After having failed to reach a deal on the sensitive issues of governance and funding several times in the last weeks, the European Parliament and the Council have come to an agreement on the revision of European system of financial supervision (ESAs review) today. The legislative package covers the reform of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB). Co-legislators agreed on the governance of the authorities, powers and tasks, financing and their role in consumer protection. In addition, a deal was found for ESMA’s direct supervisory powers, changes to the ESRB and the future role of EBA in the fight against money laundering. The agreement had to be reached urgently so that the legislative process can be completed before the European elections in May. The final text still needs to be approved by European Parliament and Council before it can enter into force.
The compromise text on governance comprises a significant strengthening of the powers of the Chair, who will be able to propose decisions to the Board of Supervisors on issues relating to Breach of Union Law, Binding mediation and inquiries into financial products or institutions and set the agenda of the Board of Supervisors. The decisions prepared by the Chair are adopted by the Board of Supervisors in a simplified non-objection procedure within 8 days. Only minor changes were made to the existing management board. While its composition will stay the same, the management board will be enabled to express its opinion and make proposals on all matters except for those where the Chair is empowered to propose decisions.
Co-legislators agreed to strengthen the ESAs mandate and powers in the areas of consumer protection and environmental, social and governance risks. The ESAs will also play a stronger role when it comes to Union-wide supervisory priorities and their implementation and reviews of national competent authorities. While ESMA will get an additional role in the supervision of EU critical benchmarks and 3rd country benchmarks, EIOPA will get a limited role to help national competent authorities (NCAs) in their work on internal models of insurance companies. The EU-wide fight against money laundering will have its centre at EBA while EIOPA and ESMA can provide their opinions and object to decisions concerning financial institutions under their auspices within a non-objection period of 20 days. The accountability of the ESAs towards the European Parliament will be increased.
Many of the more progressive proposals by the Commission and the Parliament were lost due to Council resistance. This concerns among other points strategic supervisory plans developed and supervised by the ESAs, independent reviews of NCAs conducted by the ESAs only, information requests directly to financial institutions and fines in case of non-compliance with those requests, competences for the ESAs in the context of outsourcing and delegation, and direct supervision powers for ESMA with respect to prospectus approvals. In addition, the Commission had proposed a new governance framework with strong powers for an independent Executive Board with a European perspective entitled to take decisions in areas where there are conflicts of interest in the Board of Supervisors. Parliament had slightly weakened the Commission’s governance proposal while the Council resisted strongly in the interinstitutional negotiations, so that in the end the changes are closer to an adjustment of the status quo than to the original Commission proposal. The new funding model proposed by the Commission was rejected by both co-legislators.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“Given the divergence of Parliament’s and Council’s initial positions, today’s conclusion of the negotiations brings relief for a reform that was on the edge of the abyss. However, it is irresponsible that EU governments blocked a true European restart for common financial supervision. It is again the German government which is on the brakes for real European progress. Germany has entered into an unholy alliance with the countries with lax financial supervision on the subject of the European watchdogs. Those who support the Capital Markets Union like Germany put their credibility at risk when blocking stronger European financial supervisors.
Despite its shortcomings, the overhaul of the European financial watchdogs is a step forward to a stable, green and consumer friendly financial markets in Europe. In the face of severe EU-wide money-laundering scandals, it was high time to equip EBA with considerable tools and powers in this field. Nevertheless we continue to demand a dedicated European agency for the fight against money laundering.
The authorities’ new competences for the protection of consumers are a breakthrough. The reform will help improve the equal protection of consumers and small-scale investors everywhere in Europe. The ESAs new role in sustainable finance will help markets to better reflect environmental, social and governance risks (ESG) and avoid financial crises caused by environmental damage. The ESAs will be tasked to monitor sustainability risks and develop a methodology to include environmental risks into their stress tests. We welcome that the principles of proportionality and transparency are written into the authorities‘ legal bases.
The bitter pill for all pro-Europeans is the weak compromise on the governance of the authorities. A continuingly suboptimal decision making framework reduces the value of all new powers and competences that will remain underused. It is well-known that the ESAs have been unable to use some powers due to conflicts of interest in their main steering body. The Council willingly put national above European interests at the expense of financial stability.”
What we have achieved or successfully defended (from a Green perspective):
Consumer protection
- ESAs to collect, analyse and report on consumer trends; EP added that this should include the development of costs and charges of retail financial services and products in Member States to status quo
- ESAs to contribute to level playing field where consumers have fair access to comparable financial services, products and redress (our proposal)
- coordinate mystery shopping activities of NCAs where relevant (our proposal – slightly weakened but maintained)
- Product intervention: now also explicitly on basis of threat to consumers; renewal after 6 months instead of 3 as before; possibility for 1-year product ban after 2 renewals; Alignment of Article 9 (product intervention) EBA/ESMA Regulation and MIFIR (our proposal)
- EP addition to status quo: ESAs can conduct inquiry into particular type of financial institution or product (Article 22(4)) also on the basis of consumer protection issues (our proposal)
Environmental, social and governance factors (ESG)
- ESAs shall take into account sustainable business models and the integration of environmental, social and governance related factors (COM proposal, we supported)
- monitor market developments with respect to ESG risks (proposed by us and others) (8(1)f)
- ESAs to put in place a monitoring system to assess material environmental, social and governance-related risks, taking into account the COP 21 Paris agreement (proposed by us and others)
- ESAs to include environmental risks into existing stress tests: develop common methodologies for assessing the effect of adverse environmental developments on the financial stability of institutions (stress tests) (proposed by us and others)
Powers of the ESAs
- Reviews of national competent authorities led by ESAs and conducted by ESA staff and NCA staff. BoS can amend review reports which is subsequently submitted to three EU institutions (core of Commission proposal maintained)
- Breach of Union law: In future ESAs can initiate arbitration process with NCA concerned to discuss action necessary to comply with union law (our proposal)
- New article with whistleblower channel for all 3 ESAs with strong specifications (proposed by us and social democrats)
- Outsourcing and delegation: ESAs to set up coordination groups if requested by 5(7?) BoS members who see need to coordinate with regard to specific market developments. All BoS members have to participate. Ex-post notification of NCAs to ESAs on how work of coordination group has been taken into account.
- EIOPA – setting up of collaboration platforms in situations of risks to policy holders in cross-border situations (proposed by us and others)
- What remains from strategic supervisory plans: ESAs to define union-wide supervisory priorities. NCAs have to report how they take them into account. ESAs may make recommendations to NCAs on the basis of the priorities (core of COM proposal maintained, a bit too reduced in the end)
- New instrument: ESAs can issue time-limited “no-action-letters” and warn commission and NCAs if application of legislation leads to disruptions (proposed by ALDE and us)
Governance of the ESAs
- Appointment of the Chairperson: 1 month non-objection period for the EP maintained from status quo (COM had proposed to replace it by approval of shortlist)
- The Chairperson can vote in the Board of Supervisors (except for Articles 10 – 18, 9(5) and Chapter 5) and the Management Board
- Strong specifications for whistleblower channel (new article 17a) (Proposed by us and others)
- Chairperson to make proposals for decision to the BoS, to be adopted in simplified non-objection procedure on Articles 17, 19 and 22(4)
- Compensation for non-industry members of Stakeholder Groups: In future also for preparatory work and follow-up (proposed by us and others)
Accountability of the ESAs
- EBA to provide summary of positions taken at meetings in international fora (Basel committee)
- Explicit anchoring of the principle of proportionality and integrity (proposed by us and others)
Money laundering
- Platform for exchange of fitness and propriety information between NCAs (at EBA only – our proposal)
- Addition of AML to scope of action (our proposal)
- Empower Joint Committee to assist the Commission in assessing the technical specifications and procedures for the interconnection of the national registers under the AMLD (our proposal)
Direct supervision
- ESMA supervision of EU critical benchmarks and third country benchmarks (we supported)
- EIOPA to assist NCAs in decision related to approval of internal models, both on solo and group level
ESRB
- Maintain votes of two Vice-Chairs of Advisory Scientific Committee in General Board
- Possibility to issue recommendations to Union institutions and Member States in response to identified risks
- Possibility for EP to ask questions to ESRB
What we have lost or could not prevent (from a Green perspective):
Consumer protection
- ESAs to conduct mystery shopping exercises themselves (our proposal, already lost in EP negotiations); now only coordination of NCAs mystery shopping
- ESAs mandate to collect information related to complaints submitted to NCAs (our proposal, already lost in EP negotiations)
- Standards for complaints handling by NCAs (our proposal)
- Product intervention powers for EIOPA in sector legislation (our proposal, already lost in EP negotiations)
- product intervention: after renewal after 6 months, ban of products becomes permanent and won’t expire anymore as before
- ESAs to develop standards for conduct of business supervision (our proposal)
Environmental, social and governance factors (ESG)
- Mandate to develop methodology for specific new carbon stress tests (our proposal)
Powers of the ESAs
- Possibility for ESAs to report to the Commission where differences in the national transposition or application of Union acts hamper the functioning of the single market or cause detriment for consumers (our proposal)
- Coordinate stances of NCAs which participate in international standard setting bodies, weaker wording maintained (our proposal, lost at EP level)
- COM proposals for ESAs to be able to request information directly from financial institutions and the fines procedure related to it; (we supported, lost at EP level)
- Guidelines, recommendations and Q&As are explicitly limited to the legal acts mentioned in Article 1 para 2 excluding para 3. (We opposed at EP level)
- Obligatory notification between NCAs and of ESAs where services are provided on the basis of the freedom to provide services or the freedom of establishment (proposed by us and others, lost at EP level)
- Stronger role in delegation / outsourcing: obligatory ex-ante notification by NCAs to ESAs; recommendation to NCAs where verification arrangements insufficient; (compromise: see coordination groups)
- EBA to seek full membership at Basel Committee
- Reviews of competent authorities also on initiative of EP / Council (our proposal)
- Stress tests: status quo maintained, no strengthening achieved as proposed by Commission and us
Governance of the ESAs
- Establishment of an Executive Board as proposed by Commission with relevant decision making powers
- Possibility for BoS to suspend voting rights of BoS member when independence has been assessed insufficient (our proposal) → weakened in current technical compromise
- EP approval of shortlist of candidates of the Chair
- Improved selection procedure for Chair and Executive Board members with Commission shortlist, EP approval of short-list and 1 month non-objection period for EP (lost at EP level)
- Chair can be removed on the initiative of the EP in case of misconduct (proposed by us and others)
- Chair voting rights in the BoS (we supported – lost at EP level)
- SRB as non-voting member in Board of Supervisors (proposed by us and others)
Accountability
- Explicit mentioning of register of documents including status of accessibility (our proposal)
- Stakeholders groups ability to oppose guidelines is enhanced (we opposed)
- Position taken by EBA in international standard setting bodies to be discussed at BoS (we supported)
Money Laundering
- Trigger to initiate AML investigation also in the hands of Chair (our proposal)
ESRB
- No independent Chairperson or Managing Director (we supported more independence)
Direct supervision by ESMA
- ESMA approval for limited set of prospectuses (wholesale, nomination > 100000€, asset backed securities and 3rd country prospectuses – proposed by us and others)
- No ESMA supervision of 3rd country trading venues – added for future Commission assessment to the review clause
Funding
- Status quo maintained – Funding gap to be closed in MFF negotiations