The European Commission has proposed a series of reforms to strengthen and further centralise supervision of the European capital and financial markets at the EU level with the aim of creating stronger and more integrated markets, including:
taking steps to further centralise the supervision of the EU capital markets at the European Securities and Markets Authority (ESMA);
improving the governance and funding of the European Supervisory Authorities (the ESAs);
implementing measures to reduce fragmentation of the insurance market and increase supervision by the European Insurance and Occupational Pensions Authority (EIOPA); and
promoting FinTech and innovation in European financial markets.
The EU’s financial supervisory framework underwent a significant overhaul in the aftermath of the global financial crisis, primarily as a result of the establishment of the three ESAs, as well as the European Systemic Risk Board for the monitoring of macro-economic risks. As the EU has now largely recovered from the financial crisis, the EU is now moving forward to advance the Banking Union and the Capital Markets Union in order to keep pace with European and global developments in these markets.
On 20 September 2017, the European Commission (the “Commission”) issued a communication to the European Parliament, the European Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions entitled “Reinforcing integrated supervision to strengthen Capital Markets Union and financial integration in a changing environment” (the “Communication”) proposing reforms aimed at promoting growth and investment in Europe through further financial integration of the Single Market and the Economic and Monetary Union and the establishment of a full Capital Markets Union.
The proposals follow on from the Commission’s autumn 2016 and spring 2017 public consultations. They also take into account the March 2014 recommendations of the European Parliament and the review report prepared by the Commission in August 2014.
The proposals, if adopted, would be aimed at improving the mandates, governance and funding of the ESAs for banking (the European Banking Authority), for securities and financial markets (ESMA), and for insurance and pensions (EIOPA) and giving the ESAs coordination powers over day-to-day supervision by national competent authorities. The ESAs will set EU-wide priorities for supervision in “Strategic Supervisory Plans”, against which national competent authorities would be assessed. National competent authorities will be required to draw up annual work programmes in line with the relevant Strategic Supervisory Plan.
The key proposals outlined in the Communication include:
(i) Moving towards a single capital markets supervisor
The Commission believes that well-integrated capital markets are essential for the financing of the EU’s real economy and for a well-functioning Capital Markets Union and act as important shock-absorbers in the Economic and Monetary Union. In addition, integrated capital markets reduce the potential need for public risk-sharing.
Currently, ESMA only has direct supervision over a limited number of market operators and activities (e.g., credit rating agencies and trade repositories), and most supervision of the capital markets, including the approval of new listings, is at the national competent authority level.
In the Communication, the Commission proposes to extend ESMA’s direct supervision. In particular, in a bid to streamline procedures for companies accessing the EU capital markets and to remove the potential risk of supervisory arbitrage, it is proposed that the Prospectus Regulation is amended to transfer direct supervision of, and approval authority over, certain prospectuses to ESMA, from national competent authorities (such as the UK Financial Conduct Authority).
Such prospectuses would include:
- prospectuses for certain wholesale non-equity securities;
- prospectuses relating to asset-backed securities;
- prospectuses that are drawn up by specialist issuers, such as property companies, mineral companies, scientific research-based companies and shipping companies; and
- prospectuses drawn up by non-EU country issuers.
This proposal would streamline the process especially for approving prospectuses to be distributed across borders by establishing a single point of entry to tap EU capital markets, without further notification needs, reducing the administrative burden for market operators. In addition, ESMA will benefit from economies of scale in the approval of prospectuses.
In addition, ESMA would have greater roles in:
- Benchmarks: the supervision of benchmarks that are deemed to be critical (e.g., EURIBOR) and endorse all non-EU benchmarks used in the EU (e.g., LIBOR);
- Data Reporting Services: the authorisation and supervision of these data reporting service providers who report transactions involving certain financial instruments to regulators and the market, in order to reduce fragmentation and costs and to ensure the same quality and reliability of data across the EU;
- Market Abuse: the co-ordination of market abuse cases and the right to act in specific cases, where certain orders, transactions or behaviour give rise to well-founded suspicion and have cross-border implications for the integrity of financial markets or financial stability in the EU, including by recommending that relevant Member States initiate investigations and share information;
- EuVECA, EuSEF and ELTIF funds: the direct supervision of European Venture Capital Funds (EuVECA), European Social Entrepreneurship Funds (EuSEF) and European Long-Term Investment Funds (ELTIF), which are collective investment funds with rules harmonised at the EU level and sold to investors across the EU.
- Product intervention powers: the ability to restrict or prohibit the marketing, sale or distribution of units or shares in UCITS (Undertakings for Collective Investment in Transferable Securities) or alternative investment funds
These are further steps proposed to be taken inconnection with the Commission’s goal of establishing a single capital markets authority across the EU, which it views as being “ultimately necessary”. More integrated supervision at EU level is intended to reduce costs and obstacles for financial firms that wish to expand within the EU and provide more choice for investors and consumers.
(ii) Improved governance and funding of ESAs
The Communication proposes a new governance system for the ESAs. This governance system would include the creation of Executive Boards with permanent members, aimed at quicker, impartial and EU-oriented decisions in respect of the coordination of supervisory practices, while integrating the knowledge and experience of national supervisors. Under the proposals, national supervisors will continue to set overall directions and decide on regulatory matters within the Boards of Supervisors in each ESA. However, newly-created, independent Executive Boards, similar to the boards of the European Central Bank (ECB) and the Single Resolution Board (SRB), will be in charge of case-by-case decisions and certain supervisory matters in each ESA.
Currently there is a fixed distribution of funding between national authorities (60%) and the EU budget (40%). This funding structure has been deemed insufficient and has often meant in practice that the ESAs have not been able to find the resources needed to cope with increased workloads and have had to abstain from doing certain other tasks. This proposal introduces a new funding system to ensure that the resources of the ESAs are commensurate with their tasks.
The new system will also give ESAs more independence and flexibility by reducing the impact of public budgetary constraints. While the EU budget will continue to contribute a share of the ESAs’ funding, industry and market participants that benefit most directly from the supervisory convergence fostered by the ESAs would play a stronger role in the financing of the ESAs for the benefit of doing business in a stable and competitive market.
(iii) Convergent and effective financial supervision
It is proposed that the role of ESAs in coordinating the activities of national authorities and setting EU-wide supervisory priorities should be strengthened. It is proposed to strengthen the ESAs powers to ensure supervisory convergence through inter alia, carrying out independent reviews of national authorities’ activities, setting EU-wide priorities for supervision, intervening on a timely basis in cases of possible supervisory arbitrage and collating transaction data from market participants to build-up market expertise and better use the ESAs’ supervisory powers.
In particular, it is proposed that EIOPA will have a stronger role in promoting convergence in coordinating the authorisation of insurance and reinsurance companies’ internal risk measurement models. This is intended to help overcome fragmentation and ensure better supervision of large cross-border insurance groups.
Solvency II allows the use of internal models by insurers, subject to supervisory approval. Despite ongoing work by EIOPA on supervisory convergence in internal models, major inconsistencies remain in the requirements of national competent authorities for internal models across the EU. Divergence in the supervision and approval of internal models may lead to inconsistencies and creates an unlevel playing field. The proposal will enhance supervisory convergence by setting out in further detail EIOPA’s role with regard to internal models through: provisions on cooperation; information sharing; clear powers for EIOPA to adopt opinions and guidelines in this area, and to contribute to dispute settlement.
Furthermore, EIOPA will set EU-wide priorities for supervision in the form of a “Strategic Supervisory Plan” against which all competent authorities will be assessed. Competent authorities will be required to draw up annual work programmes in line with the Strategic Plan.
(iv) Promoting sustainable finance and FinTech
The Communication notes that FinTech is set to play a key role in shaping the future of the EU financial sector (e.g., by facilitating access to financial services, offering new ways of investment in firms, improving operational efficiency and expanding choice). Accordingly, the benefits of the proposed further financial integration of the Single Market and Economic and Monetary Union are expected to be enhanced by the new opportunities presented by FinTech and the Commission proposes that the EU’s integrated supervisory framework must be adjusted to avoid the creation of barriers to an integrated market for digital financial services.
The Commission proposes that ESAs should be used to promote green and other sustainable finance (in order to, among other things, facilitate a transaction to a low-carbon economy), while ensuring financial stability, by taking into account environmental, social and governance-related factors and risks in all the tasks they perform. It is proposed that ESAs should be required to prioritise FinTech and coordinate national initiatives to promote innovation and strengthen cybersecurity.
The Commission is currently seeking the views of the European Parliament and the Council on its proposals set out in the Communication as a high priority, in order to ensure their entry into force before the end of the current legislative term in 2019.
The Commission invites feedback on its proposals by 15 November 2017.