the oversight of payment and securities settlement systems. As a result, the NBB is now responsible for the micro- and macro-economic supervision of the financial system in general, in addition to its other tasks.
•The CBFA has become the Financial Services and Markets Authority (Autoriteit Financiële Diensten en Markten/Autorité des Services et des Marchés Financiers, abbreviated "FSMA"). The FSMA has been given six main tasks: (i) supervision of financial markets; (ii) supervision of rules of conduct; (iii) supervision of financial products; (iv) the financial education of the public; (v) the supervision of institutions for occupational retirement provision; and (vi) supervision (including, where applicable, compliance with anti-money laundering legislation) of various players active in financial circles, e.g. banking and insurance intermediaries, UCITS management companies, portfolio management companies and investment advisors, and foreign exchange offices.
2. Duties of the NBB
The decrees, regulations, circulars and communications of the former CBFA in the fields transferred to the NBB by the Royal Decree of 3 March 2011 will remain in effect until modified or possibly repealed.
Since 1 April 2011, the NBB has issued several new circulars and communications on subjects such as the implementation of the CRD III rules on capital requirements, the information required to fulfil the NBB's annual publication obligation under the Capital Requirements Directive, securitisation, and changes to the reporting requirements for financial companies.
3. New FSMA sanctions procedure
Effective 15 July 2011, the FSMA applies new rules to determine the application of administrative sanctions. On this date, Articles 8 and 15 to 20 of the abovementioned Act of 2 July 2010, containing rules on the procedure and composition of the sanctions commission, entered into force.
The new provisions provide for:
•a new distribution of roles between the various parties: upon receipt of the auditor's investigative report, the management committee will determine the appropriate follow-up (i.e., referral of the matter to the sanctions commission, settlement or no further action);
•the 10 members of the sanctions commission are now appointed directly by royal decree and, upon establishment of the commission, the term of office of half its members is limited to three years (rather than six); half the commission will consequently be replaced every three years.
The new procedural rules will also apply to cases in progress. Indeed, files which the management committee has already referred to the auditor (pursuant to former Article 70 §1 of the Act of 2 August 2002 on the supervision of the financial sector) will be subject to the new rules for further processing. This means that the auditor must submit its report to the board of directors, which will then decide whether to refer the case to the newly formed sanctions commission. The royal decree provides, however, for a certain number of exceptions.
3. Regulation on sound remuneration policies in financial institutions
The Royal Decree of 22 February 2011 approved the CBFA's regulation of 8 February 2011 on sound remuneration policies in financial institutions (hereinafter the “CBFA Regulation”). The CBFA Regulation transposes Directive 2010/76/EU of 24 November 2010, amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations and the supervisory review of remuneration policies ("CRD III").
The CBFA Regulation applies to credit institutions, investments firms, settlement institutions and institutions treated as settlement institutions. Remuneration policy covers all aspects of remuneration including salaries, variable remuneration, discretionary pension benefits and any similar benefits. Furthermore, the remuneration policy applies to all staff members whose professional activities can have a material impact on the firm's or institution's risk profile.
The CBFA Regulation lays down a set of principles governing the establishment and application of remuneration policy and establishes transparency and disclosure obligations in relation to this policy. The most important principles are the following:
•the remuneration policy should promote sound and effective risk management rather than encouraging risk-taking;
•guaranteed variable remuneration should remain exceptional and should only apply to new staff during the first year of employment;
•the fixed and variable components of total remuneration should be appropriately balanced;
•at least 50% of any variable remuneration should consist of an appropriate balance of shares or other instruments;
•at least 40% of variable remuneration should be deferred over a period of at least three to five years;
•variable remuneration should be paid or vested only if it is sustainable based on the institution's financial situation;
•staff members should not use hedging strategies to undermine the risk alignment effects embedded in their remuneration arrangements; and
•severance payments should reflect performance over time and should not reward failure.
The CBFA Regulation requires that the new principles be applied to services provided in 2010 for: (i) remuneration due under contracts concluded before 1 January 2011 and awarded or paid after that date and (ii) remuneration awarded - but not paid - before 1 January 2011.
4. Ban on short selling
On 11 August 2011, the FSMA extended the ban on the short selling of shares of financial institutions to covered shorting. This decision was prompted by the volatility of the financial markets and was taken after consultation with other members of the European Securities and Markets Authority (ESMA). The FSMA will assess when to lift the temporary ban on covered short selling. The aim is to do so as soon as market conditions so allow and, insofar as possible, in coordination with other ESMA partners.
The purpose of the ban is to:
•limit the possibility of making a profit through the dissemination of misleading information; and
•ensure a uniform approach in this area, given the degree of interconnectedness between certain European financial markets.
The ban has been implemented progressively as follows.
•The Royal Decree of 23 September 2008 first banned uncovered transactions (in shares or derivatives) executed on Euronext Brussels ("naked shorting") and required the disclosure, including on the FSMA's website, of any net economic short position[1] in excess of 0.25% of the share capital of a financial institution to which the measures apply (i.e., Ageas NV/SA, Dexia SA, KBC Groep NV and KBC Ancora Comm. VA).
•Effective 12 August 2011, the concept of "uncovered transactions" was extended to transactions effected with borrowed shares. Thus, not only "naked shorting" but also "covered shorting" is now banned. In other words, it is prohibited to acquire a net economic short position by any means whatsoever (e.g. contracts for differences, spread bets, options, equities, etc.) or to extend such a position to the shares of the financial institutions listed above.
•Qualified intermediaries must take reasonable measures to ascertain that their clients have appropriate coverage[2] for their proposed transactions.
•Pre-existing net economic short positions do not fall under the ban, but may not be increased. The existing disclosure obligations remain in force, including for such positions.
The new measures apply to all transactions in the securities of the abovementioned financial institutions, regardless of whether they are carried out on- or off-exchange (over-the-counter). The ban on short selling also applies to intraday positions.
Moreover, the FSMA released on 25 August 2011 a new version of the FAQs for the ban on short selling of the shares of financial institutions.
5. Moratorium on the distribution of complex structured products
On 20 June 2011, the FSMA asked the financial sector to stop distributing to individual investors structured products that are considered particularly complex.
Distributors that agree to the moratorium commit not to distribute structured products that are considered particularly complex, based on a test proposed by the FSMA. The moratorium applies only to products the distribution of which began after 1 August 2011. It does not affect products distributed before that date.
The voluntary moratorium will remain in force until new rules on the distribution of structured products to retail investors are drawn up.
The voluntary moratorium is the first step in a process intended to lead to the adoption of a regulation on the distribution of complex products. This step was followed by a public consultation, which runs from 12 August until 15 October 2011. The FSMA is gauging public opinion to, amongst other things, the criteria it uses to determine whether a product should be considered "particularly complex". It is also interested in whether the regulation should refer, like the current moratorium, only to the complexity of a structured product or also to the risk associated with the product. Finally, the FSMA wants to know whether the regulation should also cover products that are not structured but are still complex and/or risky. The draft regulation is expected to be issued by the end of this year.
Distributors participating in the moratorium are mentioned on a list kept by the FSMA which is published on its website. As of 29 July 2011, all representative banking institutions and insurance companies involved in distributing structured products had signed on to the moratorium. Effective 1 September 2011, financial intermediaries such as brokers and agents are also able to sign on to the moratorium.
The FSMA has also published on its website FAQs on the purpose of the moratorium and the technical issues raised by its application.
6. Initiatives at the Community level
Important new financial legislation has been passed over the past few months and new developments are still expected at the Community level in the following areas:
•Financial supervision:
Since January 2011, the regulation of financial services across Europe has been overseen by three European supervisory authorities, one for banking (EBA), one for insurance and occupational pensions (EIOPA), and one for the securities markets (ESMA). These authorities replace the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR), and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS);
•Hedge funds:
The much-awaited AIFM Directive[3] has finally been published. The objective of the directive is to create a comprehensive and secure framework for the supervision and prudential oversight of alternative investment fund[4] managers in the European Union;
•Capital requirements:
Even though CRD III,[5] which deals with capital requirements for the trading book, re-securitisations and the supervisory review of remuneration policies, was only adopted at the end of last year, the Commission deemed it necessary to adopt, on 20 July 2011, a fourth set of changes ("CRD IV") in order to implement the Basel Committee standards into Community law. The latest proposal replaces the current directives with a directive governing access to deposit-taking activities and a regulation establishing prudential requirements for financial institutions.
•Financial markets:
The Commission is preparing updates to the Markets in Financial Instruments Directive or MiFID (Directive 2004/39/EC) and the Market Abuse Directive (Directive 2003/6/EC). The updates should be released later this year and will give regulators more control over banks' use of new technology and products, including automated trading, over-the-counter derivatives and dark pools. A separate proposal will set out common standards for regulators when levying fines or initiating criminal proceedings against market manipulators and insider traders.
•Credit rating agencies:
Even though the Community regulation on credit rating agencies entered into force only recently (December 2010), it was already amended earlier this year.[6] The Commission is once again considering new proposals regarding sovereign debt ratings, competition in the market and possible liability rules for agencies;
•Short-selling:
A Commission proposal (COM(2010)482) obliges traders to disclose short positions above certain limits and eliminates the practice of naked shorting by forcing investors to borrow or arrange to borrow bonds before a transaction. The Parliament’s committee for Economic Affairs voted in March 2011 to extend the ban to credit default swaps, although a May 2011 Council compromise allows regulators to lift the ban if the market starts to lose liquidity. Talks between the two institutions are ongoing (see also the above discussion on the extension of the short selling ban in Belgium);
•Deposit guarantee schemes:
The Parliament and the Council are currently discussing the overhaul of Directive 94/19/EC, including the possibility of raising depositor compensation to €100,000 in the event of a bank failure;
•Mortgage loans:
A new proposal for a directive[7] introduces requirements for the advertisement of mortgage loans, to ensure that all institutions involved in the extension and distribution of mortgage loans to consumers are adequately regulated and supervised. The proposal also establishes principles for the authorisation and registration of credit intermediaries and for the provision of services throughout the internal market (a European passport). The objective is to ensure that all consumers purchasing a property or taking out a home-equity loan are adequately informed of the possible risks.
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[1] A "net economic short position" means any instrument (contracts for differences, spread bets, options, equities, etc.) giving rise to exposure, whether direct or indirect, in a company's equity share capital.
[2] "Appropriate coverage" means coverage that consists of the securities that have been sold or the securities to which the transaction in derivatives relates. Again, coverage through derivatives is not considered adequate.
[3] Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011.
[4] The term "alternative investment fund" covers a wide range of investment funds that are not already regulated at the European level by the UCITS Directive (Directive 2009/65/EC), such as hedge funds, private equity funds, real estate funds and a wide range of other types of institutional funds.
[5] Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies, OJ L 329, 14.12.2010.
[6] Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies, OJ L145, 31.5.2011.
[7] Proposal for a Directive of the European Parliament and of the Council on credit agreements relating to residential property, COM/2011/0142 final, 31.03.2011.
