"One of Bulgaria’s biggest challenges, but simultaneously one of the biggest positive developments, is the country’s intention to join the European Exchange Rate Mechanism," says CMS Partner Elitsa Ivanova. "This is basically the waiting area for the Eurozone and the EU banking union."
The first step in joining European Exchange Rate Mechanism (ERM II) was a joint letter of intention by the Minister of Finance and the Bulgarian National Bank sent in June 2018, Ivanova says, followed by an Action Plan for joining ERM II and participation in the single supervisory mechanism through close cooperation with the European Central Bank. She reports that the Action Plan, setting out the various steps Bulgaria needs to take in order to join ERM II by July 2019, was approved by the Bulgarian government in August 2018.
"Us joining the Eurozone will have profound implications in relation to many sectors, and the whole country," Ivanova claims, noting that her particular field of expertise – banking and finance – is one that will experience serious change.
As drafted, Ivanova explains, the Action Plan already calls for serious interference in Bulgaria’s legislation and institutional functions, primarily in the form of amendments to legislative acts dealing with credit institutions and the bank recovery and resolution regime, the non-banking financial sector and the Bulgarian National Bank. Some of these amendments were already enacted in 2018, while others are expected to be introduced this year, she says. In addition, six Bulgarian banks are undergoing asset quality review and stress tests based on ECB methodology to be completed by Fall 2019 – the second review since 2016, Ivanova reports.
Additionally, as part of the Action Plan, Bulgaria has committed to review its legislation for any gaps in the insolvency framework and strengthen its Anti-Money Laundering framework. The review of the insolvency framework has been delegated to a working group, with changes expected to be implemented in April 2019. The Anti-Money Laundering framework was somewhat controversial, particularly among lawyers. "There is now a concern that requirements related to disclosure of information around anti-money laundering may cut across client-lawyer privilege," Ivanova says, adding that she thinks "the changes resulting from the steps identified in the Action Plan affect a number of areas, and create other issues that previously have not been uncovered."
Still, she says, some factors have not been explicitly indicated in the Action Plan for joining ERM II. Among them is judicial reform and increased efforts to combat corruption and organized crime. The failure to address these issues may be significant, she says, as the EU commissioner responsible for the Eurozone has indicated that "these will be an important element in the overall assessment of whether Bulgaria is ready to join ERM II."
In the midst of Bulgaria’s accession to the ERM II mechanism, the Deputy Governor of the Bulgarian National Bank, Dimitar Kostov, announced his resignation on March 1, 2019. "The press says he intended to do that earlier," Ivanova says, "but he was asked to stay and help with the preparation for joining the ERM II." She refers to reports that Kostov felt that "now the time was right for him to resign and for a new person to take over the banking supervision, seeing how the cooperation with the ECB and the single supervisory mechanism have gained momentum."
Ultimately Ivanova says, even after joining the ERM II, it will take two or three years before Bulgaria can join the Eurozone.
On another subject, Ivanova reports that, as the final Brexit date is approaching, many English-qualified lawyers are concerned about their practices outside the UK. Ivanova, who is herself both English- and Bulgarian-qualified, says, "Brexit poses a lot of issues about what will happen when the UK leaves the EU, what happens with credit and financial institutions, which previously operated on a single passport, in relation to regulated services provided on a cross-border basis after the March 29, 2019." She explains that the mutual recognition of professional qualifications and the ability to practice and establish firms within the EU will also be affected. "I will not underestimate the effect that Brexit will have across the legal market. For us and other international law firms, where the governing law of key transactional documents continues to be English, and where we do a lot of cross-border work, Brexit is definitely a challenge. We are preparing ourselves for the worst case scenario."