The European Commission (EC)’s proposals for a new pan-European financial regulatory structure, based on recommendations by the de Larosière group, do not provide a sufficiently clear framework, according to some observers.
The Commission has called for the creation of the European System of Financial Supervisors to provide a more centralised structure for financial regulation in the region. The body would be fully accountable to political authorities in the EU. Under its new plans, the three current EC committees charged with harmonising banking, insurance and securities – CEBS, CEIOPS and CESR respectively – would be converted into European supervisory authorities. Regulation would continue to take place at the member state level for firms operating locally, but companies doing business across borders would be regulated by ‘colleges’ of supervisors from the relevant countries. The supervisory authorities would oversee this structure and intermediate where necessary.
However, the pan-European supervisory authorities would be directly responsible for overseeing certain entities with pan-European reach, such as rating agencies and EU central counterparty clearing houses. Karel Lannoo, CEO of the Centre for European Policy Studies, argues that it is unclear under the proposals whether the supervision of clearing and settlement would fall under the proposed European Banking Authority, which would replace CEBS, or CESR’s successor, the European Securities Authority.
“It would have been better to have a single integrated supervisory entity at European level,” he told theTRADEnews.com. “This would result in more consistent supervision, rather than turf wars about who should supervise what.”
In November 2008, EC president José Manuel Barroso mandated the de Larosière group to give recommendations on how to strengthen European supervisory arrangements and rebuild citizens’ trust in the financial system. The resulting report was published on 25 February 2009. Market participants now have until 15 July to comment on the EC’s proposals. Legislation is expected in the autumn, and the new framework should be in place by 2010.
Rather than converting the existing committees into authorities with marginally greater powers, Lannoo thinks the EC should have introduced a single system of financial supervisors. While he acknowledges that the committees’ new powers could harmonise the implementation and monitoring of pan-European directives such as MiFID, he adds, “It is too gradual. The events of the past few months during the financial crisis do not require a gradual response. This was an opportunity to have a more efficient Europe-wide supervisory system but we are not getting there. If we don’t have it now it will be even more difficult later.”
However, others feel that the new proposed regulatory framework will bring benefits. According to Jarkko Syyrilä, director of international relations at the UK Investment Management Association, the plans could take away some of the pain of offering asset management services across Europe.
“Our members – UK asset management firms – sell investment funds to investors in all 27 EU member states so we certainly welcome the part of the proposals suggesting there will be a more harmonised rule-book,” said Syyrilä. “Providing services cross-border is really cumbersome at the moment because, while there are some harmonisation initiatives, such as the UCITS directive, there is still a lot of diversity in national implementation of them.”
UCITS, originally adopted in 1985, is designed to facilitate the distribution of investment products throughout the EU by only requiring the products to be authorised by one member state.
Syyrilä estimates that around one-third of UK asset managers’ business originates overseas, with the bulk from Europe. “It is important that this business can be conducted as flexibly as possible so more harmonised reading of the rules should act in our favour,” he said.
The clearing and settlement of pan-European equity trading could also benefit from the proposed regulatory framework. Regulation of clearing houses at the EU level,
as envisaged under the current proposals, could ease interoperability. The Commission is likely to regulate clearing houses on a pan-European basis as part of its desire to create a robust post-trade infrastructure for derivatives and cash securities.
“At the moment, clearing houses are not really regulated on a cross-border basis at all, which causes a lot of difficulties for providing cross-border clearing services,” said Richard Stones, a consultant in the financial institutions group at law firm Lovells. “To the extent that everybody wants to have interoperability and the ability to choose clearing and settlement venues, the current regime is very unsatisfactory. However, the proposals introduce the idea of true European regulation, and clearing houses on this basis would be regulated directly by the new European bodies.”
Despite trading across borders, Europe’s new multilateral trading facilities (MTFs) are unlikely to see much change as a result of the proposed structure, according to Stones. “An MTF is pretty unlikely to be much affected because the rules are quite clear that an MTF is regulated in its home market, and is regulated in accordance with the EU provisions anyway,” he said.
CESR has recently taken a bigger role in overseeing MTFs. While national regulators are still responsible for supervising the platforms, CESR issued guidance on 20 May saying that regulators could refer decisions to the committee about the use of pre-trade transparency waivers by non-displayed MTFs.