MEPs Back New EU Financial Regulators

by Ulrika Lomas, for LawAndTax-News.com, Brussels

24 September 2010

The European Parliament (EP) has provided the final seal of approval to the package of reforms to European financial supervision, which will see a fundamental shift in the way banks, stock markets and insurance companies are policed from January 1, 2011.

Whilst day-to-day supervision is still to be done at national level, the new framework of European Union (EU) financial supervision is intended to provide further protection to investors, by giving Europe the means it needs to detect the risks which can accumulate across the financial system, as was witnessed in the run up to and at the height of the recent financial crisis.

In the revamp, three European supervisory authorities (ESAs) will be established to replace the current committees, which have advisory powers and can only issue non-binding guidelines and recommendations.

The three new ESAs will be a European Banking Authority (EBA), based in London; a European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt; and a European Securities and Markets Authority (ESMA) in Paris.

These new authorities will be made up of the 27 national supervisors, and are given a stronger role within the current setup. This will enable them to guide those supervisors to ensure tighter supervision of cross-border financial institutions, and the daily work of the ESAs will see them drive coordination within the current system.

The ESAs will also be able to monitor how national supervisors implement their obligations under EU law, and will have the power to investigate specific types of financial institution, product or activity, such as naked short selling, to assess what risks they pose to a financial market. When specific financial legislation regulates these areas of activity, or in emergency situations, ESAs may temporarily prohibit or restrict harmful financial activities or products.

In the event of disagreements between national supervisors, ESAs will be able to impose legally-binding mediation and, if no agreement can be reached within the relevant college of supervisors, to impose supervisory decisions on the financial institution concerned. ESAs will be able to intervene as mediators at their own discretion, rather than only at the request of one of the national supervisors.

Mechanisms, such as joint committees, will be introduced to ensure agreement and co-ordination between national supervisors of the same cross-border institution or in colleges of supervisors. For example, the EBA, the EIOPA and the ESMA are to form a joint committee to oversee cooperation and coordination between national supervisors in the case of financial conglomerates.

Furthermore, the ESMA will be entrusted with direct supervisory powers over credit rating agencies registered in the EU and have the power to request information, to launch investigations, and to perform on-site inspections.

A European Systemic Risk Board (ESRB) will also be established with the task of monitoring and warning about the general build-up of risk in the EU economy. The ESRB will develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks they carry.

Both the ESAs and the ESRB will be able to grow as events require. Particularly for the ESAs, the EP has ensured that the European Commission (EC) will report back every three years on whether it is desirable to combine the separate supervision of banking, securities and insurance with the benefit of having all the ESAs headquartered in one city, and on whether the ESAs should be entrusted with further supervisory powers, notably over financial institutions with pan-European reach.

The legislative texts empower the EC, the ESAs and the ESRB to ask the European Council to declare an emergency. The EP will also be able to ask the Council to declare an emergency through resolutions and questions, in the same way as it has a right to make requests to the Council and the EC in any other matter.

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