In June 2009 the European Council approved the reform of the EU’s supervisory structure, building on the de Larosiere Report and in September 2009 the Commission brought forward a package of proposals to set up the two new bodies, the European Systemic Risk Board (“ESRB”) and the European System of Financial Supervisors (“ESFS”). On 27 September 2010 the European Parliament approved the proposed reforms of the EU’s supervisory framework.

The EU Council has now recently given its final approval to the regulations establishing the ESRB, which will provide macro-prudential oversight of the financial system, and the three new European Supervisory Authorities (“ESAs”). In addition, the Council has adopted a regulation giving the European Central Bank (“ECB”) specific tasks with regard to the day-to-day running of the ESRB and a Directive amending existing EU legislation in respect of the powers conferred on the ESAs (the so-called Omnibus Directive).

The new bodies will be part of the European system of financial supervisors, which will also include the supervisory authorities of the Member States. The ESRB and the EIOPA (the insurance and pensions authority) will be based in Frankfurt, the EBA (the banking authority) in London and the ESMA (the securities and markets authority, replacing CESR) in Paris. The ESRB’s role will be to monitor and assess potential threats to the stability of the financial system. Where necessary, it will issue risk warnings and recommendations for action and will monitor their implementation. The ESAs will replace the three existing committees of supervisors at EU level (CEBS, CEIOPS and CESR), and their principal responsibility will be ensuring that a single set of harmonised rules and consistent supervisory practices are applied by the supervisory authorities of the Member States.

The EU, however, will need to reach a deal on its budget for next year to ensure the new bodies are funded and operational from 1 January 2011. An attempt to reach agreement on the 2011 EU budget failed on 15 November 2010 due to reluctance by Member States to grant MEPs extra powers in future budget negotiations. The European Commission will therefore now have to draft a new proposal, whilst in the first months of 2011 funding the new system on the basis of the 2010 budget.

Ministers at a recent ECOFIN meeting held this month also gave initial approval to tightening up from 2011 onwards the supervision of financial conglomerates which have banking and insurance activities in more than one Member State. The legislation will enable financial supervisors to apply banking, insurance and supplementary supervision concurrently so as to address loopholes identified during the recent financial crisis.