While the abolition of the FSA has dominated the headlines, developments in Europe could be far more important. The new European regulators have started work and the PRIPS consultation and MiFID and IMD Reviews are looming large on the regulatory horizon. We set out here a brief summary of the likely themes for 2011 and beyond.

The creation of three new European Supervisory Authorities (ESAs) has sparked much debate as to the effect these will have on national supervisors, such as the FSA. According to the Commission (EC), the new ESAs (which have replaced the former level three committees1) represent the “transformation of advisory committees into watchdogs with a bite”. The FSA in its Business Plan describes itself as acting in a policy influencing and national supervisory role.

The new EU supervisory system commenced operation from 1 January 2011. As with all things new, the launch was heralded with yet more websites:

  • European Banking Authority (EBA) here  
  • European Insurance and Occupational Pensions Authority (EIOPA) here  
  • European Securities and Markets Authority (ESMA) here  
  • European Systemic Risk Board (ESRB) here  

Keen to demonstrate its pre-eminent position in financial services regulation, the FSA has been quick to offer useful comments in a statement about the ESAs (here) and in a paper on policy considerations (here).

Ordinarily, the financial services sector leaves it to lawyers and academics to watch the EU legal horizon, safe in the knowledge that the FSA can be expected swiftly to introduce new rules to implement (often by ‘gold-plating’) any relevant changes. The ESAs will have a far more direct effect.

On a micro-prudential level, the daily work of the ESAs will see them drive co-ordination within the current system of colleges of national supervisors set up to watch over cross-border financial institutions. The new authorities have enhanced powers to develop harmonised supervisory roles and improve the supervision of cross-border institutions. Taking EIOPA as an example, its powers and functions are extensive, including the following:

  • the power directly to instruct individual companies in certain circumstances (although this can only be exercised under very strict conditions)  
  • responsibility for developing binding proposals for technical standards and ensuring consistent application (unlike CEIOPS, whose technical standards were non-binding)  
  • taking on a quasi-mediatory dimension as it will work to resolve cases of disagreement between national supervisors – although EIOPA is required to endeavour to facilitate a compromise, in the event that an agreement is not reached it will have the final say  
  • playing the central co-ordinating role between national supervisors in emergency situations – the existence of which will be declared by the Commission  
  • taking a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services.  

EIOPA will also be able to issue warnings in cases where a financial activity poses a serious threat to its objectives and, through one of its proposed powers, will be able to impose temporary bans on risky financial products and activities. Perhaps one of the most significant powers, from the FSA’s perspective, is that it is proposed EIOPA may, on its own initiative, investigate an alleged breach or non-application of EU law by a competent authority. Where national supervisors implement their obligations under EU law incorrectly, EIOPA will have power to issue instructions to the national supervisor concerned. The day-to-day supervision of firms is, however, set to remain at national level.

The ESRB was established at the same time as the ESAs to strengthen the monitoring and assessment of potential threats “arising from the interaction between macro-economic developments and the financial system in the EU” and worldwide. The ESRB co-ordinates with the Financial Stability Board and International Monetary Fund in order to achieve this. On the macro-prudential level, the role of the ESRB is continually to assess the stability of the whole financial system. Should the ESRB identify risks, it will issue recommendations to the individual Member State(s) concerned and the ESAs will become involved in the provision of data to the ESRB when needed.

With the FSA set to be decommissioned in favour of three new authorities, the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and Financial Policy Committee (FPC), and the establishment of three new ESAs, what will happen to domestic financial supervision? In its Business Plan for 2010/11 the FSA states that it will be working to ensure that the new European regulatory architecture and the ESAs are effective. The effect of the ESAs clearly cannot be ignored and their creation as “policy-making fora will fundamentally change the nature of the FSA which will increasingly become the European supervisory arm of a centralised European policy decision-making process”.

One wonders at the wisdom of breaking up the FSA at a time when UK Financial Services Plc needs a strong, co-ordinated voice at the heart of Europe, protecting its world-leading position in financial services from interference by the EU.

MiFID review

The European Commission has also launched a review of MiFID, three years after implementation of the Directive, to make suggestions for possible improvements in the changed economic climate post-2007. With regard to investor protection and the provision of investment services, the EC makes the following suggestions for amendments to the Directive:

  • clarification of the scope of the Directive  
  • modification of the conduct of business rules to reflect the current economic climate  
  • updates to investment firms’ authorisation provisions and organisational requirements.  

As it stands, member states have the option to exempt categories of firms. In the review, the Commission proposes firms currently exempt from MiFID should still be subject to requirements, in national legislation, similar to the following MiFID provisions:  

  • persons seeking authorisation should pass the ‘fit and proper’ test (see below)  
  • investment service providers shall be under a duty to act in the best interests of the client when transmitting orders received from clients.  

With regard to investment firms’ conduct of business obligations, MiFID currently permits firms to provide investors with a means to buy and sell certain noncomplex financial instruments without undergoing any assessment of the suitability of the given product. Such services are deemed to be ‘execution only’. The Commission proposes either amending the articles describing non-complex financial instruments so as to clarify what they are, or deleting the relevant article thereby abolishing the execution-only regime altogether. This, understandably, has provoked an angry reaction from those providing execution-only services.  

At the moment MiFID only requires persons who effectively direct the business of an investment firm to be sufficiently experienced and have a good enough reputation (the ‘fit and proper’ test) to ensure the sound and prudent management of an investment firm. However, the EC now proposes that both executive and non-executive directors be subject to the fit and proper test. The FSA, of course, already requires this under the Approved Person regime. The Commission also proposes that compliance, risk management and internal audit functions should be able to report directly to the board of directors so as to strengthen board involvement in these three. In this regard, the review proposals are playing catch up with the gold-plated standards already applicable under FSA regulation.  

For a copy of the MiFID review click here.  

Review of the Insurance Mediation Directive (IMD)

The Commission has also identified that consumers often have an insufficient understanding of insurance products and the risks associated with them. With that in mind, the Commission believes that a revision of the IMD should focus on addressing the following:

  • insufficient quality of information provided to consumers  
  • conduct of business rules – conflicts of interest and transparency  
  • legal uncertainty due to unclear definition of scope in the IMD  
  • the burdensome notification system.  

As a result the Commission commenced a consultation, which closed on 28 February 2011. The revision of the IMD aims to bring about effective regulation in the retail insurance market and ensure a level playing field between all participants involved in the selling of insurance products. HM Treasury and the FSA published a joint response on 2 March 2011 in which both agreed that the priorities of the IMD Review are transparency, management of risk and elimination of conflicts of interest. We await an announcement on the results of the consultation.  

For a copy of the consultation paper click here.

PRIPS consultation

The EC has also closed its latest consultation on legislation for its Packaged Retail Investment Products initiative (PRIPS). Adopting conduct of business principles from MiFID and running in parallel with the FSA’s own RDR initiative and communications about products (see below), the PRIPS initiative adds another layer of complexity to the regulatory scene. Whilst still worrying about how to define a PRIP, the EC proposes new rules on pre-contractual product disclosure but to use the existing MiFID, IMD and UCITS framework to regulate the sale of PRIPS.

For a copy of the consultation paper click here.


The current changes to the regulatory structure in the UK (post-FSA) will not directly effect the rules governing regulated firms. The regulatory architecture in the UK will dictate who supervises and enforces the rules (until such time as the ESAs take over) but the rules themselves are still dictated by the EU. The PRIPS initiative, and MiFID, IMD and other reviews by the Commission could lead to very significant changes in the directives that determine our regulation and may warrant closer attention than some of the out-going FSA’s own programmes (like RDR). Together, therefore, the potential for upheaval is very great indeed and that is why the death throws of the FSA should not distract attention from the real engine of change on the Continent.