European regulation strangulation, part 2

America innovates, China replicates and Europe regulates

I often find the maze of European regulations hard to follow and track. It’s ok if you’re tracking one – like that Payment Service Directives and Regulations – but when you’re trying to track many, it’s an ever changing cauldron. Right now, I’m trying to work out with MiCA, FiDA and DORA are all about, but there are many more, such as the MiFID II review which came into force in March 2024.

So, let’s start with MiCA which stands for “Markets in Crypto-Assets”, and refers to a European Union regulation that establishes a comprehensive framework for governing crypto assets within the EU, aiming to provide legal clarity and consumer protection for the crypto market by regulating the issuance and trading of crypto assets not covered by existing financial regulations; essentially, it’s a set of rules designed to create a harmonized regulatory environment for crypto activities across the European Union.

MiCA regulation entered into force on June 29, 2023, with further provisions in December 2024.

The European Union’s proposed Financial Data Access (FiDA) framework is set to revolutionise the banking sector and broader financial services landscape. Once passed into law, FiDA will require financial intermediaries to share customers’ financial data – subject to customer consent – with scope to extend beyond traditional banking to include investment and insurance sectors. This shift is not just an extension of open banking; it represents a fundamental change in how financial data is accessed and used.

According to current information, FiDA is expected to come into force around mid-2025, with full implementation likely starting in early 2027.

The EU’s Digital Operational Resilience Act (DORA) regulation was agreed in force January 2023, and will fully in force since last month (January) 2025. The focus is to make financial institutions digital security better, and has three key objectives:

• to make the financial sector more resilient to digital disruptions
• to harmonize rules for digital operational resilience
• to establish a common legal framework for ICT risks

Then there’s the EU AI Act. The "AI EU Regulation," also known as the "AI Act," is a European Union law that sets out a comprehensive framework for regulating the development, marketing, and use of artificial intelligence (AI) systems. The aim is to promote trustworthy AI by protecting citizens’ fundamental rights. It is not specific to finance and covers a wide range of services, and came into force on 1 August 2024, and will be fully applicable 2 years later on 2 August 2026.

With so many acronyms and things developing in Europe, I asked my good friend David Doyle – a subject matter expert on these things – to tell me what else we should think about. He came back with a lot:

EU Priorities 2024-2029 (Draghi report)

• bolstering the EU’s competitiveness : “Innovative firms hindered by inconsistent and  restrictive regulations”
• promoting an innovation and business-friendly environment by reducing excessive reporting requirements
• Recalibrating insurance, securitization and private credit rules to fund the real economy and infrastructure

EU expected to go on the “offensive” to promote its strategic business interests to avoid becoming collateral damage in a global trade war following  US Presidential elections: emphasis on strategic autonomy

• European Commission (EC) to consolidate existing and future EU ESG (environmental, social and governance) reporting obligations into one  EU “omnibus” regulation.
• EC to tweak the Sustainable Finance Disclosure Regulation – industry complain about lack of standardised metrics to assess ESG.  ESA’s recommendations:
• Recognize that the informational needs of retail investors and institutional investors differ, and so different approaches are needed for these target markets
• German Chancellor calls for simplified Corporate Sustainability Reporting Directive (CSRD) – companies will have to report on how sustainability issues affects their business and the impact of their activities on people and the environment.

Despite  onerous nature of the EU AI Act  – sets a global standard  – EC consults on how and for which purposes AI applications are used in the financial sector, with AI Act amendments expected in 2025

• Compared to US, the EU struggles with under-developed capital  markets, and immobilized citizens savings, impacting negatively on EU firms scaling-up innovation: continuing impediments  are national states’ self-interests and EU citizens traditional conservative investment culture. Two key measures:

Transform ESMA into centralized, independent, stand-alone  SEC-type Pan-EU  regulator for the EU securities market

Revamp EU Retail Investment Strategy:

• new rules on enhanced disclosure requirements, restrictions /bans on inducements, value for money of financial products, stricter suitability assessments, and improved product governance, as well as a regulation of the “finfluencers”.

The new  EU bank prudential (CRD VI ) rules on third-country bank branches expected to challenge 3rd-country banking activity in the EU region:

• prohibit the remote provision of certain banking services into the EU and banning 3rd-country bank branches from operating on a cross-border basis from  one EU state
• lending  consumer credit, credit agreements relating to immovable property, factoring, financing of commercial transactions require a local EU state branch in the EU jurisdiction where the clients are based.

Mandatory risk warnings

• Risk of significant USA –EU divergence on financial services  regulation, probably also vis-à-vis the UK
• The increasing EU legislative reliance on extraterritorial clauses in CRD6/CRR3, AI Act, DORA,  MiCA, i.e. requirement to set-up an EU company structure to service EU clients, thus triggering potential conflict of rules and restrictive practices.

Phew!

It’s no wonder that I write a lot about European regulation strangulation or, in context, America innovates, China replicates and Europe regulates.