By John Filar Atwood
In an effort to further the transition to a capital markets union with integrated financial supervision, the European Commission has issued plans to reform the European Union’s financial industry supervisory structure. Among other things, the proposals would give the European Securities Markets Authority (ESMA) direct supervisory authority over several aspects of the capital markets such as benchmarks, market entry and market abuse cases.
The EU overhauled its financial system after the global financial crisis by introducing a single rulebook for financial regulation in Europe and creating the European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB). The new proposals would further the reform effort by enhancing regulatory and supervisory convergence within the single market.
To ensure the uniform application of EU rules and promote a capital markets union, the EC proposed to give ESMA direct supervisory power in specific financial sectors that are highly integrated, have important cross-border activities and which are regulated by directly-applicable EU law. The EC is not proposing to change the responsibilities of national authorities to supervise other areas such as central depositories, money market funds, trading venues, UCITS or alternative investment funds.
ESMA’s role. Under the reform plan, ESMA will authorize and supervise the EU’s critical benchmarks and endorse non-EU benchmarks for use in the EU. In addition, ESMA will be in charge of approving certain EU prospectuses and all non-EU prospectuses drawn up under EU rules.
The EC proposed to have ESMA authorize and supervise certain investment funds with an EU label with the aim of creating a genuine single market for the funds. They include European Venture Capital Funds, European Social Entrepreneurship Funds and European Long-Term Investment Funds.
Finally, ESMA will be given a greater role in coordinating market abuse investigations. It will have the right to act where certain orders, transactions or behaviors give rise to suspicion and have cross-border implications or effects for the integrity of financial markets or financial stability in the EU.
Stronger coordination. A primary objective of the reform proposals is to strengthen coordination of supervision across the EU. The ESAs will set EU-wide supervisory priorities, check the consistency of the work programs of individual supervisory authorities with EU priorities and review their implementation. They also will monitor regulators’ practices in allowing market participants such as banks, fund managers and investment firms to delegate and outsource business functions to non-EU countries, to ensure that rules are followed and risks are properly managed. The functioning of the ESRB will be made more efficient in order to strengthen its oversight of risks for the financial system as a whole.
The plan provides that ESAs will make decisions more independently from national interests. Under the new governance system, newly-created executive boards with permanent members will lead to quicker EU-oriented decisions. In addition, interested parties will be able to ask the EC to intervene if the majority consider that the ESAs have exceeded their competences when issuing guidelines or recommendations.
The EC also proposed to make the funding of the ESAs independent from national regulators to improve the autonomy and independence of the ESAs. The EU would continue to contribute a share of the ESAs’ funding, but the rest would be funded by contributions from the financial sector.
Fintech and sustainability. The reform proposals also include steps to foster the development of financial technologies (fintech), and to ensure that sustainability considerations are taken into account in supervisory practices at the European level. The EC’s vice president for financial stability, financial services and capital markets union said in a news release that the reform package will make it easier for EU companies to operate across borders, and to take advantage of new opportunities in fintech and sustainable and green finance.