3 Financial services
| (30660)
10511/09
+ ADDs 1-2
COM(09) 252
| Commission Communication: European financial supervision
|
| Legal base | — |
| Document originated | 27 May 2009
|
| Deposited in Parliament | 29 May 2009
|
| Department | HM Treasury |
| Basis of consideration | EM of 1 June 2009
|
| Previous Committee Report | None
|
| To be discussed in Council | ECOFIN Council 9 June 2009 and European Council 18-19 June 2009
|
| Committee's assessment | Politically important
|
| Committee's decision | For debate in European Committee together with the Commission Communication: Driving European Recovery
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Background
3.1 In its Communication Driving European Recovery, addressed
to the European Council, the Commission welcomed the de
Larosière Report[8]
and supported the main thrust of its recommendations. It said
that it would be developing proposals to establish a new Community
financial supervision system in order to suggest a reform programme
with five key principles:
- providing the Community with a supervisory framework that
detects potential risks early, deals with them effectively before
they have an impact and meets the challenge of complex international
financial markets;
- filling gaps where Community or national regulation
is insufficient or incomplete, based on a "safety first"
approach;
- ensuring that Community investors, consumers
and SMEs can be confident about their savings, access to credit
and their rights as concerns financial products;
- improving risk management in financial firms
and aligning pay incentives with sustainable performance; and
- ensuring more effective sanctions against market
wrongdoing.[9]
3.2 The European Council at its meeting of 19-20
March 2009 agreed that the Commission should bring forward a package
of proposals for regulatory and supervisory reform by the end
of May 2009. In this context the Commission has recently presented
proposals in relation to Packaged Retail Investment Products,[10]
remuneration policies for the financial services sector[11]
and Alternative Investment Fund Managers.[12]
The document
3.3 In this Communication the Commission sets out
proposals for a new Community supervisory architecture, with two
new pillars — a European Systemic Risk Council and a European
System of Financial Supervisors. The proposed European Systemic
Risk Council:
- would act as a macro-prudential
early warning system;
- would be an independent body;
- the European Central Bank would provide logistical
and administrative support;
- the purpose of the Council would be to monitor
and assess potential threats to financial stability that arise
from macroeconomic developments and developments within the financial
system as a whole;
- it would issue risk warnings and, where necessary,
recommendations for action to deal with these risks, which would
be acted on by the recipients on a "comply or explain"
basis;
- it would work with counterparts at international
level such as the International Monetary Fund and the new Financial
Stability Board;
- it would not have any legal powers;
- the Council would be made up of Community central
bank governors, the Commission and would be chaired by the President
of the European Central Bank, with a non-eurozone central bank
governor as vice chairperson; and
- the chairpersons of simultaneously proposed European
Supervisory Authorities would also be members.
3.4 On the micro-prudential side, the Commission
proposes a European System of Financial Supervisors made up of
national supervisors, who would continue to supervise individual
firms, but who would be overseen by three new European Supervisory
Authorities. These authorities would replace the current Lamfalussy
Level 3 committees in banking, securities and insurance[13]
and would have increased responsibilities, defined legal powers
and greater authority. Their key role would be to ensure harmonised
rules and more uniform supervisory practices and enforcement.
They would also have a role of directly supervising Central Counter
Party clearing houses and Credit Rating Agencies, in crisis management
and in oversight of a new central Community database of all micro-prudential
information collected by national authorities.
3.5 The Commission proposes a number of powers for
the authorities, including:
- binding mediation between supervisors;
- binding decisions where there is a breach of
Community law;
- power to adopt decisions over individual firms;
- some rulemaking roles; and
- the power to make some emergency decisions, for
example over short selling.
3.6 The Commission says that it proposes to bring
forward legislative proposals to give effect to the framework
it sets out in the Communication in the autumn of 2009. It invites
comment on the Communication from stakeholders by 15 July 2009.
And it concludes by inviting the European Council, at its meeting
of 18-19 June 2009, to:
"endorse the creation of a new European Systemic
Risk Council (ESRC), chaired by the ECB President and including
governors of national central banks, the chairpersons of the three
European Supervisory Authorities and a member of the European
Commission. There should also be close involvement of national
supervisory authorities and the chair of the Economic and Financial
Committee in the work of the ESRC;
"agree that the ESRC will be charged with continuously
assessing the stability of the financial system as a whole and
be given the necessary authority to issue timely warnings/recommendations
for remedial action and to monitor responses;
"agree on the establishment of a new European
System of Financial Supervisors (ESFS) composed of 3 new European
Supervisory Authorities working in a network with national supervisory
authorities to develop common supervisory approaches to the supervision
of all financial firms, to protect consumers of financial services
and to contribute to the development of a single set of harmonized
rules. Inter alia, the ESFS should draw up technical standards,
help ensure the consistent application of Community law and resolve
disputes between supervisors;
"underline the importance of a truly integrated
approach to European financial supervision: the need for strong
interaction between the ESRC and the ESFS including the exchange
of micro-prudential information relevant for macro-prudential
analysis; the willingness of the relevant parties to act upon
risk warnings and/or recommendations; and the need for the ESRC
to act as an interface with international institutions notably
the FSB and IMF;
"welcome the Commission's intention to bring
forward, as soon as possible, the legislative changes to put in
place the new framework for EU supervision, on the basis of the
orientations set out in this Communication and after further consultation
of stakeholders, so that the necessary measures are adopted in
time for the renewed framework to be up and running during 2010;
"in addition, support the acceleration of work
to build a comprehensive cross border framework to strengthen
the European Union's financial crisis management/resolution systems,
including guarantee schemes and burden sharing."
3.7 The Communication is accompanied by a, non-quantitative,
impact assessment and an executive summary of the assessment.
In the executive summary the Commission refers to its consultation
on the de Larosière Report, during which it received 116
submissions, describes the problems it seeks to address, sets
out general and specific objectives, discusses a range of options
and concludes:
"The selected options should fully achieve the
objectives … by giving effect to a number of immediate changes
to the organisation of financial supervision in the EU. These
expected changes are reflected by the Operational Objectives set
for the ESFS and the ESRC. In general, by contributing to safeguarding
financial stability and to a more effective control over the conduct
of financial companies, the proposed new framework would increase
the welfare of most stakeholder groups in the Internal Market:
"Financial institutions, including their shareholders
and employees: by improving the business environment due to enhanced
financial stability and more effective crisis prevention in the
EU; ensuring a level playing field and reducing compliance costs
for cross-border companies; attracting investments to the Internal
Market from third countries thanks to enhanced financial stability;
maintaining jobs and creating new jobs in the financial sector.
"Users of financial services, including depositors,
investors, pensioners, and non-financial companies: by increasing
consumer and investor confidence in relation to the increased
reliability of the financial sector; reducing risks of default
of individual financial institutions; improving stability of pension
funds and providing incentives for development of cross-border
occupational pension funds; facilitating access to finance by
strengthening the single capital market in the EU.
"Consumers and employees in the wider economy.
The successful identification and prevention by the ESRC of systemic
financial crises with the potential to spill over into the real
economy can have a beneficial effect in preventing or reducing
macro-economic recessions and the associated effects on output
consumption and jobs.
"Public authorities, including supervisors,
central banks and finance ministries: by clarifying roles and
responsibilities at the national and Community level and establishing
an effective framework for conflict resolution; indirect strengthening
of supervisory independence; creating a framework linking micro-prudential
supervision with macro-prudential supervision; providing governments
and other concerned authorities with recommendations for actions
needed to protect macro-economic stability in the EU and individual
Member States, and giving effectiveness to the analysis of macro
prudential developments carried out in the central banks; and
by diminishing risks of having to inject public money into the
financial system."
The Government's view
3.8 The Financial Services Secretary to the Treasury
(Lord Myners) says that, in keeping with the agreements reached
at the G-20 London Summit of 2 April 2009, the Government:
- supports a strengthened macro-prudential
early warning system in the Community to enhance financial stability;
- welcomes, therefore, the Commission's proposal
to set up an independent European Systemic Risk Council;
- supports strengthening the regulation of financial
services in the Community, including harmonising the rules applying
to Community firms, fewer national derogations which create regulatory
arbitrage, improving the quality and efficiency of supervision
through greater use of peer review and mediation in disputes between
supervisors;
- fully supports measures to ensure the proper
application and enforcement of Community rules; and
- agrees that day-to-day supervision should remain
at national level.
3.9 The Minister continues that the Government is,
however, concerned about some elements of the Commission's proposals.
He says that it is particularly concerned that, despite Commission's
reassurances, the implication of the proposed supervisory architecture
is that it could result in the new authorities having supervisory
powers over national supervisors or individual firms and, in theory,
in direct or indirect fiscal consequences for national treasuries.
He comments that the Government believes the financial crisis
has shown the critical importance of keeping supervisory and fiscal
responsibility aligned to ensure effective crisis management arrangements.
3.10 The Minister tells us that the Government:
- will look carefully at the
legislative proposals that are likely to follow this autumn, to
ensure that the mechanisms chosen to meet the stated objectives
are cost effective and efficient;
- will, before then, seek to ensure that the first
decisions made at June 2009 European Council reflect its concerns
and do not threaten national competence over supervisory decisions;
and
- will continue to discuss the strengthening of
financial regulation and supervision in the Community with UK
industry and stakeholders and within the tripartite (the Treasury,
the Bank of England and the Financial Services Authority) arrangements.
Conclusion
3.11 This Communication clearly marks an important
step towards new regulatory and supervisory arrangements for the
Community's financial services sector. We recommend that it should
be debated in European Committee together with the Commission
Communication Driving European Recovery, which we have
previously recommended for debate.[14]
3.12 In the debate Members may wish to explore
further the Government's reactions to these latest proposals.
The may also wish to examine the Commission proposal that the
European Council should endorse its approach before the period
it has allowed for stakeholder comment on its Communication (until
15 July 2009) has expired.
8 See http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225_en.pdf. Back
9
(30474) 7084/09 + ADD 1: see HC 19-xii (2008-09), chapter 1 (25
March 2009). Back
10
(30623) 9493/09 + ADDs 1-2: see chapter 26 in this Report. Back
11
(30628) (30641) (30642) 9495/09 9589/09 + ADDs 1-2 9590/09: see
chapter 27 in this Report. Back
12
(30624) 9494/09 + ADDs 1-2: see chapter 9 in this Report. Back
13
TheLamfalussyprocessesareafour-levelapproachtoregulationoftheCommunityfinancialservicessectoranda
variant of the comitology process. (Comitology procedures regulate
exercise by the Commission of implementing powers conferred on
it by the Council and the European Parliament and are essentially
intended for detailed measures to implement Community legislation.)
At the third level committees of national regulators work on strengthening
co-ordination of regulation, for instance by establishing common
interpretations of legislation and peer group review of regulatory
practice. The Level 3 committees are the Committee of European
Banking Supervisors (the CEBS), on which the UK representatives
are from the Financial Services Authority and the Bank of England,
the Committee of European Insurance and Occupational Pensions
Supervisors (CEIOPS), on which the UK representatives are from
the Financial Services Authority and the Pensions Regulator and
the Committee of European Securities Regulators (CESR), on which
the UK representative is from the Financial Services Authority. Back
14
See footnote 9. Back
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