When talking about legislative power in the context of regulations and documents issued by ESMA, it is often referred to the so called Lamfalussy Process. This is an approach to the development of financial service industry regulations used by the European Union, which was originally developed in March 2001 and named after the chair of the EU advisory committee that created it, Alexandre Lamfalussy. It is composed of four “levels,” each focusing on a specific stage of the implementation of legislation. In principle, the Lamfalussy Process aims to provide several benefits over traditional lawmaking, including more-consistent interpretation, convergence in national supervisory practices, and a general boost in the quality of legislation on financial services.
The original document of European Commission that outlines the application of the Lamfalussy Process can be found here.
Since the creation of the EU supervisory authorities, and in particular ESMA, the process has been amended to award these specialist authorities greater involvement and powers. The ESMA regulation (see full text here) has introduced the following updated four level framework:
Level 1 Directives and regulations, continue to set out the high level political objectives on the area concerned by the legislation. Occasionally, at this early stage, ESMA may be asked for technical advice by the Commission as it develops its legislative proposal.
At Level 2 though ESMA has been given a greater role in drafting subordinate acts known as delegated acts and implementing acts. Delegated acts are concerned more with the substantive content of the legislative requirement, for example setting out what authorisation information firms must provide to competent authorities, whilst implementing acts are similar to executive measures giving effect to the substantive requirements, this might include for example, standard forms, templates and procedures for communicating information or processes between competent authorities.
At Level 3, ESMA may develop guidelines and recommendations with a view to establishing consistent, efficient and effective supervisory practices within the European System of Financial Supervision, and to ensure the common, uniform and consistent application of Union Law. The guidelines and recommendations are addressed to competent authorities or financial market participants. Whilst not legally binding, these have been strengthened under ESMA and competent authorities must now make every effort to comply and must explain if they do not intend to comply. Financial market participants can also be required to report publicly whether they comply. ESMA also takes other steps under Level 3 to ensure supervisory convergence.
At Level 4, a fast track procedure has been introduced. On this basis, ESMA now has a new role since at the request of a national competent authority, the European Parliament, Council, Commission or the Stakeholder Group, ESMA can be requested to launch an enquiry and can issue a recommendation addressed to the national authority, within two months of launching its investigation. ESMA is also be able to launch investigations on its own initiative. The Commission is also able to follow its usual procedures for referring a case against the Member State to the Court of Justice.