ESMA speech on EU capital markets
The chairperson of the European Securities and Markets Authority (ESMA), Verena Ross spoke on EU capital markets ESMA71-1146515930-438 Verena Ross's keynote speech at the Eurofi 2024, 12 September 2024. Ms Ross referenced:
- ESMA’s recent position paper setting out 20 recommendations for deepening the EU’s capital markets.
- Mario Draghi’s report on European competitiveness.
- the proposed EU Savings and Investment Union.
- cost and fees as a critical component when evaluating the benefits of an investment.
- “We should create a voluntary EU-label for “basic” investment products. Such a label could be used by certain financial instruments, such as for example a sub-set of UCITS funds or a plain vanilla corporate bond. Simple advice that meets basic investment needs should go hand in hand with that. Such ‘simplified’ advice (which could be based on streamlined suitability assessments) would be a step that could also benefit firms by reducing compliance costs”.
- Interestingly, Ms Ross notes that small and medium-sized enterprises are the backbone of the European economy. In the past five years, they have created around 85% of new jobs and provided two-thirds of the total private sector employment in the EU.
- Ms Ross proposes that capital markets require convergent supervision. Pan-European market infrastructures would benefit the most from direct EU-level supervision, simply because of their critical role in the European financial system. Moreover, ESMA should act as the gatekeeper for services that are vital to the functioning of EU capital markets and are provided by entities based outside the EU.
ESMA’s second trends, risks and vulnerabilities report of 2024
ESMA published its second risk monitoring report of 2024, setting out the key risk drivers currently facing EU financial markets. Beyond the risk drivers, ESMA’s report provides an update on structural developments and the status of key sectors of financial markets, during the first half of 2024.
Verena Ross, ESMA’s Chair, said that “We continue to see risks in the fund area linked to liquidity mis-matches, particularly in the real estate sector, and deteriorating quality of assets linked to interest rate, credit risk and valuation issues.”
ESA report on risks and vulnerabilities in the EU financial system
The three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) issued their Autumn 2024 Joint Committee Report on risks and vulnerabilities in the EU financial system. The report underlines ongoing high economic and geopolitical uncertainties. The ESAs warn national competent authorities of the financial risks stemming from these uncertainties and call for continued vigilance from all financial market participants. For the first time, the report also includes a cross-sectoral deep dive into credit risks in the financial sector.
Against the backdrop of these risks and vulnerabilities, the ESAs advises national competent authorities, financial institutions and market participants to take specified policy actions, including:
- Financial institutions and supervisors should remain prepared to face the impacts of continued high interest rates on the real economy.
- Credit risk should continue to be monitored and carefully managed as its potential materialisation remains a concern. This underlines the need for adequate provisioning levels and forward-looking provisioning policies, while prudent and up-to-date collateral valuation remain important. Amid rapid expansion of private credit, transparency for non-bank lenders should be improved, while their risk management and loan origination standards may require further scrutiny.
- With ongoing deep uncertainties and recent increases in asset valuations, financial institutions need to be flexible and agile and have proper plans and processes in place to address unexpected short-term multi-fold challenges.
- Financial institutions and supervisors should ensure that consumers are aware of the effects of inflation on real returns for savings and investments generally. Financial institutions and supervisors should remain vigilant regarding the impact of inflation on product development.
- Cyberattacks have been increasing, including successful ones, and the sophistication of attacks is growing. The global IT disruption in July from the CrowdStrike update also shows the extent of vulnerabilities to operational risks. Given DORA, entities operating in the financial sector and their supervisors should address cyber risks more holistically, leveraging on risk management, incident reporting, threat led penetration testing and supervisory cooperation. Entities and supervisors should also be prepared to address challenges brought by new technologies such as artificial intelligence.
For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.
