Financial supervision: European Council confirms position ahead of negotiations with Parliament

EU member states are committed to strengthening the supervisory framework for European financial institutions.

The Council confirmed its position on proposals to review the functioning of the current European system of financial supervision (ESFS). It invited the Romanian presidency to start negotiations with the European Parliament as soon as possible.

Eugen Teodorovici, minister for finance of Romania, which currently holds the presidency of the Council, has said the following:

“The European supervisory authorities play an important role in contributing to the health of the EU’s financial system. They ensure that our common rules are implemented coherently throughout the EU and that national supervisors cooperate as efficiently as possible. This file is a priority for our Presidency and we are now ready to begin negotiations with the Parliament and are committed to reaching an agreement as soon as possible”.

System of financial supervision

The European system of financial supervision was established in 2011 and consists of:

– Three European supervisory authorities (ESAs): the European banking authority (EBA), the European insurance and occupational pensions authority (EIOPA) and the European securities and markets authority (ESMA). They supervise and provide regulatory guidance for individual sectors and institutions.

– The European systemic risk board (ESRB) which oversees the financial system as a whole and coordinates EU policies for financial stability.

Following the financial crisis, the EU overhauled its financial system, including how it is regulated and overseen. It introduced a single rulebook, i.e. a set of regulations agreed at EU level and directly applicable in all EU member states, and created the ESAs. These authorities play a key role in ensuring that the financial markets across the EU are well regulated, strong and stable. They contribute to the development and consistent application of the single rulebook, solve cross-border problems, and thereby promote both regulatory and supervisory convergence.

In September 2017, the Commission put forward a package of proposals to review the tasks, powers, governance and funding of the ESAs and the ESRB, so as to adapt the authorities to the changed context in which they operate. In addition, the Commission put forward in October 2018 an amended proposal containing provisions reinforcing the role of the EBA as regards risks posed to the financial sector by money laundering activities.

The Council has been examining the package of proposals at technical level since October 2017.

In its mandate, the Council suggests to introduce improvements to the existing system for supervisory convergence in order to improve the efficiency, coherence and overall transparency of the process. The Council position introduces new tools, for example the elaboration of a strategic supervisory plan at EU level, while reinforcing existing mechanisms such as peer reviews or consultation of the stakeholders groups.

The general approach also reviews the existing governance structure. It maintains the principle that decisions have to be taken by the board of supervisors and ensures a key role for national competent authorities within the ESAs governance structure: no decision should be taken against the will of a majority of national supervisors, and the ultimate decision-making body of the Authority is the board of supervisors.

In parallel, the Council recommends reinforcing the role and powers of a management board as the main body preparing the board of supervisors’ meetings and decisions. It should be composed of a chairperson, six members of the board of supervisors and two full-time members, selected on the basis of their merit, managerial skills and experience of financial supervision. The chairperson and the fulltime members of the management board should be accountable to the European Parliament and to the Council.

As regards the authorities’ funding scheme, the Council position generally preserves the existing system of contributions coming partly from the EU budget and partly from national competent authorities.

Review of the powers of each of the three ESAs

The reform also reviews the powers of each of the three ESAs. The Council recommends giving ESMA direct supervision powers over critical benchmarks as well as services offering consolidated trading data covering trade in equity and non-equity instruments in the EU, the so-called “consolidated tape providers”. In addition, the Council proposes that information exchange and cooperation between national authorities be strengthened, and that the ESAs take better account of cross-border activities.

Finally, the reform aims at improving the functioning of the European Systemic Risk Board (ESRB) with target amendments. In its position, the Council seeks to clarify the role and competences of the ESRB in order to minimise potential risks of conflict of interests between the ECB’s different responsibilities in the fields of monetary policy, micro-prudential supervision (as the SSM) and macro-prudential supervision (as the ESRB).

Background and next steps

On 10 January, the economic and financial committee of the European Parliament adopted its position on the full review of the European system of financial supervision.

In December 2018, EU ambassadors approved a partial mandate for negotiations on the anti-money laundering component of the ESFS package

Following the Council’s confirmation of the general approach, both co-legislators are now in a position to start trilogue negotiations on the basis of the complete ESFS mandate, with a view to reaching an agreement at first reading. The first trilogue is scheduled to take place on 14 February.