In the last two years we have witnessed true regulatory hysteria in Europe. In 2001 the Lamfalussy Report kicked off the process for developing EU supervisory infrastructure to oversee the financial industry. Three supervisory committees (CESR, CEBS and CEIOPS) were established, however by the time the financial crisis hit Europe in 2007, we were in for yet another review of financial supervision in Europe.
As of January 2011 a new EU supervisory structure has been in place consisting of the European Systemic Risk Board (ESRB) and three European Supervisory Authorities (ESA) – the European Securities and Markets Authority (ESMA) in Paris, the European Banking Authority (EBA) in London and the European Insurance and Occupational Pension Authority (the EIOPA) in Frankfurt. These effectively replaced the previous committees – but was this change really necessary?
Examining the structure and membership of the new ESAs one could think that years of negotiations lead to the mere change of name and promotion of the European committees to supervisors as, effectively, the decision makers will remain the same. Question therefore arises as to the necessity of new supervisory bodies in the first place. Would not an internal restructuring of the level three committees be sufficient? Or is there more to the new structure?
Besides setting what will effectively become binding industry standards, the ESAs will enjoy investigative powers and, in certain cases, will be able to impose decisions which will be legally binding on market participants. This is a new power. Arguably however the most recent developments are not necessarily the most efficient ones. The ESAs will lack the close proximity to the markets they supervise – one that is typically enjoyed by national supervisors. Despite intensive attempts for harmonisation, the EU financial markets are still far from being identical and there are differences in the application of regulations which makes overall supervision by a single body difficult.
The ESAs’ regulations give them certain powers in case an emergency has been declared by the European Council. In such circumstances the ESAs will be able to issue decisions to individual national regulators to ensure national regulators and market participants comply with EU law. Despite this looking like the most useful power of the ESAs for the benefits of the internal market, it is hard to predict whether the ESAs will be able to issue the most commercially constructive decisions due to their lack of expert knowledge of individual EU members’ markets’ structure. What works for one Members State’s economy may not necessarily work for the other. Close cooperation with national regulators in emergencies may therefore be crucial before any decisions are taken by the ESAs.
It is hard to predict how far the ESAs will exercise their statutory powers and how much they will be willing to interfere with national regulator’s affairs. Even if the ESAs act in line with their objectives and stay in the shadow, having yet another supervisory layer with executive powers will arguably increase uncertainty, potentially endangering the competitiveness of the EU financial markets. Our hope is that the ESAs will understand that interfering with and placing excessive restrictions to national regulators may against European economic recovery.
