On Wednesday 20 September, the Commission will present a legislative proposal to revise the competencies, governance and financing of the three European financial supervisory authorities (ESA). In particular, the initiative will grant the European Securities and Market Authority (ESMA) new direct supervisory competencies and will require financial players to make a contribution to the financing of the activities of the three authorities.
The draft regulation, modifying the text establishing the three ESAs and of which EUROPE has had sight, aims to amend and reinforce the European financial supervisory framework to give the European authorities the resources they need to maintain financial stability and integration in the EU (see EUROPE 11862). It takes the form of a so-called 'omnibus' regulation, aiming to make progress in parallel on amendments to the three legislative texts instituting the European authorities.
Another aim of this proposal is to bring supervision into line with new challenges, particularly Brexit. “The decision of the United Kingdom to leave the EU reinforces the case for more integrated supervision within the EU27 and a reassessment of supervisory relations with third countries so as to ensure proper management of all financial-sector risks”, the draft communication to accompany the legislative proposal states.
Readers may recall that the current European architecture provides for micro-prudential supervision to be coordinated by the ESAs - ESMA for the financial markets, the EBA for the banking sector and EIOPA for the insurance sector - and the competent national authorities, whilst micro-prudential supervision comes under the purview of the European Systemic Risk Board (ESRB), which is made up of the national central banks, supervisors and European institutions.
An extension of competences. To reinforce the convergence of supervision within the EU, the Commission is firstly proposing to strengthen the role of the ESAs in coordinating the activities of the credit ratings agencies, by for instance allowing them to carry out independent examinations of their activities, lay down common supervision priorities for the national supervisors or through early intervention in the event of regulatory arbitration.
Of the three authorities, ESMA is expected to benefit from the broadest extension of its competences. Whereas it directly supervises only a small number of operators, specifically the credit ratings agencies and trade repositories, the Commission is proposing to transfer responsibility for the direct supervision of ratings agencies to ESMA for: - certain funds regulated at European level, such as venture capital funds (EuVECA) and social entrepreneurship funds (EuSEF) (see EUROPE 11862); - certain categories of prospectuses produced by European issuers and all prospectuses drawn up under EU rules by third-country issuers; - data declaration service providers; - and certain administrators of financial benchmarks.
According to the draft communication, these are all areas in which ESMA's direct supervision could help to reduce cross-border obstacles and help increase the efficiency and integration of the market.
Other entities that would come under ESMA's direct supervision are: central counterparties (CCP) located inside and outside the EU, in line with the new supervision mechanism proposed by the Commission in June (see EUROPE 11807).
Equivalence of third-country legislation with EU rules. The prospect of Brexit foreshadows a sizeable challenge: the procedure for granting equivalence of the financial legislation of a third country with the EU rules, through a unilateral Commission decision (see EUROPE 11742).
In its proposal, the European institution calls on the European authorities to carry out regular monitoring of developments in the regulatory framework in third countries with one or more equivalence decisions (see EUROPE 11734), and to submit a confidential annual report to it. Within this framework, ESAs will have to set in place administrative cooperation agreements with the third countries, the Commission states.
Revision of governance. In order to fulfil their mandate and ensure supervisory convergence within the EU, the European Supervisory Authorities must be equipped with a solid governance structure, the draft communication states.
The Commission is effectively proposing to create an independent executive committee within each of the three supervisory authorities, in which it would hold 'observer' status, and which would be made up of full-time members (three each for the EBA and EIOPA and five for ESMA). This committee would be tasked with making decisions by simple majority to tighten up the coordination of supervision practices.
There is also a proposal to change the organisation of the ESRB to take account of recent changes in the institutional environment of the EU, in particular the creation of Banking Union in the Eurozone. In particular, it proposes to institute the fact that the ESRB is chaired by the President of the European Central Bank.
New model of financing. The European institution also hopes that in the future, the budget of the European authorities will be less financed by public resources. Currently, the activities of the ESAs are financed at a level of 60% out of the general EU budget, with 40% from contributions from the ratings agencies. The split is slightly different for ESMA, as the entities placed under its direct supervision also pay supervisory costs.
The Commission is proposing a future means of financing based on three sources: - annual contributions from the financial institutions indirectly supervised by the ESAs; - supervision costs paid by directly supervised entities; - and a balanced contribution from the EU, not exceeding 40% of the total income of each authority.
Although the Commission's draft does not set in stone the precise distribution of the total amount between the various entities, it states that this will be specified in the delegated act, whilst stressing that the financial players' contributions should be “fair and proportionate to the benefit they can draw from the work European Supervisory Authorities”.
Lastly, the Commission's proposal includes measures on sustainable finance and financial technologies (see other article). In particular, the Commission calls upon the ESAs to take account of the specific problems raised by these new challenges in carrying out their duties.
Although the three European supervisory authorities have, since the first reflections on a possible revision of their functioning, said that they were prepared to take on new responsibilities, they have constantly stressed that any additional competencies must be accompanied by adequate resources (see EUROPE 11195). In its draft regulation, the Commission acknowledges that these changes will require extra staff, estimating at 220 the number of employees who will need to be recruited, and investments in technology, the costs of which have been put at €10.2 million for the period 2019-2020.
For further explanations, see the draft communication: http://bit.ly/2haIeMR and the draft 'omnibus' regulation: http://bit.ly/2xsZfrQ (Original version in French by Marion Fontana)