EU regulatory outlook: Financial services policy agenda 2024-2029

Bloomberg Professional Services

This article was written by Laura Formisano, Head of EU Office at Bloomberg

As the European Union embarks on a new legislative term, it navigates a multifaceted and challenging environment characterized by significant uncertainty and a global geopolitical divide, shifting the political balance of global economies and bringing diverging responses across jurisdictions. 

It is now time for the EU to address some of its most pressing economic priorities to achieve its competitiveness agenda. EU policymakers are rising to the challenge and aim to deliver measures in the new 2024-2029 term to bridge the EU’s competitiveness gap and attract new financing to revitalize the European economy. A change of trend is even more critical since, without substantial investment, the European Union could have a shortfall of 40% of GDP relative to the US over the euro area’s first five decades, as Bloomberg Economics data suggest. 

Central to these endeavors will be the development of efficient and transparent EU capital markets. The upcoming term will be key for the EU to develop the necessary initiatives, and to review and deepen existing policies to ensure the regulatory framework is well-functioning and effective. At the same time, the EU aims to progress on its digital and sustainable finance agenda, as well as maintain its objective of ensuring the stability of the financial sector towards existing and emerging risks.

This report, produced by Bloomberg’s EU Regulatory Affairs team, delves into the key trends and priorities within several crucial EU regulatory policy areas, and lists some of Bloomberg’s data-driven input and contributions to future policymaking in these areas.

Markets and trading

State of Play: Over the past decade, several initiatives under the Capital Markets Union (CMU) umbrella have transformed the regulatory landscape. Despite significant changes brought by MiFID and EMIR, full integration of EU capital markets remains elusive. 

The focus now shifts to addressing these shortcomings through a revamped CMU strategy. Ensuring the markets work effectively and efficiently to develop scale, making financing more accessible to European companies and ensuring pools of capital are channeled into the EU real economy are more than ever pressing priorities to address. 

Key Policy Priorities

1. MiFID/R Overhaul: The implementation of the revised Markets in Financial Instruments Regulation and Directive (MiFID/R) is crucial. With a significant revamp of the transparency regimes, notably in OTC markets, and a new framework to facilitate the development of pan-EU consolidated tapes providing a single source of market data, MiFIR is expected to massively improve market  transparency and efficiency over the next few years.
2. Improving post-trade efficiency: The European Union is considering shortening the settlement period for securities. At the moment, when a transaction in transferable securities executed on trading venues must be settled by no later than the second business day. Building on ESMA’s advice, the European Commission is working on a legislative proposal to shorten this to one business day, following the US move to T+1 earlier this year and in line with other major jurisdictions. The EU will also implement rules aimed at simplifying cross-border services and enhancing settlement efficiency under the new regime for central securities depositories.

Looking forward: Data transparency and quality are essential for a well-functioning market. Effective implementation of MiFID/R Level 2 measures will be crucial, particularly regarding identifiers and market data. The development of a CTP that genuinely enhances market functionality and integration is also vital. Achieving true capital market integration in Europe requires a regulatory framework that supports seamless data access and market operations.

Digital finance

State of Play: Technological innovation is transforming business operations, particularly in financial services, with data becoming central to EU finance. Generative AI is a market that could reach €1.4 trillion in 2032, according to research by Bloomberg Intelligence.

The rise of AI and its impact present both opportunities and challenges for the regulatory landscape. AI-driven analytics and automation enhance decision-making, risk management, and customer engagement. Yet these advancements also bring regulatory complexities, such as ensuring data privacy, cybersecurity, and ethical usage of AI. The evolving digital finance ecosystem requires regulators to adapt swiftly to maintain market integrity while fostering innovation.

Key Policy Priorities

1. AI Regulation: The EU’s first comprehensive AI Act aims to categorize AI applications by risk and establish specific regimes for large foundation models and generative AI. 
2. Operational Resilience (DORA): Ensuring digital and operational resilience in the financial sector remains a top priority, with new requirements for risk management, incident reporting, and third-party outsourcing.

Looking forward: Regulation should foster innovation while providing clarity and protection for consumers. The AI Act is expected to bring much welcomed transparency and information on how and when AI is involved in making decisions.  An international framework that harmonises regulations, protects users and future-proofs the financial sector will be also beneficial. Balancing regulatory oversight with the need to encourage technological advancements is crucial for the financial sector’s growth and stability. 

Sustainable finance

State of Play: The sustainable finance agenda has gained significant momentum, driven by both the public and private sectors. The EU has led the regulatory agenda on ESG (Environmental, Social, and Governance) initiatives, and aims to further deepen it by completing and reviewing some of its flagship legislation. 

Key priorities will revolve around reducing regulatory complexity and ensuring international consistency as other jurisdictions outside the EU ramp up efforts to develop sustainable finance policy frameworks. 

Key Policy Priorities

1. EU Taxonomy: Over the coming years, the scope of companies required to report under the EU Taxonomy will expand under the Corporate Sustainability Reporting Directive (CSRD). Strengthening interoperability among the EU and other regional taxonomies via international initiatives such as the International Platform on Sustainable Finance (IPSF) will remain a priority.
2. Sustainable Finance Disclosure Regulation (SFDR): The planned review of the SFDR will aim to improve consistency in the EU’s sustainable finance framework and clarify its key concepts and definitions.
3. Corporate Sustainability Reporting Directive (CSRD): Implementing the CSRD by completing the European Sustainability Reporting Standards (ESRS) will stimulate the quality and availability of data.

Looking forward: Regulation can be a force for good by providing much-needed transparency to the sector. To be effective, sustainable finance regulation should be consistent and accessible. Clarity and interoperability will be key to ensuring policies are able to deliver against their intended objectives, and for market participants to effectively implement their sustainability strategies. For example, aligning reporting requirements under the SFDR with European Sustainability Reporting Standards (ESRS) and promoting global regulatory coordination on Taxonomies and disclosures are crucial steps. Access to high-quality ESG data via the CSRD will empower investors to make informed decisions and support the transition to a low-carbon economy.  

Risk, capital, and financial stability

State of Play: Since the 2008 global financial crisis, EU policymakers have been tasked with developing safeguards against a wide range of financial stability risks, while ensuring the European banking sector remains globally competitive. Symbolizing this delicate balancing act is the recent EU decision to delay the Basel III requirements for market risk until January 2026, while pressing ahead with the rest of the Basel III regime from January 2025. 

As activity in the non-bank and market-based finance sector continues to grow, policymakers are also increasingly alert to the need for more transparency on both the volume and quality of lending by non-banks as well as more detailed data on interlinkages with the traditional financial sector. 

Key Policy Priorities

1. Basel III Implementation: Finalizing and implementing the remaining Basel III bank capital standards to enhance financial stability alongside promoting European competitiveness.
2. Non-Bank Financial Institutions (NBFIs): Developing a regulatory framework for NBFIs to ensure comprehensive oversight and risk management.
3. Investment fund regime: The reforms to the AIFMD and UCITS framework for EU investment funds are designed to mitigate financial stability risks and promote harmonization of liquidity risk management. 

Looking forward: At a time of heightened interest rates and global economic instability, the importance of protecting the stability of the financial system to achieve effective risk management becomes much less academic. The EU decision to delay FRTB to better align with the US is a reminder of how fragmentation in international timelines can quickly lead to competitiveness concerns. As a broad and varied range of non-bank financial intermediaries increasingly embed their position within the financial ecosystem, policymakers and regulators should continue to demand greater transparency to mitigate risk. Nonetheless, policymakers should also recognize the important role that non-bank finance plays in the development of capital markets.

Conclusion

Europe needs to unlock new investment to achieve its competitiveness objectives. Fully functioning capital markets are essential to this purpose but a new approach is needed. As the future shape of the CMU will be developed by the new EU leadership, it is essential that all players within the financial sector contribute to this goal. 

At the backbone of Europe’s financial markets, Bloomberg has a key role to play to provide much needed transparent, high-quality data for financial players across Europe, supporting the EU to achieve these ambitious objectives.