Select Committee on European Scrutiny Thirty-Fourth Report


5 Financial management

(a)

(26712)

11021/05

COM(05) 181


(b)

(27519)

9628/06

COM(06) 213


Draft Regulation amending Regulation (EC, Euratom) No. 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities

Commission Report on the application of the provisions of the new Financial Regulation

Amended draft Regulation amending Regulation (EC, Euratom) No. 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities

Legal baseArticle 279(1); consultation; unanimity (from 1 January 2007 QMV)
Document originated(b) 18 May 2006
Deposited in Parliament(b) 24 May 2006
DepartmentHM Treasury
Basis of considerationEM of 18 June 2006
Previous Committee Report(a) HC 34-vii (2005-06), para 10 (26 October 2005)

(b) None

To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decision(a) Cleared

(b) Not cleared. Further information requested

Background

5.1 Management of the general budget of the European Communities is governed by Council Regulation (EC, Euratom) No. 1605/2002, the so-called Financial Regulation, and Commission Regulation (EC, Euratom) No. 2342/2002, the so-called Implementing Rules. These Regulations were a significant recasting of the previous legislation, introducing new accounting practices and systems, and came into operation from 1 January 2003. When the new Financial Regulation was adopted in 2002 the Commission gave a formal undertaking to the Council to report by 1 January 2006 on its operation, particularly in relation to the discontinuation of centralised ex ante (before the event) controls and, if necessary, to submit appropriate proposals.

5.2 In document (a) the Commission presented both the promised report and a draft Regulation to amend the Financial Regulation. It said that the main objectives of the review were to:

  • improve efficiency and transparency in the operation of the rules, frequently by clarification rather than change;
  • simplify the procedural and documentation requirements for contracts and grants and ensure they are proportionate to costs and risks;
  • simplify the requirements for grants for prior verification and for financial and legal guarantees and ensure they are proportionate to costs and risks; and
  • clarify and streamline the rules governing methods of management.

In the draft Regulation the Commission presented the amendments it considered necessary under the headings of Budgetary Principles (refining the principles set out in the Financial Regulation), Methods of Management (concerning shared management with Member States, international bodies and other agencies), Financial Actors (concerning principally internal audit), Recovery of Amounts Receivable, Public Procurement and Contracts, Grants (simplification of checks and guarantees in relation to risk), Accounting and Offices (concerning inter-institutional offices).

5.3 When we considered this document in October 2005 we noted that significant improvement in management of the Communities' financial resources is important and long awaited. But, given the expectation that the document would be overtaken by revised proposals from the Commission, we did not clear it and postponed consideration of this matter until deposit of a new document.[21]

The new document

5.4 Document (a) has now been the subject of:

  • in October 2005 a broadly favourable opinion from the European Economic and Social Committee;
  • in December 2005 a broadly favourable opinion from the European Court of Auditors, but with comment that the extent of the revision is too wide and expression of some concern in specific areas;
  • in March 2006 a substantial contribution on the Commission's proposal, suggesting 134 amendments, from the European Parliament; and
  • in March 2006 a completed first reading by the Council.

5.5 In order to take account of the views of these four bodies, as well as those of others consulted by the Commission, it has now proposed, in document (b), an amended draft Regulation in place of that in document (a). The Commission asserts that the amendments do not change the basic structure or the key elements of its original proposal. It says the amended draft Regulation preserves the provisions of the financial reform initiated in the current Financial Regulation and Implementing Rules and strikes a better balance between protection of the financial interest of the Communities and proportionality of administrative costs and user-friendly procedures.

5.6 It is the Commission's hope that consideration of the amended draft Regulation can be completed in time to allow it to adopt new Implementing Rules, with a view to both coming into operation from 1 January 2007.

The Government's view

5.7 The Economic Secretary to the Treasury (Ed Balls) says that the Commission's revised proposal contributes to the process of improving financial management in the Commission and protecting the financial interests of the Community. He tells us that the Government agrees with the Commission that the current Financial Regulation is overly stringent and in need of clarification. The Minister says that the Government is considering the details of the revised proposal carefully.

5.8 Meanwhile the Minister comments that the Government is pleased that:

  • there is to be a new budgetary principle of effective and efficient internal control; and
  • this principle includes a reference to the need to enforce controls that are sufficient to attain a tolerable level of risk, taking into account the multi-annual character of programmes as well as the nature of the payments concerned.

Conclusion

5.9 As document (a) is overtaken by document (b) we now clear the former.

5.10 As for the amended draft Regulation, document (b), as we have commented previously, improved management of the Communities' financial resources is important and overdue. We note the Commission's assertion that its revised proposal strikes a better balance between protection of the financial interest of the Communities and proportionality of administrative costs and user-friendly procedures and that the Government agrees with the Commission that the current Financial Regulation is overly stringent and in need of clarification. However before considering the document further we should like to hear the outcome of the Government's detailed consideration of the proposal, particularly as to any significant issues it needs to pursue before agreeing to the legislation.

5.11 Meanwhile we do not clear document (b).





21   See headnote. Back


 
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