European Regulatory Radar

Welcome to the latest edition of European Regulatory Radar

The new issue of European Regulatory Radar brings you the latest updates impacting financial services providers in the region. Complementing the UK Regulatory Radar series, European Regulatory Radar provides an overview of the wider economic and political environment, progress across the regulatory agenda and deep-dive articles on some of the most important regulatory developments.

Ursula von der Leyen’s new College of Commissioners has now been finalised, signalling the start of the next five-year legislative cycle. The new programme will focus on reinvigorating the EU economy, boosting competitiveness, reducing bureaucracy and closing the innovation gap with the United States and China.

In its latest Financial Stability Review, the ECB highlights “elevated financial stability vulnerabilities in a volatile environment”. With inflation closer to 2%, concerns have shifted to downside risks. Although markets have been resilient so far and the EBA’s December Risk Dashboard (RDB) showed bank profitability to be holding up well, the ECB cautions against complacency, flagging key areas of vulnerability such as stretched valuations in equity and corporate bond markets, high risk concentration and sovereign debt sustainability challenges in several euro area countries. It also notes the need for a comprehensive set of measures to increase the resilience of the non-bank financial intermediary sector.

Insurers face similar issues, with EIOPA’s Financial Stability Report noting “a challenging risk landscape marked by high uncertainties”. EIOPA is monitoring key and emerging areas of risk, including insurers’ holdings of real estate, asset intensive reinsurance transactions, and digitalisation and cyber. Nevertheless, EIOPA’s 2024 stress test results reveal that European insurers remain well positioned – see more below.

Policy initiatives have continued to progress.

Banks — 1 January 2025 marked the start of implementation of the bulk of the final Basel reforms through the amended Capital Requirements Regulation (CRR3). Implementation of the market risk components (FRTB) will follow on 1 January 2026, coinciding with the start of the UK’s Basel 3.1 implementation.

The 2025 EBA EU-wide stress test exercise has now commenced, with submissions due in April, June and early July, and results expected in early August. The 2025 test will have a wider geographical reach and greater focus on proportionality than the 2023 iteration.

The ECB has published the results of its 2024 Supervisory Review and Evaluation Process (SREP) which guides the calibration of capital requirements, qualitative measures and supervisory priorities. Overall, the ECB found the euro area banking sector to have remained resilient, with banks maintaining capital and liquidity positions well above regulatory requirements and good profitability. The average SREP score was broadly stable. However, internal governance, risk management and operational resilience are still key areas of concern.

The ECB’s updated supervisory priorities for 2025 to 2027 reflect the need for prudence in the face of persistent geopolitical tensions and continuing uncertainty around the macroeconomic outlook . The ECB will focus on banks' resilience to these threats, the importance of timely remediation of known material shortcomings and the need to address challenges stemming from digital transformation and new technologies. The ECB emphasises the importance of strengthening credit risk management frameworks, addressing persistent deficiencies in risk data aggregation and reporting (RDARR), and implementing robust digitalisation strategies to manage the risks associated with new technologies. For more, see below.

Insurers — The revamped Solvency II and new Insurance Recovery and Resolution (IRRD) Directives have been published in the Official Journal, and their provisions will generally apply from 30 January 2027. EIOPA and the European Commission are busy developing the technical details that will sit underneath these Directives.

The second batch of Solvency II technical consultations covers biodiversity risk management, regulatory technical standards (RTS) on managing sustainability risks, diversity of management bodies, revised guidelines on undertaking specific parameters, market and counterparty risk exposures in the standard formula (SF), and implementing technical standards (ITS) on which entities should be treated as 'central governments' when calculating the SF SCR.

EIOPA is consulting on capital requirements for insurers holding cryptoassets, proposing a 100% haircut regardless of balance sheet treatment and investment structure. However, it remains possible that a differentiated treatment could be applied to certain cryptoassets authorised under the Markets in Cryptoassets Regulation (MiCAR).

In addition, as a result of proposed threshold changes to Solvency II, EIOPA is now calling for consistent and effective supervisory practices to align these changes to the EU’s Digital Operational Resilience Act (DORA).

Finally, the 2024 EIOPA stress test results have shown the insurance industry to be well-capitalised and able to withstand the associated ‘severe but plausible’ scenario. EIOPA will however continue to monitor for resilience, particularly around liquidity and procyclicality under stressed conditions.

Asset managers — ESMA has launched a data gathering exercise on the costs associated with manufacturing and distributing EU investment funds. The aim is to increase transparency around these costs to help develop a more competitive market for EU UCITS and AIFs.

ESMA has continued to progress the development of the AIFMD II level two materials by consulting on new rules for open-ended loan originating AIFs. The draft rules set out the characteristics that need to be met to permit these funds to maintain an open-ended structure.

ESMA has also published a noteworthy Q&A on its ESG-related fund names guidelines. While it clarifies expectations on exclusions related to controversial weapons and on green bonds, the most interesting comments relate to a 50% minimum investment threshold in sustainable investments for funds that use “sustainable” terms.

Meanwhile, the proposed Retail Investment Strategy is at a crossroads and the shape of any final package remains to be seen.

Capital markets — Following the MiFIR review, RTS are expected to be updated throughout 2025 which firms will need to monitor for the impact on their trade and transactions reporting. ESMA has started the tender process for the bonds consolidated tape.

The European Market Infrastructure Regulation (EMIR) 3.0 requirements for EU counterparties to have active accounts at EU CCPs will apply from end-June. Trade associations are asking the Commission to extend the equivalence decision for UK CCPs (which expires at end of June 2025) in a non-time-limited manner and well in advance of 31 March 2025 to avoid market stress and disruption.

Following publication of the Listing Act package in the Official Journal, Member States are required to transpose the changes to the Listing Directive and MiFID II into national law by 6 June 2026 and for the multiple-vote shares directive by 5 December 2026.

Amendments to the Prospectus Regulation and Market Abuse Regulation have come into effect, subject to exceptions.

Provisional agreement was reached in December 2024 on the review of the EU Benchmark Regulation. In an effort to reduce the regulatory burden, the Council and Parliament have agreed with the Commission’s original proposal that non-significant benchmarks should no longer be within scope of the regulation.

ESMA has recommended a move to T+ 1 in Q4 2027, giving firms just under two years to increase automation in settlement processes in order to meet the compressed settlement time frame.

Operational resilience — DORA took full effect from 17 January and will have a significant impact on many financial entities either based or operating in the EU. Third party risk management, and more specifically critical third parties (CTPs), will increasingly be in the spotlight.

In advance of this deadline, the EBA, EIOPA and ESMA issued a joint statement reminding firms of their obligations and the fact that fines will be imposed for non-compliance.

Digital finance — MiCAR applied fully from 30 December 2024. Financial regulators have confirmed that they will continue to provide ongoing guidance during the initial transitional period as Member States move from applicable national law onto the MiCAR regime. This transitional period will vary by state, up to and including 1 July 2026.

The EBA is consulting on technical elements for the calculation of cryptoasset exposures in relation to their prudential treatment. Although the CRR3 previously introduced a transitional regime for these exposures, the new RTS will further develop the capital treatment for various types of risk and align more closely to the relevant Basel requirements.

All components of the AI Act will apply by August 2026. Ahead of that date, provisions related to prohibited systems will apply from February 2025 and provisions related to generative AI will apply from August 2025. Supplementary guidance will also continue to be issued by the financial regulators.

ESG and sustainable finance — The EBA has finalised its guidelines on the management of ESG risks. The guidelines are prescriptive and cover detailed requirements on materiality assessments, identification and measurement of ESG risks, managing and monitoring ESG risks, and transition plans. They will apply from 11 January 2026, or from 11 January 2027 at the latest for small and non-complex institutions.

Regulation ((EU) 2024/3005) on the transparency and integrity of ESG rating activities has now been published in the Official Journal and will apply from 2 July 2026. The regime recognises that ESG ratings play an important role in global capital markets and consequently addresses the need for them to be independent, comparable where possible, transparent and of adequate quality. For more, see below:

The articles below provide more detailed insights on some of the most significant developments. Click on the links to read more: