Spain’s corporate sector is one of the most indebted in Europe. During the crisis it gained global notoriety for being uncompetitive (although this was not necessarily the case, the fact being that Spain was simply a net borrower). Certainly, many Spanish corporates will continue to rely on bank funding – particularly as banks become more competitive and less expensive. However, for those corporates looking to diversify their funding sources, or in search of longer tenors, a high yield bond issuance may be the answer. These were among the many themes discussed at a seminar organised by AFME at BBVA’s premises in Madrid in April. Well-attended by banks, investors, lawyers, issuers and financial advisors, the seminar provided an opportunity for market participants to come together to discuss and better understand issues related to high-yield bond issuance in Europe. Panellists described how the European high yield market has matured into a large, stable source of funding over the past two decades. In particular, Spanish companies have become more active in the last 5 years, not only with respect to issuing high-yield bonds, but with respect to corporate bonds in general. The Spanish high-yield market really came to prominence post-financial crisis and after the collapse of the securitisation market. Until this point, thousands of Spanish companies had been benefiting from cheap bank funding. But with lending constraints and other factors resulting in banks shrinking their balance-sheets, companies began looking for new sources of financing to restructure their debt, expand or for other general corporate purposes. As a result, European banks began embracing high-yield bonds and issuance grew from EUR 44.6 billion a year in 2010 to what is nearly a EUR 100 billion market today, according to AFME’s High Yield and Leveraged Loan data report. The principal force behind the increasing relative size of the high-yield bond market was a process known as “disintermediation”. Disintermediation is where businesses in need of funding bypass bank lending and go directly to the capital markets. While the bank to bond shift is now well-established, there is still work to do for Spain to catch up with more sophisticated markets such as the UK, Germany and Italy. More recently, high-yield issuance volumes have been negatively affected by external factors driving volatility, such as China's economic slowdown, volatile energy and base metal prices and their impact on equity markets, as well as macroeconomic policy events. Fortunately, fresh stimulus measures announced by the ECB and other factors have resulted in an improvement in conditions for the European high yield market. Bond issuance has some clear advantages over bank funding, such as greater flexibility, longer terms (up to 10 years and even 15 in some cases), and lower collateral requirements. In 2016 we are likely to see more issuers come to market, lower default rates, and a race for yield. In this respect, Spanish companies have become more opportunistic than ever before. Many now wish to structure their bonds so that they can be combined with loans – balancing the best of both worlds in their funding mix.

The new film The Big Short portrays the events that led to the sub‐prime crisis. While the crisis began in the US, the ensuing fallout tarnished investment banking’s reputation as a whole, including here in Europe. The result is that a decade later there is still a lack of public trust surrounding investment banks, the products offered and the benefits they bring to the real economy. Is this justified? Has progress been made? Answering the following four questions will help us judge. 1. Are Europe’s banks safer than they were? The short answer is: unequivocally yes. The European Commission’s financial reform programme has reduced the likelihood of bank failure. CRDIV, which implements the Basel III proposals in Europe, has provided a comprehensive set of reforms to improve banking regulation, supervision and risk management. Both capital and liquidity have increased in terms of quantity and quality, with equity capital held by banks at least ten times greater than it was at the time of the crisis, liquidity up around fourfold and leverage broadly halved.introduction of loss-absorbing capacity (TLAC and MREL). Risks which arose through the interconnectedness of banks have been addressed through the central clearing of derivative trades and the imposition of additional capital buffers. The structure and power of supervisors has been reformed, stress tests and other macro prudential tools introduced, and the largest Eurozone banks placed under the watchful eye of the ECB via the Single Supervisory Mechanism. MiFID II will establish pre‐and post‐trade transparency rules to boost transparency in financial markets and broaden best execution standards for the buy side. While the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism ensure that troubled European banks can be wound up (or resolved) in an orderly way, without recourse to taxpayers. However, this is not to say individual financial institutions are free from risk: as the landscape has changed, banks have been obliged to change too. The European banking industry is undergoing an intense phase of strategic change, as firms test out new business models. What was profitable before is often no longer a viable business. There is a welcome emphasis on identifying core activities, achieving sensible returns, and focusing on areas of long term competitive advantage. But this is sometimes a double‐edged sword. For example capital charges have significantly reduced returns and lowered the attractions of many fixed income businesses, which have suffered lower liquidity as a result. And while new technology enables our members to promote efficiencies there is new competition, from fintech companies, and new risks, for example from cybercrime. 2. Do Europe’s banks need more regulation? Right now more regulation is not the answer, but better regulation may be. We therefore welcome the Commission’s Cumulative Impact Assessment, which is the EU’s implicit acknowledgment that there should be a pause. The review will look at the overall impact of post‐crisis financial regulation. We hope this will help eliminate measures that threaten to throttle the real economy. In this context, I would include the unnecessary proposals to introduce Bank Structural Reform (BSR) and a Financial Transactions Tax, both measures which run counter to the growth agenda. Concern also remains over the Basel Committee continuing to push ahead with further regulatory change which will have to be adopted in Europe. Instead of focusing on further reform when the effects of current legislation are uncertain, we should look to the role banking can play in economic growth. The industry has welcomed the Capital Markets Union (CMU) project. We now have a proactive agenda to promote financial markets as a key engine of growth and jobs for the real economy. By channelling much‐needed capital throughout Europe CMU can promote investment into Europe’s businesses and infrastructure, delivering much needed growth. This initiative has the potential to demonstrate the positive impact financial markets can play in wider society. Few would question the idea of a single integrated European capital market. 3. Is there a level playing field globally? Greater consistency is still needed in applying regulation nationally across borders. Without doing so the benefits of projects such as CMU will simply not filter through to the real economy. International regulation is often implemented at the national level, creating opportunities for arbitrage and undermining Europe’s ability to compete. This contradicts the principles laid out by the G20 almost a decade ago: that a global crisis must be met with a global plan for reform and a level playing field. This needs to be overcome. 4. Is there unfinished business? Media comment continues to show that, while we have moved on from the culture depicted in The Big Short, public trust in banking is still a long way from being re‐established. Culture and ethics are now at the heart of banks’ corporate governance, but change will take time, and has to percolate down through the whole bank. Management must visibly lead on ensuring that the tone from the top permeates through the bank. Regulators in Europe and indeed across the world are putting in place new supervisory plans, new codes of conduct are being worked on such as the global FX code mentioned, and bankers in some jurisdictions are being made subject to increased personal accountability – examples being the UK Senior Managers and Certification Regime and the Dutch Disciplinary Regulations for Banks Board. But the question remains as to whether enough progress has been made. Cultural change can be and is being inspired by these regulatory initiatives. But only the organisations themselves can undertake the necessary change from within. Banks are key cogs in the global economy and in order best to serve their clients, they have a duty to restore their credibility.

We moved on 2 November to new offices at Canary Wharf, after almost six years at St Michael’s House. The change has exceeded our expectations: we have more space and light and after a few weeks we are well-established in our new premises. Feedback from the many members who have visited the office has been very positive, and we look forward to welcoming many more of you here in the New Year. The improved office environment has been achieved at a significantly lower cost than our premises in George Yard in the City of London. The move coincides almost exactly with our sixth anniversary. AFME came into being in the aftermath of the financial crisis and this is a good moment to take stock. Europe’s wholesale banking industry recognised the need to speak with one, constructive voice to policy-makers. Since then, we have worked hard on a succession of dossiers, from CRDIV to BRRD and MiFID 2, Banking Union and more recently Bank Structural Reform, Capital Markets Union (CMU) and the UK’s Fair and Effective Markets Review. Our mission has been to provide fact-based evidence to policy-makers to ensure that regulation is fair and consistent with the aim of creating deep, liquid and functioning capital markets for Europe. It would be premature to say that after six years the job is done and that we are poised to return to a "new normal". Banks are still making the headlines for the wrong reasons. It would be a bold claim that the industry is understood and appreciated by the population at large as much as by regulators and parliamentarians. There is a change in tone, however, as we saw, in the UK, when Mark Carney, Governor of the Bank of England, spelt out that there will be no Basel IV: no further wave of transformational prudential regulation. Banks are much better capitalised than before the crisis, and this factor, together with reduced leverage and clear rules on resolution, means that the risk of banks failing and the public bearing the consequences, has considerably reduced. The European Commission’s CMU project is unambiguously good news. There is at last an appreciation that healthy capital markets contribute to much needed jobs and growth. It will take more than one Commission term to implement the key measures, whether on securitisation or private placements and insolvency reform, but the direction of travel is clearly positive. Sometimes, there are contradictions in policy: we think Europe’s proposed Bank Structural Reform is unnecessary, in the light of the significant reform of capital requirements and the resolution regime. Negotiations over the EU 11’s pointless and unworkable Financial Transactions Tax continue at a time when Europe needs to move on from FTT and focus efforts on the Commission's growth agenda. And notwithstanding the absence of Basel IV, there are significant challenges ahead, not least the Fundamental Review of the Trading Book and the introduction of loss-absorbing capacity (TLAC and MREL). For European financial markets, a major uncertainty comes from the possible exit of the UK from the EU following a referendum likely to be next year. Europe’s financial markets are very substantially concentrated in the UK, and decoupling of the UK would not advance the EU’s objective of building a Capital Markets Union. With that thought, I extend to all members season’s greetings and best wishes for the New Year.

ESMA’s Market Abuse Regulation (MAR) takes effect on 3 July 2016, with publication of the final wording coming early in the new year. But further refinement is still needed to create effective, efficient regulation that identifies market abuse. ESMA’s Market Abuse Regulation (MAR) will replace the current Market Abuse Directive (MAD) for EU Member States. And unlike MAD, MAR is directly applicable regulation that both banks and regulators will have to comply with once it goes live in July. That means putting in place new processes, training and systems. But with the final wording imminent, some last minute fine-tuning of the draft technical standards is needed if the final regulation is to be effective and practical in July. The first area to tackle is the overly broad definition of investment recommendations. MAR stipulates that both marketing communications and traditional investment recommendations have detailed and thorough disclosure notices. Substantive, independent research based on models and rating systems may benefit from in-depth disclosures. However, it is doubtful whether this is appropriate for marketing communications. Indeed, a five word sales note with pages of disclosures could be considered excessive. A more elegant, user-friendly solution would be a simple link saying “click here for the disclosures”. Including marketing communications within MAR could lead to distributors being more reluctant to offer their daily insights that form an important part of their ongoing relationship with investors, and creates more efficiency for fund holders by improving information flow – less market information available, so less trading volumes, liquidity and, ultimately, less growth. Similar tweaking of ESMA’s definition of ‘order’ is also needed in relation to tracking suspicious transactions. Quotes, requests for quotes – ESMA has included them all in its definition of ‘order’ for MAR, contrary indeed to the original MAR Level 1 text. If all quotes and requests for quotes are treated as orders, banks will be building systems well beyond the July 2016 go-live date. An understanding of context is needed. For example, proposals to use automated systems to spot suspicious trading behaviour are not appropriate in all settings. Despite the rise of online trading, trades can still be executed over the phone. Automated systems have the potential to miss nuance in speech, raising erroneous ‘red flags’ when trigger words are mentioned. Automated trading systems do have a role to play in identifying market abuse. But the draft requirements should reflect the differences between trading systems – whether electronic or human – rather than assuming automation. Similarly, order definitions should not too broad as to hinder the practicalities of trading and back-office processes. There are also data protection issues. Banks will be required to record sensitive personal data of all individuals not directly employed by the institution. For example, contractors or outside agencies brought in to work on specific, short-term projects. This requirement needs to be on a best efforts basis. Banks should be able to trust the information supplied by contractors as being accurate. Do regulators really need all this data? Are regulators are creating a rod for their own backs by collecting reams of data, which has the potential to obscure actual market abuse? Building new systems, training staff and ensuring a business is fully compliant with MAR by July 2016 is a big task. Progress has been made and we are getting closer to having appropriate processes in place. Refining MAR is not a case of weakening regulation. Rather, it is about creating efficient, implementable processes that effectively prevent market abuse. It is vital to get this right. Thus, the text needs to be clarified to accord with the timeframe (and the Level 1 text).

Trust in the financial services sector remains stubbornly low. According to the Edelman Trust Barometer, only half of the countries surveyed put their faith in financial services. And the picture is even worse for banks. From 2014 to 2015, trust in banks declined in two thirds of the countries covered, with the highest levels of distrust seen in the EU where only 34 per cent of the informed public say they trust banks. While the situation has improved markedly since those first painful years post-crisis, banks are still a long way from being seen as a vitally important part of the economy and society. This continuing lack of trust can obscure the good work that is being done by the industry to reform itself. Banks have undertaken significant internal reforms and balance sheet restructuring. Management systems and corporate governance have been bolstered. Significant changes have been introduced in remuneration policies and practices in order to eliminate some of the purely revenue-based incentives that encouraged excessive risk-taking and misconduct. Risk management is no longer regarded as a secondary function: in most firms it is now at the centre of the decision-making process. Similarly, compliance is involved at an early stage in the product development and client take-on processes. Of course, these systems are not yet fail-safe, but they are much stronger than before and continue to improve. Yet little of this improvement has registered among the public. And it is not helped by media coverage of past scandals in the sector, brought back to the forefront of the public mind each time regulators hand down new fines. Therefore, we need to keep up the momentum on improving standards. The UK Fair and Effective Markets Review last year is an excellent example. The review aimed to assess the way wholesale markets operate, to help restore trust in those markets and to influence the international debate on trading practices and standards. One of the Review’s recommendations resulted in the establishment of a FICC Market Standard Board (FMSB) which already has strong participation from the global banking community. The FMSB is an industry-wide initiative comprising regulators, infrastructure, and buy- and sell-side market participants. It aims to produce guidelines, good practice and guidance in areas ranging from staff training to supervisory convergence. And regulators outside the UK are keeping a close eye on its output, given that it intends to achieve global adherence. There are other initiatives too. The BIS FX Global Code of Conduct project, for example, has set itself the ambitious deadline of May 2017 to produce comprehensive global standards for FX trading. And there is also the UK Senior Managers Regime, which imposes personal liability on senior managers of banks for regulatory breaches in their area of responsibility. This is already changing the way that UK banks think about structure, risk and conduct. But as well as improving standards, we need to do more to address the culture of banking itself – the way banks are run, the way bankers behave, and what needs to be done to effect deep and lasting change in both. This goes beyond legislation. IMF managing director Christine Lagarde said earlier this year: “Regulation alone cannot solve the problem. Whether something is right or wrong cannot be simply reduced to whether or not it is permissible under the law. What is needed is a culture that induces bankers to do the right thing, even if nobody is watching.” Although cultural change is already beginning to take place, we have to recognise that it is a long-term project, as can be seen from the Trust Barometer figures. It is not enough that the industry changes – wider society must recognise that it has done so. This requires greater transparency and better communication. Banks need to show that they have a positive contribution to make. A good example in this respect is the work AFME has done to help raise awareness of alternative financing options for European SMEs, which face particular challenges in accessing finance. Positive initiatives from the industry to help stimulate economic growth will go a long way towards helping to rebuild public trust. Culture and ethics are now at the heart of banks’ corporate governance, but change will take time, and has to percolate down through the whole bank. Indeed it may take a generation. To ensure that the tone from the top permeates through the bank, management must visibly lead. If the highest revenue-generating banker commits a regulatory breach, for instance, he or she must be dealt with in exactly the same way as a junior member of back office staff. Of course, cultural change can be inspired or instigated from outside an organisation. But only the organisation itself can undertake the necessary change from within. Banks are key cogs in the global economy and in order to best serve their clients, they have a duty to restore their credibility.

The European Commission’s financial reform programme has made the EU financial services sector fundamentally more resilient, reducing the likelihood of bank failure and containing its effects should this occur. But the right balance needs to be found so regulation does not prevent the financial sector from carrying out its basic economic functions and supporting future economic growth. The Commission’s recent consultation on the impacts of capital requirements on the European economy kicks-off the Capital requirements regulation and directive (CRD4/CRR) review process and represents the ideal opportunity to determine where that balance should sit. Untangling the effects of multiple regulatory change Unfortunately, however, the Commission’s consultation does not take into account the significant impact of the measures other than capital requirements that are also part of the CRD4/CRR – notably liquidity and leverage requirements. Moreover, its scope does not extend to the Bank Recovery and Resolution Directive – a new prudential framework that goes hand in hand with the CRDIV, providing authorities with the toolkit to manage recovery and resolution, ensuring the continuity of a bank’s critical functions and restoration of viable parts. That said, another consultation exercise – the recently launched cumulative impact assessment, issued in conjunction with the Commission’s Capital Markets Union (CMU) action plan – should help in understanding the broader implications of EU prudential regulation within the overall financial reform package. But looking at current legislation is only part of the picture. Beyond the EU, there are several initiatives underway at international level that are likely to further increase capital requirements and significantly reduce the prudential framework’s level of risk sensitivity. Some are already calling this programme of change “Basel 4”. It is crucial for the Commission to consider how these future developments may impact European growth. Financing of growth requires daily decisions to be made on risk, so there is a concern that a lack of risk sensitivity in the capital framework will lead to a mispricing of risk, creating a misallocation of capital across the economy, less diversification across firms’ portfolios, and potentially increasing risk to the financial system as a whole. Moreover, the uncertainty banks face regarding calibration of the various requirements, the sometimes contradictory interactions between the requirements, and the prospect of yet more regulation, complicates their decisions on how to best allocate capital. Uncertainty thus ends up affecting the range and pricing of the products and services they can offer to their customers. When examining the prudential framework and the impact it has on the economy, the Commission’s analysis and review must therefore be comprehensive and forward-looking. Making sure the end-user doesn’t lose out Banks have responded to previous regulatory reform by taking multiple restructuring actions, both organisationally and in their product offering. The regulatory changes driving these responses may represent an over-correction, beyond what could be considered as “necessary deleveraging”. Indeed, the decrease in lending to corporates and the structural and comparably small share of market-based financing in Europe are signs that bank customers are being presented ever-decreasing choice. This will potentially be worsened by the current draft bank structural reform proposal for the separation of banks’ trading activities While there may not yet be an apparent impact on prices to customers, the extensive cost cutting and activity reduction undertaken by banks over the past years means that banks may have been able to shield their core customers from much of the impact of regulation. However, this can only be a finite exercise, particularly given persistent low returns and the increasing pressure from shareholders for higher returns which are driving significant organizational and managerial changes at several leading banks. Regulators too cannot be indifferent to low industry returns. Banking profitability plays an important role in contributing to financial stability as retained earnings are the main source of additional capital needed to meet higher capital requirements. There is also evidence that low returns on capital have forced many banks to exit or reduce market-making activities. This implies that they are now being more selective in offering their balance sheet capacity, with market liquidity in both primary and secondary markets being affected. There are concerns that market liquidity could be further affected when interest rates rise. End-users will ultimately lose out and face a less diversified and more costly capital markets offering. Getting the balance right To be clear, the industry fully supports much of the post crisis regulatory repair programme and its key objectives. However, with the development of the CMU in the EU being one of the key priorities for policymakers, it is essential that the Commission examines how the prudential framework, including prospective further changes emanating from Basel, affects banks’ ability to provide market liquidity. Moreover, even once economic growth returns and monetary policy normalises, restrictive regulation means that the industry may very well not be in a position to support this growth. The Commission now has a once-in-a-generation opportunity to put in place a prudential regulatory framework to support growth and develop European capital markets. This framework must involve finding the appropriate trade-off between the benefits of financial stability and a banking sector that is able to provide credit to the economy. But this balance should not be jeopardised by unnecessary regulatory layering.

September saw the unveiling of the European Commission's much anticipated action plan for building a Capital Markets Union (CMU). Among the many targets of the wide-ranging initiatives are Europe's small and medium-sized businesses (SMEs). Certainly, providing more funding options for Europe's small businesses has been recognised as essential for investment and business. SMEs are the backbone of the European economy, accounting for 99% of all companies in the EU and two-thirds of private sector employment. Yet they are struggling to raise capital, particularly during the all-important development phase. The underlying challenges are threefold. The first is a general lack of awareness about the funding options available and EU small businesses still lean heavily on financing sources, such as banks. Indeed, data from AFME's Bridging the Growth Gap report shows that there is three times as much bank lending provided to EU SMEs as compared to their US equivalents. The second is the underdevelopment of other sources of financing – such as venture capital and angel investing – for SMEs in the EU. Yet, for start-ups or growing companies with unpredictable cash flows, equity finance may be more suitable than loans. Finally, a shortage of equity, particularly for the smallest and growing SMEs, is problematic. Europe's savings market structures are less geared to equity investing and our pot of pension savings is not sufficient to provide this much-needed equity. For example, EU pension funds provide a mere €4.3 trillion in investable assets compared to €14.9 trillion in the US. A structural challenge With such roadblocks holding back growth, will the Commission's CMU action plan provide sufficient support to overcome them? While capital markets should not and will not replace bank funding for SMEs, it is clear that the EU needs a more diverse funding landscape in order to improve access to market-based funding sources at all stages of SMEs' development. In this respect, it can be useful to draw some comparisons with the US market, particularly given the similar €17 trillion annual GDP of the two regions. However, it is important to bear in mind that EU markets are different than the US and should be developed based on the different values and economic and political structure of Europe. For example, the US benefits from greater diversity and flexibility of funding sources. US private pension funds play a bigger role and their risk appetite is greater than Europe. They invest more in the equity asset class than their European peers (53% vs. 37% of funds managed). In the United States, friends, family and other private investors provide 33% of SME financing, compared with just 9% in Europe. And in 2013, business angels in the US invested €20 billion in SMEs versus only €6 billion in Europe. The private equity and venture capital (VC) sector is also less developed in Europe. For instance VCs invested €26 billion in US SMEs in 2013 versus only €5 billion in Europe. Yet, VCs and business angels play a valuable role in the rapid evolution of the latest-generation entrepreneurial companies in America. In addition to capital, they help with strategy and business contacts. Often, their expertise is invaluable to young businesses. In this respect, properly structured and regulated crowdfunding is important too, particularly for the smallest of SMEs. While the US provides a useful model for comparison, Europe must adapt SME funding to the specificities of the domestic market. Finding cross-border funding opportunities Also key to the success of the CMU will be helping SMEs identify and access cross-border funding opportunities. The multitude of financing available and the fragmented nature of pan-European support measures often make it difficult for SMEs to procure cross-border funding. This is despite the fact that many governments and pan-European institutions provide extensive loan and equity support. For example, navigating the different funding sources offered by 28 member states and their individual treatment of tax on debt and equity can be a challenge. The Commission has therefore pledged to explore ways of building a pan-European approach to better connect SMEs with a range of funding sources. In this respect, a more comprehensive and flexible approach to SME financing in Europe could be beneficial to growth. SMEs are watching with interest to see how the Commission's CMU proposals will improve access to finance. Most of the action plan is still to be converted into concrete actions and legislations, however, fostering a culture of risk-taking and innovation among our SMEs and investors will be vital to this. Similarly, encouraging a culture of greater equity involvement and improving access to and information on all of the various funding options will do much to boost growth.

It is indisputable that a significant overhaul of banking regulation was required after the financial crisis, which exposed a range of vulnerabilities in the financial system. The subsequent regulatory reform programme, which has included over 40 major pieces of legislation, has radically reshaped the way financial markets operate and substantially improved the resilience of the banking sector. New regulations have been introduced to improve banks’ capital and liquidity positions, strengthen market infrastructure and capital markets transparency, and ensure the resolvability of financial institutions. As a result, banks are now much less likely to fail, and where they to do so any losses are expected to be borne by bank investors rather than taxpayers. Viewed in isolation many of these measures were both necessary and have had their intended effects. Bank leverage has fallen, the quantity and quality of capital and liquidity held by banks has risen strongly, and the overly complex products of the crisis years have largely disappeared. Yet the cumulative impact of the swathe of post-crisis regulations is beginning to give rise to some unintended consequences. The recent launch of a review of the Capital Requirements Directive (CRD IV) on bank financing of the economy is therefore very timely. The European Commission's (EC) consultation focuses largely on the impact capital regulations have on the availability and pricing of end-user borrowing. It is encouraging that special consideration is being given to the financing for small and medium-sized businesses, corporate borrowing and infrastructure projects, which are key drivers for economic growth in Europe. On the other hand, the consultation ignores key elements of the CRD: leverage and liquidity requirements. While these requirements are not yet fully applicable, their impact is already felt by banks and their customers since market pressure does not afford banks the luxury of waiting for final regulatory texts or phased-in implementation periods. In response to these and other regulations, banks have sought to refocus their business on key products and service offerings in favour of core clients. This has resulted in fewer financing options and a reduction in choice, particularly for those customers unable to directly access the markets themselves. The impact on overall loan availability in terms of volume and pricing has been relatively muted so far. Borrowers still benefit from the banks’ willingness to absorb often most of the cost of new regulation, rather than pass it on to customers, and from highly expansionary monetary conditions. This is unlikely to remain the case as monetary conditions normalise and bank shareholders increase the pressure on managements to deliver improved returns. There is also a risk that by focusing on one corner of the canvass we miss the whole picture. Examples of this bigger picture are the planned overhaul by the Basel Committee of the way the capital regime itself functions, or the changes in capital requirements for banks’ trading books. The Basel reforms are clearly evolving towards a capital framework that will be significantly less sensitive to the levels of risk banks face and are likely to have a negative effect on capital allocation to business and productive investment financing. While we have seen reforms which make a strong contribution to financial stability, these other measures have less clear cut financial stability benefits and also carry the potential for larger detrimental impacts on financial markets liquidity. European proposals for the structural separation of trading businesses are also likely to exacerbate the situation. Something more ambitious is therefore needed to capture the cumulative impact of proposed regulations and the way that different reforms interact with each other and impact on markets. The Basel Committee’s plans to consider the coherence of its entire regulatory package are a move in the right direction. What is conceivable on a global scale must be within reach on a European level. We therefore believe the EC should turn its focus from a partial consultation of CRD IV to a systematic assessment and review of its entire financial regulatory agenda, both existing and future. Such an approach would improve regulatory coherence and consistency and help strike the right balance between enhancing banking stability and maintaining the efficient functioning of financial markets. It is a bold undertaking but one in which the EC can and should grasp for the benefit not only of European banking and capital markets but European economic growth.

At AFME’s Annual General Meeting (AGM), held 8 September, the Board elected BNY Mellon's Michael Cole-Fontayn as its new Chairman, succeeding Frédéric Janbon of BNP Paribas. Michael, who is Chairman of EMEA at BNY Mellon, has been a highly engaged member of the Board since 2011, with an acute understanding of the relationship between flourishing capital markets and economic growth. I look forward to working with him to drive this agenda further. I would also like to express my gratitude to Frédéric Janbon, AFME’s outgoing Chairman, who has led the Board with distinction over the last two years. During Frédéric's Chairmanship AFME has become an even stronger voice in both European and international capital markets. I am also pleased to welcome Guy America, Co-Head of Global Credit, Securitized Products & Public Finance at J.P. Morgan, as a Vice Chairman. Towards a Capital Markets Union As our recently published annual review shows, while there is much work still to be done on issues such as MiFID, Bank Structural Reform, and Growth in the new year, it is clear that representing the industry’s position on the European Commission's ambitious Capital Markets Union (CMU) project will be an important challenge for AFME in 2016. The Commission has set CMU as a flagship project for its five-year term. A European-wide union will stimulate cross-border investment, diversify funding opportunities, and reduce risks faced by market participants, an initiative that AFME whole-heartedly supports The next milestone for the project is the publication in the next few weeks of the Commission’s action plan on CMU. We will be holding a conference this December in Brussels, together with Euromoney and ICMA, to discuss the plan and the next steps for CMU. Commissioner Hill is confirmed as the keynote speaker and the event should provide the ideal forum for the industry to respond in detail to the Commission's action plan. Supporting Europe's SMEs October will see AFME release the first pan-European guide for SME financing as part of our work supporting the European Growth agenda. SMEs are at the heart of Europe's economy and a key driver for economic growth, innovation and employment, yet two thirds of EU SME finance comes from bank loans. This leaves tremendous scope for small businesses to tap additional funding sources for loans, bonds and equities. The Guide explains the main types of SME finance available, namely loans provided by banks and non-banks, bonds and equity finance, and introduces emerging finance sources such as venture capital, private equity, peer-to-peer (P2P) lending platforms and crowd funding websites. By understanding the diverse funding sources available to them, European SMEs will be better able to grow and create employment. In this respect, I hope the Guide will help facilitate decision-making on critical funding choices when it is released next month.

This has been an eventful year for the FCA, with both a substantial expansion in its remit and a significant internal restructure. Mr. Martin Wheatley, the outgoing CEO, remarked at the FCA’s July AGM that he was disappointed to be going when there is still plenty of 'unfinished business'. AFME’s compliance team has taken a look at this unfinished business, and we have some suggestions on how the FCA can finish it in the best interests of both consumers and businesses. First off there is MiFID II. Much of the FCA’s work here is sensible, and all of it well-intentioned. But there are exceptions. The FCA has led the charge on seeking to change the rules on the paying for investment research. If the FCA view prevails in Europe, most FICC research will be banned from being provided free of charge, and all research will be banned from being paid for out of dealing commission. A significant number of other European regulators, however, think differently. In common with these regulators, AFME believes that the appropriate way forward is to permit the use of enhanced commission sharing agreements, which adequately unbundle the payment for execution from the payment for research and provide complete transparency. Then there is market abuse. No-one opposes the idea of making it easier for regulators to catch those who abuse the markets. But the new Market Abuse Regulation will restrict the ability of investment banks to send recommendations (such as morning notes, market colour and the like) to professional clients, and thus enhance liquidity and ultimately capital growth. Also, swathes of sensitive personal data of individuals working in financial services on specific transactions will have to be provided to the regulators on an ongoing basis, even when none of the individuals is suspected of wrongdoing. None of this is in the interests of the consumer. And a leak, or cyber attack, would be catastrophic. We also have the Senior Managers Regime. This reversal of the burden of proof for senior individuals in banks, so that they are now guilty of a breach of regulation until proven innocent, is an important sea change in English law. Senior managers stand to lose not just their reputation and earning ability, but also their house and livelihood as a result. This reform sits uneasily in the year of the 800th anniversary of Magna Carta, and must be handled sensitively, and carefully, by regulators that are not enforcement-led. We welcome recent comments by senior regulators at the FCA and the PRA that the regime is to be applied proportionately, but comments in speeches by outgoing regulators will give little comfort compared to changes in regulation. Other areas where the Senior Managers Regime can be improved include changes to the way regulatory breaches need to be reported, and clarity about the scope of the regime for those individuals abroad who are not directly in touch with UK clients or working for the firm in the UK. Last, but by no means least, is the UK’s Fair & Effective Markets Review (FEMR), where Mr. Wheatley was one of the review’s progenitors. This is already a prime example of co-operation between the industry and regulators, and it really might succeed in improving culture, standards and behaviour in the FICC markets going forward. That would, indeed, be a worthwhile piece of finished business, as well as a suitable legacy for Mr. Wheatley.