Thursday, April 13, 2017

Strengthen EU supervisory convergence to prevent race to the bottom, urges ESMA’s Maijoor

By Lene Powell, J.D.

To prevent regulatory arbitrage and help build the Capital Markets Union (CMU), supervisory convergence powers of the European Securities and Markets Authority (ESMA) should be strengthened, ESMA Chair Steven Maijoor urged in a speech to the European Commission. Maijoor believes ESMA should have more power to collect information, take actions in the event of a Breach of Union Law, and ensure consistent authorizations of asset managers across the EU, among other authorities.

Relating to the UK’s impending exit from the EU, ESMA will issue within the next few months a general opinion on cross-cutting issues and three specific opinions in the areas of asset management, investment firms, and secondary markets.

ESMA convergence work. According to Maijoor, effective convergence work requires the right combination of general tools, including guidelines, opinions, Q&As, peer reviews and mediation, and legislation-specific tools. As an example of successful ESMA convergence work, Maijoor noted that central counterparties (CCPs) or clearinghouses are now effectively subject to identical obligations across the Union. This has supported an integrated EU market for post-trading and made a significant contribution to the CMU, he said.

Less successful has been ESMA’s work on consumer protection issues involving contracts for difference (CFD) and binary options. Maijoor said that retail offerings in these instruments are concentrated in one unnamed EU member state, where investment firms use aggressive marketing campaigns and large call centers to sell their products. Although ESMA has undertaken various convergence activities in this area, including issuing warnings, Q&As, and channeling information on consumer detriment between the host regulators and home regulator, ESMA’s tools are not currently effective enough, and the number of authorizations by the home regulator continues to grow.

Upcoming guidance on Brexit. Maijoor said that ESMA recently began convergence work relating to the UK’s decision to leave the EU, with the goal of avoiding competition on regulatory and supervisory practices between member states and a possible race to the bottom. Before the summer, ESMA will issue a general opinion on cross-cutting issues including how national authorities should ensure ongoing effective supervision of relocated activity, in particular when certain functions are subject to outsourcing and delegation. ESMA will also issue the three specific thematic opinions to provide sector specifications in the areas of asset management, investment firms and secondary markets. In addition, ESMA is working to establish a mechanism for national authorities to share live cases at EU level regarding UK market participants seeking authorization in the EU27.

Stronger powers needed. ESMA’s supervisory convergence tools have improved since its establishment, said Maijoor, but ESMA still needs additional powers including the following:
  • ESMA should have the same powers to collect information when convergence issues are at stake as it currently has for stability concerns; 
  • It should be clarified that the scope of ESMA’s Breach of Union Law powers also relate to provisions of Directives that establish unconditional obligations that are sufficiently clear and precise to be directly effective;
  • To further reduce barriers between member states and ensure that the supervision of asset managers takes the interests of clients in host member states into account, ESMA could be given convergence powers to ensure consistent authorizations across the EU.
Further, ESMA is in a unique position to contribute to the design of a common EU financial data strategy, said Maijoor. ESMA could promote a common strategy and close interaction among the relevant EU authorities in establishing reporting obligations for supervised entities. Together with strengthened convergence powers overall, this would promote consistency of practices across the EU.

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