Explanatory Memorandum to COM(2009)503 - European Securities and Markets Authority - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2009)503 - European Securities and Markets Authority. |
|---|---|
| source | COM(2009)503  |
| date | 23-09-2009 |
Experience of the financial crisis has exposed important failures in financial supervision, both in particular cases and in relation to the financial system as a whole. President Barroso therefore requested a group of high level experts, chaired by Mr Jacques de Larosière, to make proposals to strengthen European supervisory arrangements, with the objective of establishing a more efficient, integrated and sustainable European system of supervision. The Group presented its report on 25 February 2009. Building on its recommendations, the Commission set out proposals for a new European financial supervisory architecture in its Communication to the Spring European Council of March 2009. The Commission presented its ideas in more detail in its Communication of May 2009 which proposed:
– Establishing a European System of Financial Supervisors (ESFS), consisting of a network of national financial supervisors working in tandem with new European Supervisory Authorities (ESAs), created by transforming the existing European supervisory committees i into a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA), and a European Securities and Markets Authority (ESMA), thereby combining the advantages of an overarching European framework for financial supervision with the expertise of local micro-prudential supervisory bodies that are closest to the institutions operating in their jurisdictions; and
– Establishing a European Systemic Risk Board (ESRB), to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole. To this end, the ESRB would provide an early warning of system-wide risks that may be building up and, where necessary, issue recommendations for action to deal with these risks. i
Two open consultations were conducted in the development of these proposals. Firstly, following the report of the high-level group chaired by Mr Jacques de Larosière and the publication of the 4 March 2009 Commission Communication, the Commission organised a consultation from 10 March to 10 April 2009 as input to its Communication on Financial Supervision in Europe published on 27 May 2009. A summary of the public submissions received can be found on:
ec.europa.eu/internal_market/consultations/docs
Secondly, from 27 May to 15 July 2009, the Commission organised another consultation round, inviting all interested parties to comment on the more detailed reforms presented in the May Communication on Financial Supervision in Europe. The responses received were for the greater part supportive of the suggested reforms, with comments on detailed aspects of the proposed ESRB and ESFS. A summary of the public submissions received can be found on:
ec.europa.eu/internal_market/consultations/docs
The May Commission Communication on Financial Supervision in Europe was accompanied by an impact assessment analysing the main policy options for establishing the ESFS and ESRB. A second impact assessment accompanies these proposals, examining the options in more detail. The second impact assessment report is available on the Commission website.
Contents
- Legal elements of the proposal
- Budgetary implications
- 2. Consultation of the interested parties
- 3. Impact assessment
- 6. Detailed explanation of the proposal
- 6.1. Establishment of the ESAs and their legal status
- 6.2. Tasks and powers of the ESAs
- 6.2.1. Develop technical standards
- 6.2.2. Powers to ensure the consistent application of Community rules
- 6.2.3. Action in emergency situations
- 6.2.4. Settlement of disagreements between national supervisory authorities
- 6.2.5. Colleges of supervisors
- 6.2.6. Common supervisory culture, delegation of tasks and responsibilities and peer reviews
- 6.2.7. Assessment of market developments
- 6.2.8. International and advisory role
- 6.2.9. Collection of information
- 6.2.10. Relationship with the ESRB
- 6.2.11. Safeguard
- 6.3. The internal organisation of the ESAs and the ESFS
- 6.3.1. Board of Supervisors
- 6.3.2. Management Board
- 6.3.3. Chairperson and Executive Director
- 6.3.4. Joint Committee of European Supervisory Authorities
- 6.3.5. Board of Appeal
- 6.4. Financial provisions
- 6.5. General and final provisions
- 6.6. Key differences between the three Regulations
The Court of Justice has acknowledged i that Article 95 of the Treaty relating to the adoption of measures for the approximation of legislation for the establishment and functioning of the internal market provides an appropriate legal basis for setting up a 'Community body responsible for contributing to the implementation of a process of harmonisation', when the tasks conferred on such a body are closely related to the subject-matter of the acts approximating the national legislations.
The financial and economic crisis has created real and serious risks to the stability of the internal market. Restoring and maintaining a stable and reliable financial system is an absolute prerequisite to preserving trust and coherence in the internal market, and hence to preserve and improve the conditions for the establishment of a fully integrated and functioning internal market in the field of financial services. Moreover, deeper and more integrated financial markets offer better opportunities for financing and risk diversification, and thus help to improve the capacity of the economies to absorb shocks. Financial integration and stability are therefore mutually reinforcing. The establishment of the ESFS will be accompanied by the development of a single rule book which will ensure uniform application of rules in the EU and thus contribute to the functioning of the internal market. The task of the ESAs will be to assist the national authorities in the consistent interpretation and application of the Community rules.
As the tasks to be conferred on the Authorities are closely linked to the measures put in place as a response to the financial crisis and to those announced in the Commission Communications of 4 March and 27 May 2009, they can, in line with the Court's case law, be established on the basis of Article 95 of the Treaty.
Community action can address the weaknesses highlighted by the crisis and provide a system that is in line with the objective of a stable and single EU financial market for financial services – linking up national supervisors into a strong Community network. However, the focal point for day-to-day supervision will remain at the national level, with national supervisors remaining responsible for the supervision of individual entities. In this way, the provisions do not go beyond what is strictly necessary to achieve the objectives pursued. The proposals are therefore in accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty.
For the transformation of the existing European supervisory committees into effective ESAs, enhanced resources are needed - both personnel and budgetary. An overview of the budgetary implications of these proposals is presented in the impact assessment report and accompanying legislative financial statements (attached to this proposal).
In order to take account of sectoral specificities, three separate Regulations are needed to establish the Authorities for banking, insurance and occupational pensions, and securities. The broad thrust of these proposals is however identical. This memorandum therefore first discusses the common elements and briefly touches upon the differences between the three Regulations.
The objective of the ESAs shall be to contribute to: (i) improving the functioning of the internal market, including in particular a high, effective and consistent level of regulation and supervision, (ii) protecting depositors, investors, policyholders and other beneficiaries, (iii) ensuring the integrity, efficiency and orderly functioning of financial markets, (iv) safeguarding the stability of the financial system, and (v) strengthening international supervisory coordination. For this purpose, each ESA shall contribute to ensuring the coherent, efficient and effective application of the relevant Community law.
The ESAs will be Community bodies with a legal personality and a key element of the proposed ESFS. The latter shall function as a network of supervisors and comprise the national authorities in the Member States, a Joint Committee of European Supervisory Authorities, to cover cross-sectoral issues, and the European Commission. While the ESAs should enjoy maximum independence to objectively fulfil their mission, the Commission has to be involved where institutional reasons and the responsibilities under the Treaty so require.
The main decision-making body of each ESA will be its Board of Supervisors, consisting of the heads of the relevant national supervisors as well as the Chairperson of the respective Authority. The Chairperson will preside over meetings of the Board of Supervisors and the Management Board, and act as the head and representative of the Authority. The day-to-day management of each Authority will be in the hands of an Executive Director. As for the location of the new ESAs, it is proposed to maintain the present place of residence of the existing European committees of supervisors, as this allows for a fast and effective transition to the new regime. Section 6.3 discusses the internal organisation of the ESAs in more detail.
The ESAs will take on all the tasks of the existing European supervisory committees, but in addition have significantly increased responsibilities, defined legal powers and greater authority, as set-out in the Commission Communication of 27 May 2009 and agreed upon by the European Council of 18-19 June 2009.
The European Council endorsed the Commission's proposal that a single EU rule book should be established, applicable to all financial institutions in the Single Market. To this end, differences in the national transposition of Community law stemming from exceptions, derogations, additions or ambiguities must be identified and removed, so that one harmonised core set of standards can be defined and applied. To contribute to this, the Authorities will, in areas specified in the relevant sectoral legislation, develop draft technical standards. These standards constitute an effective instrument to strengthen Level 3 of the Lamfalussy structure, which currently is limited to the adoption of non-binding guidelines. The areas where the Authority may develop such draft standards concern issues of a highly technical nature where uniform conditions for the application of Community legislation are needed. These matters do not involve policy decisions and their content is tightly framed by the Community acts adopted at Level 1 (see the accompanying Commission Staff Working Paper for a detailed discussion on the necessary changes to the relevant Community legislation). Development of the standards by the ESAs ensures that they benefit in full from the specialised expertise of national supervisors.
The draft technical standards will be adopted by the Authority on the basis of qualified majority of the members of the Boards of Supervisors, as defined in Article 205 of the Treaty. The Community legal order requires the Commission to subsequently endorse these draft standards in the form of regulations or decisions so as to give those direct legal effects. In very exceptional cases, and only for reasons of Community interest, the Commission may decide to endorse the standards in part, or with amendments, or not at all, the reasons for which it has to make available to the Authority. The Commission's proposal is without prejudice to discussions on future procedures in the context of the transition to a new Treaty.
For the purpose of consultation with stakeholders, a Stakeholder Group will be established for each ESA, consisting of representatives of the industry, financial sector employees and users of financial services. The relative proportions of each should be balanced and no one group should dominate over the others. In those areas not covered by the technical standards, the ESAs shall, like the existing European supervisory committees, have the possibility to issue non binding guidelines and recommendations to national supervisory authorities and financial institutions and market participants. If in any specific case authorities choose not to comply with the guidelines and recommendations it should explain its decision to the Authority.
Even with a single set of harmonised rules, the application of these rules may, in occasional cases, lead to differences of opinion on the application of Community legislation. Without prejudice to the initiation of infringement proceedings by the Commission against Member States, the ESAs should therefore have a general power to contribute to ensuring coherent application of Community legislation. To this end, a mechanism should be put in place to address behaviour by national supervisory authorities who are considered to be diverging from the existing Community legislation (including the technical standards discussed in 6.2.1). This mechanism consists of three different steps:
First, the ESAs, on their own initiative or upon request from one or more national supervisors or from the Commission, would investigate these cases and, where necessary, adopt a recommendation for action addressed to the supervisory authority. Within the general duty of compliance with Community legislation the supervisory authority would be called to comply with the recommendation within one month.
Second, if the recommendation is not complied with, the European Commission may, after being informed by the ESA or on its own initiative, take a decision, requiring the national supervisory authority to either take specific action or to refrain from an action. The latter shall, within ten working days of receipt of the decision, inform the Commission and the ESA of the steps it has taken or intends to take to implement this decision.
Third, in the exceptional situation that the supervisory authority does not comply with the latter, the ESAs may as a last resort adopt a decision addressed to financial institutions in respect to Community law which is directly applicable to them (i.e. Regulations). This is without prejudice to the Commission's powers to enforce its own decision.
The ESAs shall fulfil an active coordination role between national supervisory authorities, in particular in case of adverse developments which potentially jeopardise the orderly functioning and integrity of the financial system in the EU. However, in some emergency situations, coordination may not be sufficient, notably when national supervisors alone lack the tools to respond rapidly to an emerging cross-border crisis. The ESAs should therefore, in such exceptional circumstances, have the power to require national supervisors to jointly take specific action. The determination of a cross-border emergency situation involves a degree of appreciation, and should therefore be left to the European Commission. This is subject to the safeguard clause (see 6.2.11). In parallel, work should be accelerated to build a comprehensive cross-border framework to strengthen the European Union's financial crisis management/resolution systems, including guarantee schemes and burden sharing.
A mechanism is proposed to ensure that relevant national supervisory authorities take due account of the interests of other Member States, including within colleges of supervisors. If a supervisory authority disagrees on the procedure or content of an action or inaction by another supervisory authority where the relevant legislation requires cooperation, coordination or joint decision making, the Authority, at the request of the supervisory authority concerned, may assist the authorities in reaching a common approach or settle the matter. This mechanism consists of three possible steps: i
First, if one or more national supervisory authorities request the ESA to assist in resolving such disagreements, it may first set a phase of conciliation between the authorities to try to reach agreement among themselves, with the involvement of the Authority as necessary in a mediatory capacity.
Second, if, after a phase of conciliation, they have not been able to reach such an agreement, the ESAs may, through a decision, settle the matter. i However, this would clearly be exceptional as in most cases the respective national authorities should be able to come to an agreement in the preceding conciliation procedure.
Third, in case of non-compliance by a supervisory authority with the previous decision, the Authority may also decide to adopt decisions addressed to financial institutions specifying their obligations in respect of Community law which is directly applicable to financial institutions.
It should be stressed that the dispute settlement mechanism should only address material issues, e.g. cases where action or inaction by a supervisory authority has a serious detrimental impact on the ability of a supervisory authority to protect the interest of depositors, policy holders, investors, or persons to whom services are provided in one or several other Member States, or on the financial stability of these Member States. The Authority reserves the right not to launch a settlement procedure or adopt any decision where such requirements are not fulfilled. These arrangements are subject to the safeguard clause (see 6.2.11).
Colleges of supervisors are central to the EU supervisory system and play an important role in ensuring a balanced flow of information between home and host authorities. The ESAs will contribute to promoting the efficient and consistent functioning of colleges of supervisors and monitoring the coherence of the implementation of Community legislation across colleges. Against this background, the ESAs may participate as observers in colleges of supervisors and receive all relevant information shared between the members of the college.
The ESAs shall play an active role in building a common European supervisory culture and ensuring uniform procedures and consistent supervisory practices throughout the Community. In combination with the mechanism to settle disagreements between national supervisory authorities, the common supervisory culture should help build trust and cooperation, and may increasingly create opportunities for supervisors to delegate certain tasks and responsibilities to one another. The ESAs shall facilitate this by identifying tasks and responsibilities which can be delegated or jointly exercised as well as by promoting best practices. In this respect, the Authority shall encourage and facilitate the set-up of joint supervisory teams. Moreover, the ESAs shall periodically conduct peer review analysis of national supervisory authorities.
One of the new tasks assigned to the existing European supervisory committees in the revised Commission Decisions adopted on 23 January 2009 is the monitoring, assessing and reporting on trends, potential risks and vulnerabilities in the banking, insurance and securities sector. Although the proposed ESRB will be responsible for macro-prudential analysis of the EU financial sector, the ESAs should continue the work of the existing European supervisory committees in this area as: (i) the focus of their analysis is different, i.e., micro-prudential analysis provides a bottom-up analysis, rather than macro-prudential analysis which is top-down, and (ii) their analysis may serve as helpful input into the work carried-out by the ESRB.
Through these proposals the Commission is clearly responding to the weaknesses identified during the crisis as well as to the G20 call to take action to build a stronger, more globally consistent, regulatory and supervisory system for financial services. The ESAs could serve as helpful contact points for supervisory authorities from third countries. In this context, they may, without prejudice to the competences of the European Institutions, enter into administrative arrangements with international organisations and the administrations of third countries. The ESAs may also assist in preparing equivalence decisions pertaining to supervisory regimes in third countries. Moreover, the ESAs may, upon request or on their own initiative, provide advice to the European Parliament, the Council and the Commission or publish opinions, including with respect to the prudential assessments of cross-border mergers and acquisitions. The latter should provide for additional safeguards to ensure a sound and objective assessment of future cross-border mergers or acquisitions.
At the request of the Authority, supervisory authorities and other public authorities of the Member States shall provide the Authority with all the necessary information to carry out the duties assigned to it by this Regulation. Moreover, the Authority shall, in collaboration with the supervisors operating in colleges of supervisors, define and collect as appropriate all relevant information from supervisory authorities, in order to facilitate the work of colleges of supervisors. It shall establish and manage a central system to make such information accessible to the supervisory authorities in colleges of supervisors. In principle, all information should be transferred to the ESAs by the national supervisory authorities.
The proposed framework for EU supervision can only work if the ESRB and ESFS cooperate closely. Indeed, the objective of the reform is to ensure a smoother interaction of supervision at the macro-prudential and micro-prudential levels. In fulfilling its role as macro-prudential supervisor, the ESRB would need a timely flow of micro-prudential information, while micro-prudential supervision by national authorities would benefit from the ESRB’s insights on the macro-prudential environment. The Regulations also specify the procedures to be followed by the ESAs to act upon recommendations by the ESRB and how the ESAs should use their powers to ensure timely follow-up to recommendations addressed to one or more national supervisory authorities.
In line with the Ecofin and European Council conclusions of June 2009, which stress that, without prejudice to the application of Community law and recognising the potential or contingent liabilities that may be involved for Member States, decisions by the ESAs should not impinge on the fiscal responsibilities of the Member States, a safeguard clause is introduced. This clause ensures that, where a Member State considers that a decision taken under Article 10 (i.e. emergency decisions) or 11 (i.e. settlement of disagreements) of these Regulations impinges on its fiscal responsibility, it may notify the Authority and the Commission that the national supervisory authority does not intend to implement the Authority's decision, clearly demonstrating how the decision by the Authority impinges on its fiscal responsibilities. Within a period of one month the Authority shall inform the Member State as to whether it maintains its decision or whether it amends or revokes it. Where the Authority maintains its decision, the Member State may refer the matter to the Council and the decision of the Authority is suspended. The Council shall, within two months, decide whether the decision should be maintained or revoked, acting by qualified majority. For Authority decisions adopted under Article 10, an expedited procedure applies to take into account the need for rapid decisions in emergency circumstances.
Each ESA shall comprise: (i) a Board of Supervisors; (ii) a Management Board; (iii) a Chairperson; and (iv) an Executive Director. Moreover, a single Board of Appeal should be established for all three ESAs.
The Board of Supervisors is the main decision making body of the ESAs and will among other things be responsible for the adoption of the draft technical standards, opinions, recommendations, and decisions described in section 6.2 of this explanatory memorandum. The Board of Supervisors shall be composed of:
– the Chairperson of the respective ESA, who will chair the meetings of the Board, but shall be non-voting;
– the Head of the relevant national supervisory authority in each Member State;
– one representative of the Commission who shall be non-voting;
– one representative of the ESRB who shall be non-voting;
– one representative of each of the other two European Supervisory Authorities who shall be non-voting, and
– where relevant, the Board may decide to admit observers.
As a rule, decisions by the Board will be taken by simple majority, except for those decisions pertaining the setting of draft technical standards and guidelines and decisions in relation to the articles on financial provisions, for which qualified majority voting will be used. The Board may set up panels for dispute settlement. However, the final decision is adopted by the Board of Supervisors on proposal from this panel.
The Management Board shall ensure that the Authority carries out its mission and performs the tasks assigned to it. In particular, it should be responsible for preparing the Authority's work programme, adopting the rules of procedure, and play a central role in the adoption of its budget. It will be composed of the ESA's Chairperson, a representative of the Commission, and four members elected by the Board of Supervisors among its members, who shall act independently and objectively in the Community interest. The Executive Director may participate in meetings of the Management Board without the right to vote.
The ESA shall be represented by a full-time independent Chairperson, who shall be responsible for preparing the work of the Board of Supervisors as well as chairing both the meetings of the Board of Supervisors and the Management Board. The day-to-day activities of the ESAs shall however be managed by an Executive Director, who, similarly to the Chairperson, shall be a full-time independent professional. He or she shall be responsible for the implementation of the annual work programme and take the necessary measures to ensure the functioning of the ESA. Both persons shall be selected by the Board of Supervisors on the basis of merit, skills, knowledge of financial institutions and markets, and experience relevant to financial supervision and regulation, following an open selection procedure. The candidate selected by the Board of Supervisors for the position of Chairperson shall be subject to confirmation by the European Parliament. The term of both offices shall be five years and may be extended once. Such extension would depend on the outcome of an evaluation executed by the Board of Supervisors.
Within the proposed structure, cross-sectoral cooperation will be fundamental so as to reflect the relevant market trends and realities. A Joint Committee of European Supervisory Authorities will ensure mutual understanding, cooperation and consistent supervisory approaches between the three new ESAs. A Subcommittee to the Joint Committee shall be established to specifically address cross-sectoral issues, including financial conglomerates, and ensuring a level playing field. While the actual decisions on, for example the Financial Conglomerates Directive, are being taken by the individual ESAs, the Joint Committee should ensure that common decisions are taken by the ESAs in parallel.
An appeal system will ensure that any natural or legal person, including national supervisory authorities, may in first instance appeal to a Board of appeal against a decision by the ESAs to ensure the coherent application of Community rules (Article 9), action in emergency situations (Article 10), and the settlement of disagreements (Article 11). The Board of Appeal shall be a joint body of three ESAs, i.e., it will deal with issues related to banking, insurance and securities. The Board of Appeal will have six members and six alternates with relevant knowledge and experience, excluding current staff of the national supervisory authorities or other national or Community institutions involved in the activities of the Authority. Two members of the Board of Appeal and two alternates shall be appointed by the Management Board of each ESA from a short-list proposed by the European Commission.
These provisions deal with the budgetary aspects of the ESAs and stress that the revenues of the Authorities may stem from different sources, e.g. obligatory contributions from the national supervisory authorities, a subsidy from the Community or fees paid by the industry to the Authority. It also specifies the procedures for the annual establishment, the implementation and control of the budget. The Framework Financial Regulation for bodies established under Article 158 of the Financial Regulation shall apply.
The general provisions set out practical issues related to staffing, liability of the ESAs, professional secrecy obligations, data protection, access to documents, language arrangements, headquarter agreements and participation of third countries. Within three years from the effective start of operations and every three years thereafter, the Commission shall publish a report on the functioning of the ESAs and the procedures laid down in the Regulation. This report will also evaluate progress achieved towards regulatory and supervisory convergence in the fields of crisis management and resolution in the EU.
The main differences between the three proposed Regulations concern the objectives of the Authorities, the scope of action, and the definitions, which are adapted to the specificities of the relevant sector and existing Community legislation. Moreover, the European Council concluded that the ESAs should also have supervisory powers for credit rating agencies. ESMA would be responsible to register credit rating agencies. ESMA would also be empowered to take supervisory measures such as withdrawing the registration or suspending the use for regulatory purposes of credit ratings. Supervisory powers could include the power to request information and to conduct investigations or on-site inspections. The responsibilities and powers of ESMA with regard to credit rating agencies will be defined in an amendment to the Regulation on Credit Rating Agencies.