Towards a Capital Markets Union: Commission proposes changes to financial supervisory framework

The global financial crisis and the resulting Euro-crisis were a wake-up call for EU financial markets’ legislation and supervision. European banking legislation used to be based on Directives, leaving room for national interpretation and significant divergence in national rules. The result of integration without centralised supervision was that inadequate supervision in one Member State could harm the financial market participants and consumers in other Member States. 

To have the same rules and procedures for the various financial markets was important for the stability, but also for the functioning, of these markets. However, the same rules and procedures also increased the need for better and more centralised supervision. Steps have been taken since the Euro-crisis and the integration process of the different financial markets continues. Highlights include the creation of the Banking Union, the Single Rulebook and now the path towards a Capital Markets Union (CMU). The Commission presented its Action Plan on a Capital Markets Union in 2015, with the aim of establishing the building blocks of an integrated EU capital market by 2019. In its Mid-Term Review of the CMU project, the Commission identified strengthened supervision as a new priority to accelerate market integration, and to ensure consistent supervision and uniform enforcement of the Single Rulebook.

The importance of a Capital Markets Union and a stronger Internal Market was underlined by President Juncker in his State of the Union address on 13 September 2017. One week later, on 20 September, the Commission presented a Communication together with a proposal amending the three European Supervisory Authorities’ (ESAs) founding Regulations (on the European Banking Authority (EBA), on the European Insurance and Occupational Pensions Authority (EIOPA), and on the European Securities and Markets Authority (ESMA)) and other Regulations (EuVECA, EuSEF, MiFIR, ELTIFs, BMR and the Prospectus Regulation). There was also a proposal to amend the Regulation establishing the European Systemic Risk Board (ESRB), a proposal to amend MiFID II and Solvency II, and an amendment to a pending proposal modifying EMIR.

This package would strengthen EU financial supervision, particularly giving the EU Supervisory Authorities (ESAs) more powers, changing their governance structure and improving their funding schemes. It would also promote sustainable finance and FinTech developments, making financial supervision ready for the future. Finally, more integrated financial supervision would prepare the EU for the United Kingdom’s withdrawal from the bloc.

This briefing focuses on the strategy of the Commission as described in the Communication by presenting the most important proposals and describing the implications if the proposals were to be adopted.

The European System of Financial Supervision (ESFS)

All proposed changes deal with the European System of Financial Supervision (ESFS) and its structure. The ESFS, established in 2010-2011, is the network around the three EU Supervisory Authorities (ESAs), the European Systemic Risk Board (ESRB) and the national supervisors. The ESFS needs to ensure consistent and appropriate EU-wide financial supervision, covering both microprudential and macroprudential supervision. Microprudential supervision covers the supervision of individual institutions such as banks or insurance companies. The supervision in this regard is carried out by the three ESAs: the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). Macroprudential supervision deals with the oversight of the financial system as a whole. Supervision in this regard is performed by the European Systemic Risk Board (ESRB).   

Strategy for better and more integrated supervision

In its Communication, the Commission expands on the rationale behind the proposals, discussing the financial crisis, increased supervision and the benefits of EU action so far. It emphasises how the Single Market in financial services promotes jobs, growth and investment across the EU. The Commission also states that if markets are truly integrated, savers and investors could obtain higher returns, and both consumers and businesses could get better financing conditions because of greater competition in the financial sector.

Given the extent of integration of the European Single Market, the financial markets and the capital markets, it is both clear and essential that the legal frameworks in these sectors need to be aligned. Integration in these areas is a process and the EU is working step by step to improve the legal framework.

The second part of the Communication expands on the need for more integrated supervision to foster the Capital Markets Union and financial integration. The Commission explains that integrated supervision should apply to the banking sector, capital markets, and insurance and pension markets.

The 2015 Five Presidents’ Report identified a Single European Capital Markets Supervisor as a longer-term objective. The CMU would bring about further financial integration, making it even more important to strengthen the capacity of the ESAs. In particular, the Commission argues that direct supervision by ESMA could represent a first step towards a Single European Capital Markets Supervisor. Furthermore, integrated financial markets would also increase the importance of macroprudential oversight. As a consequence, the Commission indicates that the ESRB should play a stronger role in the future.

The third part of the Communication describes the key elements of the proposals for a strengthened supervisory framework. Amendments to existing Regulations and Directives are proposed to extend the powers of the ESAs and ESRB, and to change their governance and funding schemes. Next to these proposed amendments the Commission announces a raft of upcoming legislation concerning regulatory measures for sustainable finance and FinTech, both of which are announced for early 2018. 

The Commission argues that the ESAs need to be strengthened to ensure consistent supervision and uniform enforcement of the Single Rulebook. The proposals would do this by expanding the mandate of the three ESAs:

  • The European Securities Markets Authority (ESMA) would receive transaction data directly from the market participants, giving more market expertise to ESMA for better use of its supervisory powers. It would also receive a stronger coordination role to investigate cross-border market abuse.
  • The European Insurance and Occupational Pensions Authority (EIOPA) would get a greater role in coordinating the authorisation of the internal risk measurements models used by insurance and reinsurance companies, to avoid divergent supervisory standards.
  • The procedures and guidelines of all three ESAs would be improved to reflect their importance, thereby requiring them to conduct cost-benefit analysis, but also to allow relevant stakeholder groups to seek action by the Commission if they consider the relevant Authority surpasses its competences.  
  • Direct supervision would be expanded to capital market entry, actors, infrastructure and data & information.

Next to these expanding powers, the governance structures and funding of the ESAs would also be changed, requiring the ESAs to have an independent Executive Board with full-time members to ensure effective, impartial and EU-oriented decisions. The proposals would also ensure that the Parliament and Council can provide the ESAs with the necessary budgets to reflect their new tasks and responsibilities. In addition to this, funding from industry and market participants would also be required; the participants who benefit most directly from the supervision would be required to play a more significant role in their financing.

The European Systemic Risk Board (ESRB) would also be strengthened by the amendments to increase its efficiency and to enable it to better fulfil its mission of macroprudential coordination. The Commission proposes that the ESRB is chaired by the President of the European Central Bank. The organisation of the ESRB would be modified to reflect more recent changes, most notably with regard to the creation of the Banking Union.

The fourth part of the Communication presents the plan to ‘integrate sustainable finance considerations into financial supervision’. With the scale of investments required for moving the EU economy towards a low-carbon and resource-efficient one, the EU hopes to mobilise and reorient private capital resources to more sustainable investments. The Commission is expected to present an Action Plan in early 2018 with regulatory measures for sustainable finance. As a first step, the proposals that accompany the Communication would require the ESAs to take environmental, social and governance (ESG) factors into account in their mandate.  

The fifth part deals with FinTech. The Commission recognises that the use of digital technologies transforms the financial sector to the benefit of consumers and businesses, as well as creating opportunities for FinTech start-ups. The Commission is expected to present an Action Plan in early 2018 that sets out the steps to be taken in this regard. The proposals presented in the current package would already require the ESAs to take into account issues related to innovation and technological development.

The Commission concludes by stressing the momentum, pointing out that flourishing European financial markets and continued integration processes pave the way towards better EU supervision of the financial sector. The Five Presidents' Report on Completing Europe's Economic and Monetary Union and the more recent Commission Reflection Paper on Deepening the Economic and Monetary Union have called for completing the Financial Union by 2019. The plans presented under the package are part of this bigger framework concerning the integration of EU financial markets and the creation of a Capital Markets Union. As a result, the Commission calls on the European Parliament and Council to have the rules in place by 2019.

Next steps

The Communication and proposals have been sent to the European Parliament and to the Council for consideration. These institutions are expected to express their positions on the Commission’s proposals before starting inter-institutional negotiations, with a view to reaching a first reading agreement.

The European Parliament and Council may also decide to respond formally to the Communication in the following months.

Additional facts

Documents presented under the package:

  • Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions: Reinforcing integrated supervision to strengthen Capital Markets Union and financial integration in a changing environment COM(2017)542;
  • Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) No 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) No 345/2013 on European venture capital funds; Regulation (EU) No 346/2013 on European social entrepreneurship funds; Regulation (EU) No 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market COM(2017)536;
  • Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments and Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) COM(2017)537;
  • Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board COM(2017)538;
  • Amendment of pending proposal for a Regulation amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs (EMIR II Commission's proposal) COM(2017)539.