The draft (PDF 617 KB) legislation provides more powers for the ESAs (including more direct supervision at EU level, especially by ESMA), improves governance arrangements and introduces funding by regulated firms. Specific reference is made to the outsourcing, delegation and risk transfer of key functions to third countries.
The Commission argues that:
- Although the banking sector already benefits from consistent supervision by the ECB SSM within the Banking Union, the role of the EBA in promoting supervisory convergence should be enhanced.
- Direct supervision by ESMA could significantly contribute to ensuring consistent supervision and uniform enforcement of the single rulebook for European capital markets, and would represent the first concrete steps towards a Single European Capital Markets Supervisor.
- Supervision of insurers should remain at the national level under the Solvency II framework, but EIOPA should oversee further convergence of supervisory practices.
The Commission proposes:
- To strengthen the ESAs' powers to ensure supervisory convergence, including through independent reviews of national authorities, a new role in setting EU-wide priorities for supervision, and early intervention in cases of possible supervisory arbitrage.
- ESMA should receive transaction data directly from market participants, have a reinforced coordination role as an investigatory hub for market abuse cases with a cross-border element, and have product intervention powers for UCITS and AIFs
- ESMA’s direct supervision should be extended to:
- Approving certain categories of prospectuses by EU issuers
- Authorisation and supervision of certain types of funds
- Supervisory powers in relation to CCPs
- Registration and supervision of data reporting service providers
- Critical benchmarks.
- EIOPA should have a greater role in coordinating the approval of (re)insurance and internal risk measurement models.
- The ESAs’ procedures to issue guidelines and recommendations should be enhanced through cost-benefit analysis, and by giving relevant stakeholder groups the right to seek action by the Commission if they consider that the instruments exceed the competences conferred on the ESAs by EU law.
- The Management Boards of the ESAs should be replaced by Executive Boards (with three full time members for EBA and EIOPA, five for ESMA).
- National authority funding of the ESAs should be replaced by funding raised directly from financial institutions. Contributions from the EU budget would remain, as would ESMA funding from directly supervised institutions.
- As part of its review of the prudential treatment of investment firms, the Commission intends to propose that large investment firms established within Member States participating in the Banking Union can become subject to supervision by the ECB (SSM).
- To confirm the existing arrangement that the ESRB is chaired by the President of the ECB.
In addition, the ESAs should consider the implications for supervision and supervisory convergence of (a) the UN agenda on sustainable development and investments, and (b) new developments in digital financial services (including information-sharing on cyber threats, incidents and attacks).
Implications for firms
Firms may welcome the enhanced procedures for developing guidelines and recommendations. But they will be concerned about the clear indication that current models of outsourcing or delegating key functions to third countries is being questioned, especially in the context of Brexit where many firms are seeking to retain significant resources in the UK by outsourcing from a new European firm.
EIOPA has long sought a greater role in the approval of internal models approvals. However, there will be concerns that this could become bureaucratically cumbersome and may not fully reflect national market characteristics. It is also not clear if this could mean existing internal models need to be re-approved.
Large investment firms are likely to become subject to direct supervision by the ECB.