The European System of Financial Supervision



The European System of Financial Supervision (‘ESFS’)

History and scope

The rules and institutions that make up the ESFS apply to all EU member states.

Following the 2008 credit crunch and subsequent events, including the contagion arising from the collapse of several Icelandic banks, serious criticisms were levelled at the existing EU financial services regulatory regime.

The original proposals for the ESFS were adopted by the European Commission on 23 September 2009, as the “more Europe” option for replacing the previous system. These proposals were then agreed by the European Parliament and Council of the EU following twelve months of intense negotiation, and the new supervisory structure came into being on 1 January 2011.

The main elements of the new structure were the creation of three European Supervisory Authorities (‘ESAs’) and the European Systemic Risk Board (‘ESRB’).

The European Supervisory Authorities (‘ESAs’)

The cornerstone of the ESFS are the three ESAs:

  • the European Banking Authority (‘EBA’)
  • the European Securities and Markets Authority (‘ESMA’); and
  • the European Insurance and Occupational Pensions Authority (‘EIOPA’).

These replace the previous ‘level 3 committees’ – CEBS, CESR and CEIOPS – which had been made up of representatives from national supervisors. The ESAs were intended to be more powerful and also more independent; both from the European Commission and from the Member States. It was recognised that financial supervision is an extremely technical area requiring an EU-level body with a high level of expertise.

Like the level 3 committees before them, the ESAs’ main role is to ensure the consistent application of rules by national competent authorities across the EU; and to work with the European Commission to prepare detailed secondary legislation for the implementation of financial services Regulations and Directives.

The ESFS gave the ESAs a greater role than the level 3 committees had, however: under the five-stage ‘Lamfalussy Process’ for financial services legislation (in its current, post-ESFS form):

  • the European Commission, the European Parliament and the Council of the EU agree high-level primary legislation (level 1);
  • the European Commission, with the help of the ESAs, prepares implementing secondary legislation (level 2);
  • the ESAs then prepare detailed ‘implementing technical standards’ and ‘regulatory technical standards’ – secondary legislation filling in the fine detail of the level 1 primary legislation – which must then be adopted by the European Commission (level 2.5);
  • the ESAs prepare guidance for and with national competent authorities, with the aim of co-ordinating cross-EU consistency in the application of the new laws (level 3); and
  • finally, national competent authorities are charged with actually enforcing the new laws in member states.

New and additional powers and responsibilities for the ESAs included:

  • exclusive supervision of Credit Rating Agencies;
  • co-ordinating cross-border supervision of groups by multiple national competent authorities, including colleges of supervisors;
  • generally promoting supervisory co-operation and co-ordination across Member States;
  • conducting EU-wide risk assessments and stress testing;
  • analysing the economics of financial markets to better understand market structure and market failures;
  • emergency powers enabling the ESAs to demand national competent authorities take specific remedial actions, including temporary restrictions on financial products or activities;
  • raising standards of supervision across Member States through issuing guidelines and instructions, both to national competent authorities and also to individual firms;
  • working to establish a single rulebook and a single supervisory handbook across the EU (see below); and
  • involvement in international discussions with regulators outside the EU.

The work of the ESAs has been described as ‘system management’, to distinguish it from the day-to-day, on-the-ground supervisory activities of Member States’ national competent authorities (which will now include the European Central Bank: see below).

The European Systemic Risk Board (‘ESRB’)

The ESRB is concerned with high-level macro-prudential oversight of the EU financial system, monitoring and predicting future risks to financial stability. It is a forum for co-ordination and discussion without any formal powers, save making recommendations to countries and ESAs – although if it makes a recommendation, the addressee will need to explain any non-compliance.

Single rulebook and single supervisory handbook

Beyond the new ESFS regulatory regime described above, there was also a renewed emphasis on harmonising both regulatory rules (the single rulebook) and also the application of rules by national competent authorities (the single supervisory handbook) across the EU. The ESAs are involved with both.

The ‘single rulebook’ approach also informs the process for new EU financial services legislation, which will:

  • involve more Regulations (which have direct effect in member states) and fewer Directives (which need to be implemented by national legislatures);
  • tend towards ‘maximum harmonisation’; i.e. allowing member states less discretion to ‘gold-plate’ the rules;
  • make use of ‘framework’-style primary legislation, with the detail being reserved to secondary legislation;
  • delegate more power to the European Commission to fill in the key details via secondary legislation; and
  • set more detailed standards at EU level.