A Guide to European Regulators and Requirements for Financial Institutions

European financial markets are governed by numerous regulatory bodies and are subject to several different, and sometimes conflicting legal requirements. These regulations can vary wildly by country, region, and continent, making it a challenging task indeed to guarantee compliance across all financial markets.

Here’s what you need to know about compliance for your financial enterprise in Europe.

Governing Regulations to Know

Financial institutions that don’t meet regulations face substantial risk from regulators who are ready to bring the hammer down on non-compliant organizations. As such, it’s critical to understand what is expected of financial institutions doing business in the area. Broadly, the European Union (EU) is regulated by three main compliance frameworks, each with its own standards and practices:

• European Securities and Markets Authority (ESMA)
• Global Data Protection Regulations (GDPR)
• Markets in Financial Instruments Directive (MiFID)

 

European Securities and Markets Authority

Established by the EU in January 2011, the European Securities and Markets Authority is an independent financial regulatory body responsible for maintaining financial market stability and codifying protections for investors.

ESMA also seeks to create a single market with one central set of rules for affected entities to follow, making it easier for all ESMA countries to remain compliant. ESMA achieves this through a variety of activities:

• Register and supervise credit rating agencies
• Develop and enforce rules for derivatives trading
• Investigate market abuse
• Authorize and manage trade repositories
• Cooperate with non-EU regulators
• Promote supervisory convergence
• Encourage supervisory convergence among national competent authorities across member states

As part of these activities, and to create a more consistent playing field for members, ESMA maintains direct supervision of three leading types of financial entities:

• Securitization repositories
• Trade repositories
• Credit rating agencies

ESMA has the authority to conduct investigations into entities, launch probes, and levy fines against non-compliant European securities companies. All financial companies in Europe must embrace ESMA’s standards and develop comprehensive policies for ensuring compliance. 

Depending on the scope of non-compliance failures, ESMA fines can run into millions of euros. Add in the loss of public trust and reputational damage that non-compliance brings, and it’s clear why securities companies need to make ESMA guidelines a priority.

To begin, companies should audit policies for data collection and management. Ideally, data will be stored through systems that make it easy for auditors to search and review. Companies should prioritize the centralization of data through archiving solutions that provide complete transparency into operations. 

By leveraging these types of solutions, companies can automate data handling processes, streamlining any necessary audits and allowing internal teams to devote their energies to other tasks.

Get the latest ESMA news and policy updates here.

 

 

Global Data Protection Regulations

Adopted in full on May 25, 2018, Global Data Protection Regulations represent the EU’s desire to create a single set of data privacy laws for all member states to follow. GDPR law dictates how organizations may collect, process, and retain personal data. It also establishes controls for EU residents in how companies may use or otherwise profit from their data.

GDPR is a necessary replacement for the Data Protection Directive of 1995, an update that acknowledges the need for stronger digital privacy in the internet era. With the globalization of economies and cross-border data flows becoming the new normal, regulators realized that data protection frameworks would need to evolve in kind.

Broadly, compliance with GDPR is met through several processes:

• Obtain explicit consent from individuals before collecting, processing, or storing their data
• Provide individuals with clear and concise information about how the organization will use their data
• Limit the collection and use of personal data to what is necessary for the intended purpose
• Secure personal data using appropriate technical and organizational measures
• Erase or destroy personal data when no longer needed and subject to regular monitoring

Note that GDPR regulations are applicable to any company serving EU residents, even if the company doesn’t have a physical presence in the EU itself. This is a worthwhile distinction that sets EU GDPR apart from other regulation frameworks, and it may soon become the norm.

For example, the United States California Consumer Privacy Act (CCPA) imposes specific compliance and privacy obligations on businesses that collect, store, and use consumer personal information from California residents. Many compare the CCPA vs GDPR based on this similarity, as the two represent a changing era of data privacy where physical boundaries are not, and should not be, a limitation on data security.

For GDPR countries, a failure to comply comes with drastic fines. In 2021, Amazon experienced GDPR fines to the tune of €746 million, which may seem like a drop in the bucket for a company with hundreds of billions in annual revenue—but most companies can’t absorb losses so easily.

Given that the GDPR privacy policy states that any individual can file a claim against a non-compliant organization, every entity should make compliance a top priority.

Learn more about GDPR requirements here.

 

 

The Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive has applied to the EU since 2007, intended to improve the competitiveness of the EU’s financial markets by harmonizing protections and creating a single market for investment services.

While the original MiFID regulation was primarily concerned with stock trading, the regulation was eventually updated and re-adopted in 2018 as MiFID 2–a standard aiming to create a broad, European-wide regulation framework that is consistently enforced across financial institutions and investment firms throughout the region.

The MiFID directive sets requirements for financial firms that provide investment services, such as trading, advising, and market making. It also establishes rules surrounding the transparency of transactions and standardizes financial instruments, primarily addressing five main areas:

• Inducements and unbundling of MiFID II research
• Market infrastructure and transparency
• Investor protection or best execution
• Transaction reporting
• Product governance

MiFID 2 applies to all 27 member states of the EU, and any company doing business in an area covered by MiFID II must comply with its directives. However, this isn’t always easy to do. Achieving the best execution in MiFID 2 means that investors must take all necessary steps to produce the best possible results for their clients when executing orders.

Naturally, financial institutions will have a lot of ground to cover when reaching MiFID 2 compliance. This is another area where having a robust communication platform can pay dividends. For example, there is a provision covering MiFID 2 mobile phone recording which states that all relevant phone conversations and digital communications must be recorded.

Financial institutions may need help understanding these needs, including which transactions must legally be reported and which are considered non-reportable MiFID II transactions. Part of this process involves deploying a trusted archiving solution to retain and coordinate all relevant data in order to stay compliant.

Read more about MiFID II here.

 

 

Manage Your Growing Network of Compliance Obligations

The above is just the tip of the iceberg in terms of European regulators and the obligations faced by financial institutions. There’s a lot to cover, and there’s little room for error. An easy first step is to review company policies surrounding communication, data storage, and transparency.

Given that regulators have expressed interest in ramping up enforcement, this type of strategy will become standard practice. Companies should introduce tools that take the compliance burden off their teams’ shoulders and empower employees with efficient, end-to-end communication. The enterprise-grade communication platform at LeapXpert is the perfect example.

The LeapXpert Communications Platform enables employees to interact with clients on consumer messaging applications and voice channels with strict data security, control, and governance. There’s no better way to fulfill record-keeping requirements for complete regulatory compliance.

Contact us to learn more about how we can help your institution reach its compliance goals.