Creating a stronger and more integrated European financial supervision 1. The European System of Financial Supervision
What is the European System of Financial Supervision?
The European System of Financial Supervision was set up in November 2010 in the wake of the financial crisis following the recommendations of a group of high-level experts led by Jacques de Larosière. This system was created to strengthen financial supervision, better protect European citizens and ultimately rebuild trust in the EU financial system. The ESFS consists of: The three European Supervisory Agencies which supervise individual sectors and institutions (“microprudential” pillar);
The European Systemic Risk Board, which oversees the financial system as a whole and coordinates EU policies for financial stability (“macro-prudential” pillar).
What are the ESAs and what do they do?
The ESAs are the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. They contribute to developing a unified set of rules for EU financial markets (the “Single Rulebook”). They also help to foster supervisory convergence among competent authorities and to enhance consumer and investor protection. The ESAs play a key role in ensuring that the financial markets across the entire EU are well regulated, strong and stable.
In particular the ESAs contribute to:
improving the functioning of the single market for financial services, underpinned by sound, effective and consistent regulation and supervision;
ensuring the integrity, transparency, efficiency and orderly functioning of financial markets;
strengthening supervisory coordination;
preventing regulatory arbitrage and promoting equal conditions of competition;
ensuring that risks in their respective sectors are appropriately regulated and supervised; and
enhancing customer and investor protection. Union, as set out in the Reflection Paper on Deepening the Economic and Monetary Union of May 2017 and in the Five Presidents’ Report of June 2015.
Moreover, the Five Presidents’ Report highlighted that a single European capital markets supervisor will ultimately be necessary. Strengthening the powers of the ESAs is also included in the first set of priorities of the June 2017 Midterm review of the Capital Markets Union Action Plan.
To this end, the Commission is proposing to further strengthen and integrate EU financial market supervision. This requires a reinforced coordination role for all ESAs and new direct supervisory powers for ESMA. To make this work, the Commission is proposing to make the ESAs’ governance and funding fit for their new tasks.
This reform is also a response to new opportunities and challenges in supervision: it will promote sustainable finance and make sure the EU is up to speed with new financial technologies.
How did you come up with the proposal?
Today’s proposals build on six years of operational experience with the ESAs, on almost 300 responses to the Commission’s public consultations of autumn 2016 (on the ESRB) and of spring 2017 (on the ESAs) and an intense dialogue with all relevant stakeholders. They also take into account the March 2014 recommendations of the European Parliament and the review report prepared by the Commission in August 2014.
How will these reforms foster more supervisory convergence?
This proposal gives the ESAs coordination powers over day-to-day supervision by competent authorities. The ESAs will set EU-wide priorities for supervision in ‘Strategic Supervisory Plans’ against which competent authorities would be assessed. Competent authorities will be required to draw up annual work programmes in line with the Strategic Supervisory Plan.
In addition, the ESAs will have a stronger role in coordinating some critical areas of supervision where sufficient convergence has not been achieved to date:
The ESAs will be notified and asked for an opinion in specific cases when a financial institutional or market participant intends to significantly outsource, delegate or transfer risks to non-EU countries in a way that would allow it to benefit from the EU passport while essentially carrying out its activities outside the EU. This strengthened coordination role will avoid any risk of supervisory arbitrage and ‘forum shopping’;
EIOPA will be able to better coordinate the authorisation of internal models that insurance companies use to calculate requirements on solvency capital;
ESMA will collect data on transactions in financial instruments directly from market participants. This will allow ESMA to build market expertise, better use its supervisory powers and ensure a level playing field in the EU. Moreover, this will also allow ESMA to play a stronger coordination role in investigations of market abuse cases with a cross- border dimension. ESMA may also recommend that competent authorities investigate market abuse cases in specific circumstances.