The UK Treasury Committee has urged the European Union to take more time on legislation establishing a systemic risk regulatory framework centered on a new European Systemic Risk Board and new European Supervisory Authorities for banking and securities, replacing CESR and other Lamfalussy Level 3 committees. The UK Committee has concerns about the size and composition of the Board and unease about the power the European Supervisory Authorities would have to override the decisions of national regulators. Similarly, there are concerns that the European Commission will have unilateral power to declare an emergency, which will further empower the Supervisory Authorities to direct national regulators.
The European Commission proposed the detailed legislative reform proposals in September of 2009. The EU Presidency is pressing for their adoption by ECOFIN at the European Council meeting on December 2. The Treasury Committee considers that to be much too fast for the adoption of a systemic risk framework that should last for many decades. There must be proper time for consideration.
The Commission proposed that the Board would carry have macro prudential oversight to look for systemic weaknesses in the financial system, while the sectoral Supervisory Authorities would co-ordinate micro prudential regulation. The Board, composed of central banks with voting rights and national regulators without such, would not have any direct power; its task will be to monitor systemic risk and issue warnings to appropriate authorities.
The fast track timetable for the legislation would be less worrying if the proposals were without controversy, said the Committee, but they are not. In fact, the Committee found cause for serious concern about the size and composition of the Board and the delegation of discretionary power to the European Supervisory Authorities to override the decisions of national regulators. There are also concerns that the Commission would have unilateral power to declare an emergency, which will empower the supervisory authorities to further direct national regulators. Significantly, the proposals do not appear to give due weight to ECOFIN’s own earlier admonition that the measures should not impinge on the fiscal responsibilities of the Member States.
The legislation, for example, would authorize the Securities Supervisory Authority to settle disagreements when there is a dispute between national regulators as to practices and, if its decision is not accepted by a national regulator, to adopt an individual decision addressed to an individual market participant. In the Committee’s view, this comes very close to giving the Supervisory Authority the power to directly regulate individual market participants. There is also fear that the Securities Authority could fundamentally undermine the proven system of takeover regulation in the UK, since it could issue guidelines undermining the flexibility given to national regulators and disrupt effective takeover regulation.
While UK Finance Services Secretary Lord Myners envisions that the Supervisory Authorities will not regulate individual firms but rather will work to achieve common regulatory standards, the committee said that the regulations as currently drafted would allow them to override the decision of a national regulator and to direct individual institutions.
Also, the legislation authorizes the Commission to declare an emergency when the financial stability of the markets is threatened. Once an emergency has been declared, a Supervisory Authority can adopt individual decisions requiring competent authorities to take the necessary action in accordance with the legislation to address any risks that may jeopardize the orderly functioning and integrity or stability of the financial markets by ensuring that financial institutions satisfy the requirements laid down in the legislation. If the competent authorities do not act, the Supervisory Authority has a reserve power to direct individual financial institutions.
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