In a speech to the European Alliance of Liberals and Democrats, ESMA’s Chair, Steven Maijoor, called for a fundamental review of the current patchwork of third country provisions in EU legislation and stressed the need for greater supervisory convergence within the EU.
In a speech to the European Alliance of Liberals and Democrats, ESMA’s Chair, Steven Maijoor, called for a fundamental review of the current patchwork of third country provisions in EU legislation and stressed the need for greater supervisory convergence within the EU. He also cautioned national regulators not to compete on regulatory or supervisory treatment in order to win a greater share of business that is moving from the UK as a result of Brexit, in particular regarding the possibility for firms to delegate or outsource activities back to the UK.
Steven Maijoor’s comments frame ESMA’s published programme of supervisory convergence for 2017 (see this article for further details). He highlighted the fact that because the provision of cross-border financial markets services is relatively easy, activities have concentrated in financial centres that focus on, for example, market infrastructures, asset management, high frequency trading firms and certain derivative instruments. As a result, a substantial share of national supervision concerns cross-border activities. The question is whether national regulators sufficiently assess and address the risks that their supervised entities might be creating outside their jurisdiction, in other parts of the EU.
Since ESMA was established, supervisory convergence tools have improved but are still too weak, in ESMA’s view, given the extent of cross-border activity. Mr Maijoor cited as an example the offering of CFDs and binary options to the retail market, which is concentrated from one Member State where firms use aggressive marketing campaigns and large call centres.
He called for a form of “no action” letters to be available to ESMA and for the process and timing of the various stages of drafting Regulatory Technical Standards (RTS) to be improved. ESMA needs at least 12 months after the Level 1 text has been published in the Official Journal, and the Commission should seek to endorse the RTS within the deadline envisaged in the legislation. Better alignment of Level 1 and 2 texts could be achieved with better co-ordination and communication between the institutions.
Mr Maijoor also took the opportunity to observe that the UK decision to leave the EU Brexit results in increased risks to consistent supervision. He urged national regulators not to compete on regulatory and supervisory treatment. He gave by way of practical example the ability for EU firms to delegate or outsource to a UK entity while being registered and supervised by one of the EU27 regulators.
As regards the EU framework for third countries, Mr Maijoor said it is not fit for purpose and requires overhaul. In fact, there is no generic framework. There are different arrangements in different pieces of legislation - which are a mixture of equivalence, endorsement, recognition or passporting – or no arrangement at all. Also, the framework is time and resource-intensive, requiring detailed assessments of other countries’ regimes and lengthy negotiations if a country is not initially adjudged equivalent.
Mr Maijor cited the equivalence system under EMIR: “the EU is an island of third-country reliance in a world that has mostly opted for individual registration of CCPs that want to do cross-border business.” ESMA has very limited opportunities to see the specific risks that third-country CCPs might be creating in the EU as it has very limited powers regarding information collection and risk assessment, and no regular supervision and enforcement tools.
It remains to be seen how quickly and in what way the co-legislators will respond to this call for an overhaul of the system. Certainly, it would be a major drafting and practical task to bring about greater consistency of approach. Political pressures, in Europe and beyond, may provide momentum behind the task. In the meantime, firms and market entities will wish to factor into their business planning that the third-country provisions of today may look rather different in a few years.