ELTI Position Paper: Increasing market acceptance on the targeted recast of the EU Financial Regulation
On 16 May 2022 the European Commission published a targeted amendment of the EU Financial Regulation, “aiming to strike the right balance by focusing on changes that are really necessary” and included “targeted improvements”, not least on “strengthening the protection of the Union financial interests”.
Due to the absence of impact assessment the effect of the proposed changes on EU Financial Instruments and the benefit of a greater reliance on Implementing Partners was not estimated. Such an assessment would have demonstrated that some of the proposed changes will de facto strongly discourage and consequently slow down the use of EU Financial Instruments, especially for SMEs and small-scale projects. Additionally, some proposals considerably reduce the discretion of the legislator in terms of crisis policy tools and instruments such as REPowerEU.
In this context, the ELTI association would like to highlight proposals based on the practical experience of national promotional banks and institutions (NPBIs) which are implementing partners (IPs) of EU funds, operating directly and/or with financial intermediaries.
ELTI members pay considerable attention to the quality of support provided to the people and the economy as can be seen by the application of ESG criteria, its reporting standards and procedures as well as numerous other measures. Unfortunately, the proposed changes which include additional reporting requirements (e. g. for intermediaries, additional levels of control extending also to all possible sub-contractors, shortening of reporting deadlines and many other critical provisions), do not necessarily serve the purpose of better reporting and might render the EU Financial Regulation de facto unmarketable, at least for small and medium-size operations, as well as considerably reducing the attractiveness of EU financial instruments. Final beneficiaries but also financial intermediaries would expose themselves to too many obligations in light of possible advantages stemming from using EU support, no matter which form it takes and, ultimately, might end up renouncing it. As public institutions dedicated to the general interest, we understand the necessity and difficulties in controlling public budgets and of reporting on the results of public spending, and we therefore call upon a more balanced approach in order not to jeopardise the development of financial instruments that are today of critical importance for the success of major EU policies.
The main principles underlying the amendments proposed in annex 1 are the following:
- Adopting a risk-based proportionality approach: The EU Financial Regulation refers to the key legal principle of proportionality that is also enshrined in art. 5 (1) and (4) and the corresponding protocol of the EU Treaty. ELTI would like to urge the legislators to test as many provisions as possible against this fundamental principle and to apply a risk-based approach. Such a risk-based approach would help to find balanced solutions in the interest of the final beneficiary, of the implementing partner, of the intermediaries and of the EU itself. It would also favour the use of thresholds that could be conceived proportionate to the respective obligations and/or risk(s). Alternatively, or in addition, a general threshold, in analogy to the “low value grant” (but much higher in the case of financial instruments / budgetary guarantees) could be defined. This would be the same for proportionality with regard to tax requirements.
- Reliance on the EU Pillar Assessment: Pursuant to article 158.3 and 158.4, this assessment currently comprises seven pillars, including anti-money laundering and tax fraud, tax evasion.. From the perspective of an implementing partner, the EU should rely on the assessed rules, systems, and procedures of the implementing organisation when it comes to implementing EU funds, which result from a complex and costly exercise. Such a reliance could reduce the administrative burden and thus the cost of implementation of EU funds, to the benefit of all, including notably the EU, the implementing partners and the final beneficiaries themselves. This process would also considerably speed up the implementation of EU instruments to the benefit of the economy and other beneficiaries.
- Drawing the consequences of the plurality of implementing partners under the EU 2021-2027 multi-annual financial framework. Both InvestEU and EFSD+ foresee various implementing partners for EU funds. With over 20 IPs other than the EIB Group having started – and partially already completed – the EU Pillar Assessment process, the role of assessed NPBIs should now be fully recognised. This recognition is not only consistent with the objective of transparency pursued by the European institutions but it is equally an important institutional, operational, and finally political issue which needs to be properly addressed.
When it comes to deploying financial instruments, the keys to success are the ability to act in due time, with the appropriate instrument and to report appropriately, i.e. in a transparent manner with a relevant and accurate set of data. Proportionality and selectivity of data make this possible without imposing excessive burden on all the stakeholders. In this area, the EU can rely on a security framework made up of multiple components: the labelling of the national public financial institutions (pilar), the supervision to which they are subject (risk control, etc.), the reporting obligations and the audits.
True clarifications and simplifications, as proposed in annex 1 below, would help increase the leverage of the EU financial resources on long term investment, thanks to the highly promoted financial instruments and when it involves strengthening the EU action as close to the ground as possible whilst also speeding up the implementation process. NPBIs stand ready to support the EC and the legislators in making the EU Financial Regulation a powerful tool to deliver EU support on the ground, by engaging in constant dialogue as well as bringing in their respective expertise and perspectives.