SHAREHOLDER RIGHTS DIRECTIVE ǀ BANKING UNION ǀ REYKJAVIK CONFERENCE ǀ HIGH FREQUENCY TRADING ǀ KEY INFORMATION DOCUMENTS ǀ LONG-TERM FINANCING ǀ BETTER FINANCE MANIFESTO ǀ FINANCIAL REPORTING STANDARDS ǀ AUDIT REFORM ǀ OCCUPATIONAL PENSIONS

The revised Shareholder Rights Directive should better address shortcomings related to transparency, shareholder identification, voting fees and cross-border voting restrictions

The European Commission adopted measures to improve the corporate governance of around 10.000 companies listed on Europe’s stock exchanges with the aim of contributing to their competitiveness and long-term sustainability. The package of measures implements key actions identified in the Communication on the long-term financing of the European economy (see LTF article). As part of this package, the proposal to revise the existing Shareholder Rights Directive is aimed at tackling corporate governance shortcomings relating to listed companies and their boards, shareholders, intermediaries and proxy advisors.

Whereas Better Finance generally supports the Commission’s proposals for amendments to the Shareholders Rights Directive regarding long-term Shareholder engagement, some proposals leave much to be desired. Some of the key shortcomings relate to transparency, shareholder identification, voting fees and cross-border voting restrictions.

Efforts to increase the efficiency of the chain of intermediaries and eliminate the existing difference between charges levied for domestic and cross-border voting by intermediaries are crucial in removing obstacles to cross-border voting. This issue could be properly addresses once and for all in a comprehensive manner by establishing a free-of-charge, internet-based shareholder voting process throughout the whole EU.

In terms of shareholder identification, confusion and potential conflicts of interests could easily be avoided by providing issuers as well as shareholders with the right to require intermediaries to provide identification free of charge. In the same vein, applying the principle of equality and require for any information related to the shareholder that is made available to the company to also be made available to shareholders, should also go a long way towards creating a level playing field.

Transparency is also of the utmost importance and disclosure for institutional investors and proxy advisors should happen on a mandatory basis rather than adopting the proposed “comply or explain” mechanism.

The issues mentioned above would greatly benefit from an entirely digital, internet-based voting process that is open to non-bank competition. To this end, the EC should consider using digital registers not only for shareholder identification but especially to enable EU-wide free of cost voting by EU domiciled shareholders.

Better Finance on the SRD

The Banking Union: shifting the burden of bank failure from taxpayers to creditors and shareholders

On 15 April 2014 the European Parliament (EP) adopted the Trialogue agreement on the proposed Single Resolution Mechanism (SRM) for the Banking Union. The SRM complements the Single Supervisory Mechanism (SSM) through which the European Central Bank will directly manage the supervision of banks in the Euro area as well as other EU Member States which decide to join the Banking Union, as soon as the mechanism is fully operational by the end of 2014.

Should stronger supervision in the future in some cases not manage to safeguard a bank from serious difficulties, the SRM will step in and theoretically ensure the orderly resolution of the failing bank efficiently and with minimal costs to taxpayers and the real economy.

Besides the SRM regulation covering the main aspects of the mechanism, an intergovernmental agreement relating to the Single Resolution Fund (SRF) stipulates the following:

• The SRM would apply to all banks supervised by the SSM. The Single Resolution Board (SRB) would prepare resolution plans and resolve all banks directly supervised by the ECB and for cross-border banks.
• Centralised decision-making would be built around a strong SRB and would involve permanent members as well as the Commission, the Council, the ECB and the national resolution authorities.
• All the banks in the participating Member States would contribute to the SRF which has a target level of €55 billion, with the aim of covering at least 1% of deposits over an 8 year period.

Although it is commendable that the SRM seeks to preserve the European taxpayer, the fact remains that it is to be used in parallel with bail-in measures as stipulated in the Bank Restructuring and Resolution Directive, shifting the burden of bank failure from taxpayers to creditors and shareholders.

If a bank becomes insolvent, shareholders and creditors are to be first in line to bear the losses before use can be made of SRF resources. Whereas the Banking Union is taking steps in the right direction, as long as policy makers in Brussels remain obsessed with ‘financial stability’ - a euphemism for bailing out big banks at any price - rather than with shoring up the real economy, the SRM is likely to end up as a complicated mixture between bail-in and bail-out instruments in which shareholders and bondholders will be required to take on the bulk of the burden of saving a bank.

Whereas this may to some extent safeguard the taxpayer, the costs caused by the greed of financial institutions will have to be borne by exactly those European households that we rely upon for long term investments in the real economy. And, lest we forget: the European taxpayers and the European savers are the same people, they are the European citizens.

Better Finance on the Banking Union

« Back to Basics – Economies Before, During and After the Crisis »

Following the successful conference on the BETTER FINANCE Manifesto on 28 March 2014, we can now announce the next conference organised in cooperation with our Icelandic member organisation Samtök Fjárfesta. Thanks to some early preparatory work on their behalf we can already present you with a very enticing overall draft programme covering the stay in Iceland from the 26th to the 28th of June 2014.

The conference that will take place on Friday 27 June will take a closer look at the buildup to and fallout of the financial crisis. « Back to Basics – Economies Before, During and After the Crisis » can count on the participation of Gabriel Bernardino, Chairman of EIOPA (European Insurance and Occupational Pensions Authority), and Laurent Degrabiel, Head of Investment & Reporting at ESMA (European Securities and Markets Authority) amongst others.

Preliminary Conference Programme

MiFID II: Reining in High Frequency Traders

European Union lawmakers plan to significantly restrict high-frequency trading with new rules that would rein in high-frequency trading (HFT) and tighten up rules related to the use of so-called dark pools.

High-frequency traders use software that allows trading at lightning speed. Whereas large firms have access to such technology, smaller private investors find themselves at a disadvantage.

The envisioned limits to HFT are part of a larger EU legislative effort dealing with issues ranging from commodity derivatives speculation to investor protection. “With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world”, said EU Commissioner for Internal Market and Services Michel Barnier. “While HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability, and isn’t a source of market abuse”.

The European regulatory response to High Frequency Trading is planned for inclusion in a revised version of the markets in financial instruments directive. MiFID II is expected to come into force in 2016 and will intensify rules relating to HFT, such as forcing firms to register with regulators and disclose trading algorithms.

The European Parliament is expected to adopt the MiFID II text formally at a plenary vote in April 2014. Although the framework (level 1) is now agreed, much work still remains to be done in order to finalize the details of specific provisions which will undergo a further process of consultation, negotiation and publication (level 2).

Better Finance on MiFID II

Limited scope for Key Information Documents (PRIIPS)

In April the European Parliament and Council finally adopted the Regulation on key information that small investors should be given before putting money in a retail investment product.

The new rules would require the financial services industry to provide basic information about their investment products, the risk and return that can be expected as well as the overall aggregate cost that will arise in making the investment. Thus, before signing a contract, all small (non-professional) investors should be given a short and standard format Key Information Document (KID) to help them understand and compare packaged retail and insurance-based investment products (PRIIPs), estimate the total cost of their investment as well as be aware of its risk-reward profile.

Most life insurance products will eventually be subject to the same transparency and disclosure rules as other retail investment products and the Regulation should also to some extent make it easier for consumers to understand, choose and compare products.

Whereas seven years of battling against the positions of vested interest groups yielded some results for consumer interests, the most sensitive and long term retail investment products such as equities and bonds and all personal and occupational pension saving products, remain in the dark.

Unfortunately the scope of the Regulation was thoroughly reduced following lobbying by the industry that succeeded in excluding all shares, bonds, personal and occupational pensions and bank savings products.

Better Finance on KID and PRIIPs

Crowdfunding, occupational pensions and shareholder engagement to back the long-term financing of the EU Economy

On 27 March 2014 the European Commission (EC) adopted a package of measures to stimulate new and different ways of unlocking long-term financing and support Europe's return to sustainable economic growth.

The related communication issued by the EC contained details on three concrete actions (part of a larger set yet to be outlined) to be undertaken with view on long term financing. Some of the actions proposed are of a legislative nature and include:

• a review of the Shareholders' Rights Directive (see article above) to increase shareholder engagement
• a proposal to revise the rules for occupational pension funds (revision of the IORP Directive (see article below) on the activities and supervision of institutions for occupational retirement provision) to support the further development of an important type of long-term investor in the EU
• a communication on crowdfunding to offer alternative financing options for SMEs

During his announcement of these measures Internal Market and Services Commissioner Michel Barnier said that “our financial system must regain and increase its ability to finance the real economy. This includes banks as well as institutional investors such as insurers and pension funds. But we also need to diversify financing sources in Europe and improve access to finance for small and medium-sized enterprises that are the backbone of the European economy. I am confident that the set of measures presented today will contribute to improving the ability of European capital markets to channel funds to our long-term needs.”

Better Finance on the Long-Term Financing of the European economy

Candidate MEPs to Show True Colours in Financial Matters

The launch of the BETTER FINANCE MANIFESTO met with considerable interest as demonstrated by the numerous people who attended our conference at the European Parliament at the end of March.

This manifesto is accompanied by a few concrete questions that were sent out to all candidates and major political parties and groups in the EU. This simple YES / NO questionnaire requires for politicians to show their true colours and directly engage with some of the demands in terms of financial policy by Better Finance.

We look forward to receiving their answers and publish their responses ahead of the EP elections in May. This will allow us to inform the European voters of what each candidate stands for with respect to EU citizens as savers and users of financial services.

Some early responses include those of Martin Schulz, President of the European Parliament and leader of the Progressive Alliance of Socialists and Democrats (S&D), Markus Ferber, MEP from the European People's Party (EPP) and Wolf Klinz, MEP for the Alliance of Liberals and Democrats for Europe (ALDE), amongst others.

Better Finance Manifesto and Questionnaire

Towards ‘True and Fair’ International Financial Reporting Standards

In March 2013, the EU Commissioner for Internal Market and Services, Michel Barnier, mandated Philippe Maystadt to examine ways of reinforcing the EU's contribution to International Financial Reporting Standards (IFRS) and improving the governance of the European bodies involved in developing these standards.

Mr Maystadt's final report published on 12 November 2013 recommends reorganising the current European Financial Reporting Advisory Group (EFRAG) with view on increasing its legitimacy and representativeness by including representatives of the investor community, and especially of retail investors, on its Board.

In this light Better Finance strongly supports the idea of international accounting standards but insists on the reintroduction of the concept of prudence. International accounting standards should also aim for information to be 'true and fair' rather than merely 'useful' as currently defined in the IASB objectives. In addition, failure to refer to Stewardship puts the entire process of convergence of accounting standards as well as their introduction in EU law at risk

Better Finance also requests for Mr Maystadt' recommendations to be implemented, especially where the inclusion of retail investors in the Board of EFRAG is concerned.

To ensure continuity, it was agreed in February 2014 that Philippe Maystadt would continue in his mission as special adviser in order to supervise the implementation of the reforms.

Better Finance on IFRS

There's A New Wind Blowing in International Auditing: is the end of the Big Four’s supremacy nigh?

Back in 2013 Better Finance expressed its concerns regarding the failure of auditors to provide adequate warnings, the lack of rotation of audit firms and especially the domination of the auditing landscape by a few large auditors that provide audit services to the largest listed companies. The quality of the audit remains of utmost importance for the institutional investors that BETTER FINANCE represents.

Signs of increasing competition in the audit market as well as the European Parliament’s endorsement of draft legislation to open up the EU audit services market beyond the ‘Big Four’ firms are welcome news.

The aim of the proposed legislation is to reinforce the independence and the professional skepticism of the statutory auditor, facilitate the cross-border provision of statutory audit services in the EU, contribute to a more dynamic audit market and improve the supervision of statutory auditors and the coordination of audit supervision by competent authorities in the EU.

The European Parliament adopted two texts to this end – a Directive amending the Statutory Audit Directive and the proposal for a Regulation on specific requirements regarding statutory audit of public-interest entities - in a plenary vote in Brussels on 3 April 2014. The Member States in the Council are expected to formally adopt the texts by mid-April.

Better Finance on Audit Reform

IORP II: Hope for Occupational Pension Funds?

On 27 March 2014 the European Commission adopted a legislative proposal for new rules on occupational pension funds (IORPs). The proposal aims at improving governance and transparency of these funds in Europe, promoting cross-border activity, and helping long-term investment.

The proposal has four key objectives:

• Ensure the soundness of occupational pensions and better protect pension scheme members and beneficiaries.
• Better inform pension scheme members and beneficiaries. The proposal would introduce a Pension Benefit Statement standardised at EU level that provided pension scheme members with simple and clear information about their individual pension entitlements.
• Remove obstacles for cross-border provision of services so that occupational pension funds and employers can fully reap the benefits of the single market.
• Encourage occupational pension funds to invest long-term. The proposal would adapt investment rules to allow occupational pension funds to invest in financial assets with a long-term economic profile thereby supporting the financing of growth in the real economy.