European financial regulation and supervision: facing reforms

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The EU institutions have been reforming existing financial system during last decade; finally, it introduced a specific supervisory architecture, consisting of three European supervisory authorities and a special board to monitor systemic risks. New measures will promote supervisory convergence and consistent supervision, which are key building blocks in creating a genuine EU-wide Capital Markets Union.   

The European system of financial supervision (ESFS) was introduced in 2010; it consists of the following components: – the European Systemic Risk Board, ESRB; – 3 European supervisory authorities ESAs (- the European Banking Authority, EBA; – the European Securities and Markets Authority, ESMA; and – the European Insurance and Occupational Pensions Authority, EIOPA. Both the ESRB and the 3 ESAs started their operation in January 2011, following the adoption of a package of legislative acts.
The EU-wide economic and fiscal policy coordination among the member states includes the following main directions: – the EU financial assistance, – Economic and Monetary Union, – economic and fiscal governance, – economic governance review and research, – European Fiscal Board activity, – “green budgeting” in the EU member states, – international economic relations, as well as the national productivity boards and the European Semester.

Historic review
On 21 March 2019 the European Parliament and the EU member states agreed on core elements of reforming the European supervision in the areas of the EU financial markets. The agreement, which has been an important step in ensuring a fully functioning capital markets union, reinforces the role and powers of the European Supervisory Agencies, including that of the European Banking Authority, by strengthening its role in the area of anti-money laundering. More information on this agreement can be found in the press release of 21 March 2019, as well as in the later updated factsheets.
Then, in April 2019, the European Parliament endorsed the legislation setting the building blocks of a capital markets union, including the review of the ESFS. In December 2019, the European Parliament and the Council signed Regulation (EU) 2019/2175, which reviews the powers, governance and funding of the ESAs; the regulation gives new powers to EIOPA, EBA and ESMA (more on these bodies below under ESAs’ operation).
Besides, in December 2019, the EU co-legislators also signed Directive 2019/2177, which amends the Solvency II Directive, the MiFID II Directive and the 4th Anti-Money Laundering Directive. Also as part of the ESFS review, another Regulation 2019/2176 of 18 December 2019 amended the regulation establishing the European Systemic Risk Board.
In March 2021, the Commission launched a targeted consultation (ended in May 2021) on the supervisory convergence and the single rulebook aiming at taking stock of the framework for supervising European capital markets, banks, insurers and pension funds.
In May 2022, the Commission published its report on the operation of the European Supervisory Authorities taking into account the results of the public consultation launched in 2021. The report assesses the ESAs´ tasks activities and follows up on the Commission´s commitment in the 2020 capital markets union action plan to monitor progress towards supervisory convergence.
Besides, the EU legislative bodies adopted in mid-May 2023 a final version of the regulation on markets in crypto-assets (so-called MiCAR). Thereby the EU institutions – for the first time ever – brought two main crypto-assets’ components (i.e. crypto-assets issuers and crypto-asset service providers) under a harmonized legal framework. MiCAR also aims to provide better protection of consumers and investors, preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector. Benefits of the new rules include among others also legal certainty for crypto-assets not covered by existing EU legislation and safeguarding against financial crime and market manipulation.
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Operation of the European Supervisory Authorities, ESAs
In May 2022, the Commission approved a report on the perspectives of the ESAs activities. It was noted that during the past decade, the ESAs’ activities have focused on building the single rulebook for financial services and fostering supervisory convergence. Excellent progress has been achieved in these areas, but there is still a need for continued and appropriately targeted efforts to promote a genuine Capital Markets Union. A financial system with multiple EU-wide centers has increased the need for an improved single rulebook and greater supervisory convergence.
In this context, the Commission published its action plan for Capital Markets Union in September 2020 according to which the Commission committed to: a) working towards an improved single rulebook by assessing the need for further harmonisation of EU rules; and b) taking stock of what has already been achieved in supervisory convergence.

   The following key topics are included in the EU-wide financial supervision sustem: = EU financial law-making; = the European supervisory architecture (EBA, ESMA & EIOPA), = Single Supervisory Mechanism (SSM) and the role of the ECB; = Basel Capital Accords and the CRD/CRR bank capital adequacy requirements; = Bank crisis management with an attention to Single Resolution Mechanism (SRM), = general bank resolution and insolvency; = MiFID II/MiFIR and financial services regulation, such as UCITS, KIID & AIFMD; = Market abuse regime: MAD/MAR; = Market transparency with the prospectus requirements; = Payments, clearing and settlement (PSD2, CBPR, EMIR, CSDR), and = Financial innovation.

   FISMA is the main EU instrument in fostering sustainable growth by building a deeper Economic and Monetary Union through advancing financial integration, by completing the Banking Union and further developing the Capital Markets Union. It also aims at enhancing the resilience of the financial system to protect and include all savers and investors. DG FISMA also works to strengthen the Union’s economic and financial sovereignty, including the increased role of the euro as a strategic asset for the Union, and the EU’s resilience to third-country extraterritorial measures.
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   Thus, the European System of Financial Supervision, ESFS was set up in November 2010 in the wake of the financial crisis following the recommendations of a group of high-level experts (so-called Jacques de Larosière’s group). 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: a) three European Supervisory Agencies (ESAs) which supervise individual sectors and institutions (“micro-prudential” pillar) and b) the European Systemic Risk Board (ESRB), which oversees the financial system as a whole and coordinates EU policies for financial stability (“macro-prudential” pillar).
The three ESAs include: – the European Banking Authority, “EBA”; – the European Insurance and Occupational Pensions Authority, “EIOPA”; and – the European Securities and Markets Authority, “ESMA”.
All three 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.

New funding system
Until recently, i.e. up to about 2017, there were a fixed distribution of funding among the EU member states’ national authorities (60%) and the EU budget (40%). This rigid funding structure has been deemed insufficient and has often meant in practice that the ESAs have not been able to find the resources needed to cope with increased workloads and have had to abstain from doing certain other tasks.
The new proposal (from September 2017) introduced a new funding system to ensure that the resources of the ESAs are commensurate with their tasks.
The new system will also give ESAs more independence and flexibility when it comes to funding, by reducing the impact of public budgetary constraints – i.e. the growth rates of national budgets may not increase as fast as the growth rates of ESAs’ activities. While the EU budget will continue to contribute a share of the ESAs’ funding, less of it will come from the public sector. Instead, industry and market participants that benefit most directly from the supervisory convergence fostered by the ESAs should play a stronger role in the financing of the ESAs for the benefit of doing business in a stable and competitive market.

Since the changes to the ESA Regulations became applicable only in 202044, the Commission considers that more time is needed to assess the full impact of the latest review before considering any new amendments to the ESA Regulations. Therefore, the Commission deems it premature to propose legislative changes to the ESA Regulations at this juncture.
Nevertheless, where the Commission identifies a need for changes in supervision in response to new developments or shortcomings, the Commission may suggest targeted changes in sector legislation to improve supervisory convergence and supervision.
In addition, the review revealed some areas where improvements could be implemented with no need for legislative changes. As outlined in this report, the Commission will work together with the ESAs to assess whether and in which areas non-legislative measures are warranted.
The aim of these non-legislative measures would be to promote supervisory convergence and consistent supervision, which is a key building block in creating a genuine Capital Markets Union. The Commission looks forward to continuing its engagement with the European
Parliament, the member states and all stakeholders in this matter and will closely cooperate with the ESAs.

Reference to:

     Note: The EU’s financial community is preparing to celebrate the 25th anniversary of the founding of the European Central Bank; the event will be coped with the launch of some EU-wide banking-focused initiatives in corresponding areas. So far – congratulations to the ECB’s staff…

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