The European Commission has adopted a Communication on Financial Supervision in Europe aimed at driving European recovery in the financial sector (the Communication).

The Communication, amongst other things, proposes reforms to the current financial services committees with the creation of a European Systemic Risk Council (ESRC), a European System of Financial Supervisors (ESFS), and European Supervisory Authorities (ESA). It is proposed that European financial supervision will be based on the two pillars of the ESRC and ESFS.

The ESRC will take on a macro-prudential supervisory role. The Economic and Monetary Affairs Commissioner, Joaquin Almunia, stated that the ESRC would be "charged with assessing potential threats to financial stability that might arise from macro-economic developments and from developments within the financial system as a whole." The ESRC will provide analysis, risk management and recommendations to deal with system-wide risks.

The ESFS will operate in a micro-supervisory role by supervising individual financial institutions. The ESFS will be comprised of the ESA and national financial supervisors, and is expected to be built on shared and mutually-reinforcing responsibilities combining national supervision with European objectives.

The ESA will be created by transforming the existing three Committees of European Supervisors (banking, securities, and insurance and occupational pensions) into Authorities. The three Committees and national supervisors will, in the first phase, be strengthened and a more harmonised set of supervisory powers and sanctioning regimes introduced. In phase two, the Committees will transform into the ESA and will carry out tasks at a European level, whilst national supervisors will carry out the day-to-day supervision of individual companies.

The Communication highlights a number of areas where European or national regulation is insufficient or incomplete, based on a safety first approach. These areas include:

  • the regulation and supervision of hedge funds, private equity and other systemically important market players;
  • tools for early intervention to prevent a crisis;
  • derivatives and other complex financial instruments, initiatives to increase transparency and ensure financial stability; and
  • improving risk management.

Legislation to implement these proposals is expected in the Autumn. Stakeholders are invited to submit their reactions to the Communication before 15 July 2009.

To see the full Communication, please click here.

To see the press release, please click here.