Commission proposes reform of financial regulators

The European Commission today published a statement with regard to a proposal to reform the supervision of the financial system. Its statement said that “In a move to strengthen the supervision of the European financial system and promote its integration, the European Commission on 20 September put forward proposals to reform the EU’s supervisory authorities. The reforms will ultimately benefit consumers, investors and businesses throughout the EU.” 

The supervisory authorities

The three European supervisory authorities (ESAs) make up, along with the European Systemic Risk Board (ESRB), the European system of financial supervision (ESFS) that was set up in 2010 in the wake of the financial crisis. The ESAs are the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). They were created to ensure increased stability in banking, insurance and securities markets and help prevent further crises in European and global economies. The ESRB monitors the financial system as a whole and coordinates EU policies for financial stability.

Since their creation, the ESAs have played a key role in ensuring that financial markets across the EU are well-regulated and supervised. Jacques de Larosière, who led a 2010 expert group whose recommendations formed the basis for the ESFS, said in a written statement to the European Parliament in May 2017 that the three agencies have in particular ”been instrumental in achieving a single rule book for banks, insurance companies and market activities” Now that the rules have become more uniform, attention needs to shift to their application. Convergence of day-to-day supervision needs to accelerate and adapt to new challenges. “We are seeing renewed cross-border integration, new opportunities in FinTech and a boom in sustainable and green finance,” said Valdis Dombrovskis, Vice-President for Financial Stability, Financial Services and Capital Markets Union. In addition to this, ”finance in Europe is changing due to the departure of the UK from the EU”, he added. ”We want to give the system of EU-wide supervisors the tools they need to stay ahead of new market developments.”

New powers for the ESAs

Once adopted, the proposals will improve the mandates, governance and funding of all three ESAs. These improvements will in particular allow the ESAs to fulfil a new and strengthened coordination role for the supervisory authorities, at both national level in the Member States and at EU level (i.e. the Single Supervisory Mechanism and the Single Resolution Board) .

As highlighted in the reflection paper on deepening the economic and monetary union, published in May 2017, a more integrated supervisory framework is essential for implementing the EU’s ambitious capital markets union project. The gradual strengthening of the supervisory framework should ultimately lead to a single European Capital Markets Supervisor. In this spirit, the Commission is already now proposing to give ESMA additional direct supervisory powers in some specific areas of capital markets. For instance, it would authorise and supervise the EU’s critical benchmarks and endorse non-EU benchmarks for use in the EU. It would also authorise and supervise certain investment funds, such as European venture capital funds, and play a greater role in coordinating market abuse investigations. Finally, the reforms will also improve the composition and organisation of the ESRB.

Tangible benefits

For consumers, the review will mean that the ESAs will have greater oversight over how national authorities enforce consumer protection rules and could step in in instances where consumer protection rules are not properly enforced, notably in cases of misselling. Furthermore, in serious cases of misselling and supervisory failure at national level, ESMA will be able to ban marketing or selling of fund products by fund managers.

European businesses, both big and small, should benefit from more integrated financial markets that offer better opportunities for investment, funding and risk management. In line with the Commission’s efforts to reorient the financial system so that it can support long-term, sustainable growth, the ESAs will promote sustainable finance. The proposals will furthermore give the ESAs a coordinating role for national Fintech initiatives, such as innovation hubs and regulatory sandboxes. They will also help develop a more coordinated approach towards cybersecurity.

The proposals will now be discussed by the European Parliament and the Council.