Views on improving the integrity of global capital markets
08 July 2021

Towards a deep review of the role of the European Financial SupervisoryAuthorities?

Posted In: EU, Market Structure
New York Financial district with Financial data on trading screens. Light reflections from windows.

The architecture of financial supervision in the European Union (EU) has been the subject of many discussions in the past few years. A first review of the three European Supervisory Authorities (ESAs) was made in 2019 with a new regulation granting direct supervision powers over third-country critical benchmark administrators, and data-reporting service providers to the European Securities and Markets Authority (ESMA), giving a greater role to the European Banking Authority on addressing risks from anti-money-laundering, and reshaping the governance structure of the ESAs management board. However, the initial Commission proposal for the regulation on the ESAs’ review, which was presented in 2017, proposed greater powers for the ESAs, including the approval of certain categories of prospectuses and the approval and supervision of certain funds that are regulated at EU level.

In light of the first ESA review, EU policy makers have been taking stock of what has been achieved to date in terms of supervisory convergence and is considering the introduction of new measures for stronger coordination and supervision by the three ESAs.

The European Commission is expected to release the results of an assessment exercise on the level of harmonization in European supervision, and it may put forward a new legislative initiative on the ESAs’ review by the end of this year. CFA Institute recently submitted its response to the Commission-targeted consultation on the supervisory convergence and the single rule book, which was launched to collect stakeholders’ feedback on the main strengths and weaknesses of the current ESAs’ role, powers, and governance as well as on possible new measures to achieve a single rule book.

A major improvement to the system of European supervision would be the promotion of more supervisory coordination across National Competent Authorities (NCAs). Greater convergence in supervision is fundamental to achieve a Capital Markets Union (CMU). The ESAs could enhance harmonization by providing specific guidelines that would leave little room for interpretation to the NCAs.

Concerning legislation, policy makers may contribute to reducing legislative and supervisory differences by increasingly using the legislative instrument of regulation. EU regulations are binding acts that enter into force automatically in all EU countries, and unlike directives, they do not need transposition in national legislation. It is particularly challenging, however, to reach supervisory coordination on consumer protection and financial education as EU member states retain sole legislative competences in these policy areas. A further initiative that could be taken to ensure supervisory convergence would be to undertake a mystery shopping exercise to identify inefficiencies caused by member states’ gold-plating practices.

Granting enhanced powers and resources to the ESAs is a fundamental step towards single supervision in the EU. For instance, ESMA already owns direct supervisory powers on Credit Rating Agencies (CRAs) and Trade Repositories (TRs). Widening the scope of the ESAs’ direct supervision could give a decisive boost to further capital markets integration in the EU.

An area that could benefit from ESMA direct supervision is the cross-border distribution of funds. Increasing powers on the supervision of the cross-border investment of funds sector in the EU could bring about more harmonization in the sector and reduce duplicative or inconsistent requirements, which are set up at the national level by member states’ competent authorities. Hence, direct supervision in the cross-border distribution of funds could significantly contribute to eliminating the existing barriers to the passporting of these products across the EU.

ESMA also could be entrusted with increasing responsibilities concerning data collection and sharing. The EU is looking to establish a new European Single Access Point (ESAP) for companies’ financial and sustainable-investment-related information. This access point is key to advance the EU sustainability agenda as it would facilitate data accessibility for investors and would improve comparability and usability of data. ESMA could be the authority in charge of the development of ESAP, supervision of the process of filling the reports, and aggregation of data at the European level.

The ESAs are charged with limited enforcement powers, which mainly regard infringements by financial market participants that are subject to their supervision (e.g., CRAs and TRs for ESMA). The three authorities should take a greater role as enforcement actors in the event of breaches of EU law, which occur when national competent authorities have failed to ensure compliance of financial market participants or institutions. In the report “The Brave New World of Product Governance in the EU Asset Management Industry,” CFA Institute highlighted that standards related to EU marketing rules are still applied inconsistently across member states. Recently, ESMA launched a new Common Supervisory Action with NCAs to assess the progress made on the application of Markets in Financial Instruments (MiFID II) product governance rules across EU member states. Such an action would allow ESMA and NCAs to identify areas in which further work on harmonization in the application of key EU requirements on product governance is needed.

CFA Institute recently set up an informal working group, composed of a few members with expertise on product governance, risk, and compliance, to engage and discuss cases of the application of EU rules and to raise particular issues.

With regard to the governance, the composition of the ESAs’ board of supervisors (BoS) tends to be dominated by representatives from NCAs. CFA Institute believes that greater supranational representation or voting interest in this group would result in final decisions being more independent of national interests.

A possible improvement to the ESAs’ BoS and management board is to grant increasing voting rights to the respective chairperson. More voting powers attributed to supranational figures, such as the chairperson, participating in the bodies, would ensure improved accountability and a more efficient decision-making process.

A complete restructuring in the composition of these bodies, however, could result in even better results in terms of independent decisions. For instance, the management board, which is composed of six members, selected from the BoS, and the chairperson, could be transformed into an executive board, which could be made up of permanent members from European institutions, representatives from NCAs, and stakeholder organizations, such as financial users associations. In this manner, the current management board, which has the role of ensuring that the ESA pursue its mission and carry out its tasks and activities in accordance with the EU law, would act as a more independent body.

Changes in the composition of the ESAs’ stakeholder groups and committees also could ensure greater diversity of views. Currently, these groups are composed mainly of academics and industry representatives, whereas European nongovernmental organizations and professional associations seem to be underrepresented.

Finally, the functioning of these advisory bodies also should be revised. These committees already represent an important advisory forum that the ESAs could use to learn more about relevant issues in the industry. Such groups also could provide increased support to the ESAs by having more profound and interactive conversations. Most ESAs’ standing committees hold passive discussions, with little or no active involvement from NCA representatives. Proper and more active discussions would be useful to support the work of the ESAs.

The current crisis could be seen as an opportunity to review the structure of the financial supervision in the EU. Empowering the ESAs with greater direct supervisory powers and resources and turning these authorities into more independent bodies are essential steps to achieve a genuine CMU, with a truly European single supervision.


Photo credit @ Getty Images / simoncarter

About the Author(s)
Roberto Silvestri

Roberto Silvestri is EU Policy Specialist, Capital Markets Policy EMEA at CFA Institute. He helps reach out to regulators and stakeholders about the positions that CFA Institute holds and unravel the complexities of EU regulation for CFA Institute members.

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