5.01  Most of the big decisions about the shape and content of the rules governing financial market activity in Europe are now taken at the EU level and the domestic laws of Member States have been relegated to an increasingly secondary role.¹ This has not been matched by a simultaneous centralization of supervisory responsibility. Instead, the tasks of day-to-day implementation and on-the-ground enforcement of this body of regulation still fall to Member States’ supervisory authorities, albeit with a layer of EU-wide structural coordination added on top. EU law impinges to a certain extent on the way in which supervisory responsibilities are discharged at Member State level but key structural decisions about the organization and conduct of supervision remain within Member States’ discretion. Many different supervisory models are in operation in the Member States.²

5.02  One consequence of the lack of centralization with respect to supervision is that the European financial market supervisory scene is a cluttered landscape. Many of the 27 Member States divide supervisory responsibilities between several different (p. 112) agencies, and also involve their central bank to a greater or lesser extent. The picture becomes even more crowded when authorities from the European Economic Area (EEA) countries and the ECB and the European Commission are taken into account as well. All of these bodies participate in some way in one or more of the EU-wide coordinating structures, which are as follows (see Table 5.1).

5.03  The new micro-supervisory authorities (collectively the ESAs) do not displace existing national authorities. The ESAs, together with the national supervisors and the ESRB, form the ESFS.

5.04  Why has this complicated patchwork of institutional arrangements endured? Why has Member State-based supervision not already succumbed to the powerful forces that have propelled the centralization of regulation? The model of centralized European supervision as the necessary and appropriate complement to centralized European regulation has merit on grounds of logic, clarity, and intellectual purity.^3a But, of course, financial market supervision is an intensely practical ‘real world’ activity.⁴ To understand the current institutional setting for financial market supervision in the EU and to form a view on its future direction, it is necessary therefore to conduct a careful examination that takes account of the highly-charged political questions that surround the organization of, and payment for, (p. 113) supervision and of legal issues arising from the limits of European law. This chapter conducts such an examination. The chapter provides a ‘snapshot’ of a particular period in time—the transition from a committee-based approach to the establishment of EU supervisory authorities—but it is important to capture this moment because it has the potential to come to be seen as a milestone in the history of EU financial market supervision.

5.05  Whilst regulation and supervision within the EU are not perfectly synchronized and full federalization of supervision has been judged premature, it is important nevertheless to emphasize from the outset of this discussion that the organization of cross-border supervision of European financial markets has not been immutable in recent years: it is just that, at the EU level, this development has taken place in a more incremental and evolutionary fashion than the bold steps that characterized the programme of legislative reform conducted over the same period. And it is also important to note that things are changing: the pace of reform with respect to the organization of supervision at the EU level has accelerated in the wake of the financial crisis, although the evolutionary approach has not been completely abandoned. This article will suggest that the step-by-step assumption of supervisory responsibilities by bodies that have a pan-European remit that is now occurring at an unprecedented pace is likely to lead eventually to the emergence of powerful European supervisory authorities. It will not attempt to put dates on the rebalancing of the system towards the centre (because that development is likely to occur gradually over time and is dependent on too many variables and possible contingencies to pin it down), but it will argue that the prospect of the scene becoming dominated by euro-authorities that have direct supervisory powers in respect of large swathes of financial market activity has moved significantly closer as a result of the recent post-crisis reforms.

5.06  The chapter is organized as follows. After this introduction, the following section (paras 5.07–5.10) provides an overview of the organization of financial market supervision at national level and identifies certain institutional changes that some Member States have undertaken in the aftermath of the financial crisis. The next section (paras 5.11–5.37) examines the short history of the three pan-European committees of supervisors that were in operation until their replacement by new European Supervisory Authorities with formal effect from January 2011. The next section (paras 5.38–5.84) reviews the immediate background to the establishment of the new European Supervisory Authorities and considers the significance of the Authorities’ new powers to enforce EU law, to override national supervisors, and to conduct direct supervision. All of these powers are tightly constrained and restrictive conditions apply. Nevertheless, their very existence is highly significant. The final section (paras 5.85–5.92) takes stock of these developments and considers factors that continue to stand in the way of full federalization of supervisory responsibility.

5.07  Before the financial crisis, many countries located frontline responsibility for micro-prudential supervision of all sectors of financial market activity with a single regulatory authority that operated autonomously from the central bank.⁵ Countries in this group included Belgium, Denmark, Finland, Germany, Norway (EEA), Poland, Sweden, and the United Kingdom.⁶ The Czech Republic and Slovakia also employed the integrated supervisor model but all of the relevant functions were performed by the central bank rather than by dedicated supervisory authorities. Some other countries divided responsibilities between the central bank (for banking supervision), a securities market supervisory authority, and one or more authorities that had responsibility for oversight in respect of insurance and pensions. Greece, Italy, Portugal, and Spain were in this group. Another model was in operation in the Netherlands, whereby banking, insurance, and pensions supervision were the responsibility of the central bank and another authority had responsibility for conduct of business regulation across all three sectors of financial market activity. The Dutch approach is sometimes described as a ‘twin peaks’ model, in which there is one supervisor for prudential matters and another in respect of conduct of business.⁷

5.08  The financial crisis triggered a fresh look at institutional arrangements and in particular a reappraisal of the role of central banks in financial supervision. Responsibility for macro-prudential supervision (ie systemic stability oversight) is a role that falls naturally to central banks. The crisis demonstrated both that macro-prudential supervision had not been afforded sufficient priority in the preceding years, and also the critical importance of ensuring that macro and micro-prudential supervision dovetail well. In 2010 France re-organized its institutional structures along, broadly, twin peaks lines, with a strong role for the Banque de France.⁸ The Irish legislature moved to put its central bank back at the centre of financial supervision and financial stability oversight.⁹ In the United Kingdom, (p. 115) the Financial Services Authority is to be abolished by 2013, the Bank of England is to be put back in charge of supervision at the apex of a structure involving an objectives-oriented approach in which, broadly, one authority, established as a subsidiary of the Bank, will be responsible for micro-prudential supervision and another will oversee consumer protection and markets issues.¹⁰ There have been discussions in Germany about putting the Bundesbank back at the centre of supervisory power.¹¹ Belgium has also adjusted the relationship between its central bank and the financial market supervisor, and in 2010 passed a law to replace the Banking, Finance and Insurance Commission (CBFA) by the new Financial Services and Markets Authority (FSMA).¹²

5.09  The diversity that currently exists in national institutional arrangements for the oversight of financial markets indicates that there is no foundation of common transnational assumptions about what financial market supervisory architecture should look like on which to build an overarching pan-European federal structure from the bottom up. Moreover, to the extent that it was once possible to see a convergence trend at Member State level, this could be going into reverse. Before the crisis, Wymeersch identified a movement in European countries towards the fully-integrated single supervisor model and thought that this could be a first streamlining step that could, in the longer term, foster developments at the European level.¹³ Now that some established national supervisory structures have been destabilized and wider aspects of domestic politics have produced some sharply-divided views on the appropriate shape of financial market supervision, the immediate prospects for bottom-up-driven rationalization of supervision in Europe do not look so good.¹⁴ Indeed, one of the key challenges involved in the break up of integrated national supervisors in large European economies is to manage this process in such a way as to avoid negative overspills that could undermine the progress that has been made in the promotion of supervisory coordination and consistency at the EU level.

5.10  On the other hand, the emergence of an EU-wide financial supervisory structure has never been exclusively dependent on the gradual coming together of national supervisors. In spite of the obvious potential difficulties involved in putting a pan-European structure on top of quite fragmented and diverse national approaches, ‘top-down’ interventions by EU Institutions at key moments have (p. 116) led to significant institutional developments. One such pivotal moment came in 2001 when it became clear that the ambitious integration goals of the EC Financial Services Action Plan could not be met without some institutional reordering, an initiative led to the setting up of the three committees of supervisors (CEBS, CESR, and CEIOPS). The 2008–09 financial crisis has provided another such window of opportunity. The transformation of committees of supervisors to ESAs with certain binding powers and the serious attention that has since turned to possible bold institutional innovations in respect of crisis management are steps that would have been politically unthinkable just a few years ago. Crises recede but the clock cannot be turned back; changes made in the immediate aftermath of a shock can have an enduring effect even though their full significance may not be properly appreciated until some time has passed. Whilst the principle that Member States remain in charge of day-to-day supervision still governs, there have now been encroachments, and that is significant—the Rubicon has been crossed. The following sections elaborate.

5.11  This section examines the short history of the three pan-European committees of financial market supervisors that operated until 2011: CESR, CEBS, and CEIOPS. These committees were established by the European Commission between 2001 and 2003.¹⁵ They became known, collectively, as the ‘Lamfalussy’ or ‘Level 3’ Committees because it was the influential report by a committee chaired by Baron Alexandre Lamfalussy that recommended the setting up of a body of this type for the field of securities, and which outlined a series of ‘Level 3’ tasks to be conducted by such a body.¹⁶ As from January 2011, the Level 3 Committees are transformed into the ESAs. The new arrangements are thus a form of institutional consolidation that builds on the existing structures rather than being a clean break with the past.

5.12  In broad terms, the Level 3 Committees’ activities impinged in a variety of ways on the conduct of supervision at Member State level but their powers fell short of being able to issue binding rules or otherwise to impose binding decisions on the (p. 117) Member States’ competent authorities. The Level 3 Committees had no direct supervisory powers in relation to individual market participants. Instead, they played a more indirect role by seeking to foster consistent, cooperative practices and open relations among the frontline national supervisors and marshalling peer pressure forces in respect of areas of divergence. The Level 3 Committees were thought to have contributed positively to the promotion of pan-European supervisory convergence but their limited powers and authority also led to certain blockages. The limitations of the Level 3 Committee-based approach were already apparent before the financial crisis¹⁷ and evolutionary reforms were underway (in particular certain Charter and founding Decision amendments that took effect in 2008/09), but the financial shock strengthened the case for more ambitious institutional changes and rendered it more politically palatable.¹⁸

5.13  The following sections consider in more depth some aspects of the evolution of the three Level 3 Committees. This history merits attention for several reasons. First, the Committees laid the institutional foundations for the ESAs. Secondly, they developed experience in working around legal constraints and political sensitivities and since many of those constraints still remain, useful lessons can be extracted. Thirdly, as the ESAs become established and assume more and more responsibilities the contrast between the relatively modest role of the Committees and their successors could become increasingly stark, which would put into perspective the real significance of the institutional breakthroughs that were made possible because of the window of opportunity opened by the financial crisis.

5.14  CESR was a committee of national securities regulatory authorities from Member States and other EEA countries.¹⁹ CESR was a body without legal personality.²⁰ Its small permanent secretariat was based in Paris.²¹ It was chaired, in a personal capacity, by the representative of a CESR Member competent authority.²² CESR had modest financial resources (revenues of just over €5 million in 2009, mostly from Members’ contributions).²³ The possibility for CESR to receive funding from the European Institutions was introduced in 2008.²⁴

(p. 118) 5.15  CESR held at least four plenary sessions a year but conducted most of its detailed technical work through standing committees, groups, task forces, panels, and networks, which drew together senior experts from the CESR Member authorities.²⁵ Some CESR groups were formed for specific purposes and were limited in time, while others had a more permanent role. Important groups included the following (see Table 5.2).²⁶

5.16  When it was first established, CESR operated on the basis on consensus. Charter amendments in 2008 introduced the possibility of qualified majority voting on certain matters in order to enhance the efficiency of the decision-making process.²⁷

5.17  In its early days, one of CESR’s main tasks was to advise the Commission on policy and on draft implementing (secondary) legislation in the field of securities²⁸ but with the completion in 2005 of the EC Financial Services Action Plan (an ambitious programme of legislative reform), new legislative advisory mandates became somewhat less pressing.²⁹ However, scheduled reviews of legislation meant that reviewing legislation remained an important part of CESR’s activities throughout its existence.³⁰

5.18  Another area in which CESR quickly became active was in the issuance of non-binding ‘Level 3’ interpretative guidance, recommendations, and standards.³¹ For a supervisor to have some regulatory (rule-making) or quasi-regulatory (soft standard-setting) power in addition to its supervisory (oversight of implementation and enforcement of regulation) responsibilities is not unusual—the two functions are (p. 119)

interdependent and cannot be completely disentangled³²—but for CESR, formed more or less contemporaneously with a massive package of new legislation that (p. 120) inevitably required interpretation and elaboration as it was put into effect, the standard-setting function proved to be particularly significant.³³

5.19  In addition to its standard-setting role, CESR sought to foster day-to-day coordination and consistency in supervision and enforcement in a number of other ways. Significant elements of its activities in this regard included the functioning of the CESR-Pol standing committee as a forum in which CESR Members could share their experiences concerning market surveillance and enforcement activities,³⁴ the multilateral Memorandum of Understanding between CESR Members, which established a general framework for cooperation and consultation between the national supervisory authorities,³⁵ specific protocols relating to home-host supervisory cooperation in key areas such as the supervision of branches under MiFID³⁶ and passport notifications,³⁷ and databases for the sharing between supervisors of market transactions data and of enforcement practices.³⁸ The important ‘implementation transparency’ work conducted by the CESR Review Panel shone a light on supervisory differences and national derogations in key areas.³⁹ Review Panel mapping exercises gathered together into an accessible source factual information about the matters examined.⁴⁰ These mapping exercises examined systematically the supervisory powers, and administrative and criminal sanctioning regimes of Member States in relation to the key Directives in the securities field.⁴¹ They also looked at the use that Member States made of options and discretions permitted by Directives or Regulations.⁴² Another set of (p. 121) implementation transparency-promoting measures was the periodically-updated ‘Q&A/FAQ’ documents produced by CESR expert groups and standing committees.⁴³ These documents served as a publicly-accessible central repository of information on the answers given by Member States’ supervisory authorities and/or the CESR secretariat to questions asked by market participants. Where particular Member State supervisors interpreted the requirements in an unusual way, the Q&A/FAQ format provided an opportunity for that fact to be publicly recorded.

5.20  CESR also sought to improve market transparency and maintained a variety of databases for this purpose. The CESR-MiFID database contained information on shares admitted to trading on EU regulated markets, systematic internalizers, multilateral trading facilities, regulated markets, and central counterparties. This database was a compilation of information from all CESR Members. Using the MiFID shares database, the CESR took some first steps towards a public EU network of regulated information disclosed by issuers.⁴⁴

5.21  Whilst the principle of national supervisors being in charge of day-to-day matters, with the CESR, and the other Level 3 Committees, playing a supportive, facilitative and, in certain respects, supervisor-of-supervisor, role, was firmly entrenched in the Lamfalussy Level 3 architecture, CESR was nevertheless able to begin carving out a direct, market-facing supervisory role for itself. This aspect of its activities became more pronounced in the transitional period leading up to its transformation into a European Supervisory Authority.⁴⁵ By way of illustration, during 2009 CESR became directly involved in the assessment of proposals for supervisory waivers in respect of pre-trade transparency requirements under MiFID.⁴⁶ Formally, the legal responsibility for granting such waivers lay with national supervisors but CESR was able to insert itself into this process via an agreement between CESR Members that the proposals could be considered at the CESR level at the initiative of the relevant CESR Member.⁴⁷ Another illustration is provided by the expansion of CESR’s role in relation to CRAs: for several years it directly monitored CRAs’ adherence to the IOSCO Code of Practice and towards the end of its (p. 122) life it began gearing up to assume the roles of single European point of entry for applications for CRA registration and provider of a central repository for market data supplied by CRAs.⁴⁸

5.22  CESR also played a role in the monitoring and economic analysis of securities markets across borders and sectors from a micro-prudential perspective.⁴⁹ It became a key point of contact for EU dialogues with third countries with respect to the regulation and supervision of securities markets.⁵⁰ CESR worked with the other two Level 3 Committees in an arrangement known as the ‘3L3’ Committees. 3L3 work included the publication of joint guidelines for the prudential assessment of mergers and acquisitions in the financial sector, monitoring of Member States’ implementation practices with respect to anti money-laundering laws, the development of databases in respect of non-cooperative jurisdictions, analysis of financial conglomerates regulation and supervision (including the operation of colleges of supervisors), examination of cross-sector risks, the exchange and coordination of information relating to valuation and other accounting matters, the establishment of a task force on internal governance, and the elaboration of principles relating to the delegation of tasks between Member States’ national authorities.⁵¹ 3L3 training events were held to promote the development of a common European supervisory culture.⁵²

5.23  Yet, in spite of these substantial achievements, the set-up within which CESR operated also had important limitations. CESR decisions to adopt Level 3 standards, recommendations and guidance were not legally binding, although Member countries were expected to endeavor to comply, save where the decision was incompatible with their national law, the national authority lacked competence due to legal impediments, vital political or technical impediments existed, or the objectives of the decision were met through other means.⁵³ Under the CESR Charter, underpinning in respect of these expectations was provided through ‘comply or explain’ and peer review ‘soft’ enforcement mechanisms.⁵⁴ However, CESR peer reviews indicated mixed results with respect to the compliance pull that these softer methods were able to exert.⁵⁵ For example, in the area of financial reporting, (p. 123) where there were two CESR standards, one CESR peer review found that less than half of the Member jurisdictions fully complied with the first Standard and a ‘relatively high’ 6 per cent of the Membership either did not apply the Standard at all or did not contribute to the review;⁵⁶ another CESR peer review established that slightly less than one-third of CESR Member jurisdictions were fully applying the second Standard and significantly more than one-half were not applying its principles overall.⁵⁷ These patchy results were in line with the European Commission’s overall assessment in 2007 that ‘Experience has rather shown that measures agreed at Level 3 have not been applied consistently enough in the day-to-day supervisory practice of the national supervisors’.⁵⁸

5.24  The inability of CESR (and the other sectoral committees) to write enforceable rules eventually came to be seen as one of the key weaknesses of the Lamfalussy Level 3 architecture. In the aftermath of the financial crisis, received wisdom rapidly embraced the idea that the common EU rulebook needed to be expanded, including by the adoption of technical standards developed by supervisory authorities and having formal effect under EU law.⁵⁹

5.25  Problems of inconsistent interpretation and application are not confined to non-binding standards, however; they can easily arise in the context of hard law as well. CESR had no binding power to tell a national supervisor that its interpretation of European law was wrong. This, too, came to be seen as a significant weakness. There was a CESR mediation mechanism whereby CESR sought to provide a framework for amicable settlements of disputes between national supervisors that had a cross-border dimension.⁶⁰ However, mediation outcomes under this mechanism did not have any legal effect, were not legally binding and were not enforceable.⁶¹ The European Commission noted in 2007 that ‘the introduction of mediation procedures has not borne fruit so far, since no use has been made of them’.⁶² Activity did not pick up in the crisis-dominated years that followed.

5.26  CESR was able to highlight areas of inconsistency in national supervisory practices. In principle, soft powers of this sort have the potential to foster regulatory and supervisory convergence. Once it is known that a particular jurisdiction, or small group of jurisdictions, is out of line from the norm in respect of its approach (p. 124) to a particular matter, there is scope for peer pressure to trigger changes of practice. A finding of great divergence between jurisdictions can, in theory, also help to establish a case for non-binding guidance or even for harmonizing legislation.⁶³ However, the history of CESR indicates that a sober assessment of the capacity of ‘sunlight’ in respect of supervisory practices to effect change is appropriate. For instance, the CESR mapping exercise in respect of supervisory practices in authorizing and supervising investment firms found that while practices on some aspects of the process were converging, no convergence at all could be seen on others.⁶⁴ Significant differences remained with respect to the administrative measures and criminal sanctions for infringements.⁶⁵ Disappointing results also emerged from the mapping exercise in respect of transparency disclosures, which revealed frequent national adaptations of a recommended EU-wide standard form for notifications.⁶⁶ Evidently, some national practices, developed within the context of local market conditions and against the background of local legal requirements and administrative and bureaucratic practices, were proving to be quite resistant to change. With respect to convergence in actual supervisory practices, the de Larosière Group, which conducted a review of the EU supervisory architecture as part of the EU’s response to the financial crisis, came to the rather disheartening conclusion (across all sectors) that in the crisis ‘national supervisors did not cooperate sufficiently to converge either supervisory practices or interpretations—whether the reason is to protect a national champion, restrict competition, preserve a national practice viewed as a competitive supervisory or regulatory advantage or just sheer bureaucratic inertia’.⁶⁷

5.27  CESR’s reliance on gradual, bottom-up convergence processes proved to be entirely inadequate when events during the financial crisis were widely thought to have created an urgent need for a uniform regulatory response. The focus for concerns about this weakness was the diversity of national responses to the perceived need to impose controls on the practice of short selling, where CESR attempted to promote coordinated action by CESR Members but in fact a diverse range of steps was actually taken. CESR has since advised the European Institutions to consider adopting a harmonized pan-European short selling disclosure regime.⁶⁸ The concerns of market participants about the burdens of having to comply with a number of (p. 125) different sets of national requirements strengthened CESR’s hand in this respect.⁶⁹ CESR’s experience with short selling regulation highlighted one particularly pertinent question for the design of the successor regime: whether emergency powers to intervene directly to ban or restrict practices that are perceived to be a threat to market stability could, and should, be vested directly in euro-authorities.

5.28  With respect to more technical matters, CESR’s limited powers (and resources) and sensitivities with respect to its role vis-à-vis national supervisors and to the Commission’s areas of responsibility also restricted what it was able to do. For instance, in its efforts to develop a public EU network of regulated information disclosed by issuers, CESR did not seek to press the case for a single European officially-appointed mechanism for the filing of regulated information, preferring instead the option of improving and enhancing its network of national mechanisms.⁷⁰ In explaining its decision not to advocate the more ambitious option, CESR noted that to have done so would have meant writing off at least some of the costs that had been invested in developing national mechanisms and that this could not be justified on cost-benefit grounds (a few years earlier, CESR had highlighted the fact that its ability in general to lead the development of databases and IT data sharing arrangements was constrained by its limited financial resources⁷¹ and meeting this need was one of the key factors in the introduction of partial EU funding of its activities⁷²). However, in supporting a network-based approach, CESR also acknowledged that without the possibility to impose binding standards for national mechanisms, there was a risk that national systems could be developed in different ways and that this could make integration of the network more difficult and costly. This is a concern that the new arrangements, which include the possibility of binding technical standards, attempt to mitigate.

5.29  CEBS was a committee of central banks and national banking supervisors from Member States and EEA countries. Membership of CEBS was divided into two categories: voting Members (banking supervisors) and non-voting Members (central banks that were not also banking supervisors, and the ECB).⁷³ Representatives from EEA countries were participating, but non-voting, observers.⁷⁴ CEBS, like CESR, was a body without legal personality. Its secretariat was based in London.⁷⁵ CEBS was chaired, in a personal capacity, by the representative of a CEBS Member competent authority.⁷⁶ CEBS’s financial resources were modest (revenues of just (p. 126) over €3 million in 2009, mostly from Members’ contributions).⁷⁷ The possibility for CEBS to receive funding from the European Institutions was introduced in 2008.⁷⁸ CEBS held plenary sessions at least three times a year.⁷⁹ A ‘Bureau’ of six Members prepared the agenda for meetings of CEBS.⁸⁰ The Groupe de Contact, which began life in 1972 as an informal association of European banking supervisors, was one of CEBS’s main working groups.⁸¹

5.30  Like CESR in the securities field, CEBS’s responsibilities were to advise the European Commission on banking policy issues and legislation,⁸² to contribute to the consistent application and implementation of EU law and to the convergence of supervisory practices, and to enhance supervisory cooperation and the exchange of information between national supervisors.⁸³ CEBS provided non-binding Level 3 standards, guidance and recommendations (which under Charter amendments introduced in 2008 could be adopted on the basis of qualified majority voting).⁸⁴ CEBS Level 3 measures were divisible broadly into four sub-categories: guidelines relating to supervisory processes, including guidelines on cross-border supervisory cooperation for banking and investment firm groups; guidelines relating to model validation, external credit assessment institutions, and prudential filters; guidelines on the supervisory review process under the CRD;⁸⁵ and guidelines on financial reporting.⁸⁶ The internal governance of banks and investment firms was an important cross-category matter addressed in a number of the guidelines.⁸⁷ CEBS Members had a ‘comply or explain’ obligation with respect to adherence to Level 3 measures.⁸⁸ The ‘Q&A’ approach, involving a web-based facility recording supervisory responses to practical questions, was also used.

(p. 127) 5.31  CEBS’s activity with respect to the setting of guidelines and principles surged in 2006 as a direct consequence of the adoption of the CRD, dipped thereafter as the emphasis shifted from design to delivery,⁸⁹ but then took off again as a result of the crisis.⁹⁰ The financial crisis sparked a period of intensive regulatory activity, which took the CEBS into some highly contentious areas, such as the interpretation of amended CRD rules on banks’ remuneration policies.⁹¹

5.32  Following the blueprint developed by CESR, in 2007 CEBS established a mediation mechanism to provide for non-binding mediation between its Members.⁹² However, this procedure was never activated. CEBS also had a peer review mechanism.⁹³ This was used to examine the implementation of CEBS guidelines relating to the supervisory validation of banks’ internal models and to conduct a review into the functioning of colleges of supervisors for large European cross-border banks. The first CEBS peer review found a ‘very high’ level of observance of the guidelines, ‘with some minor exceptions’ but also that ‘when drilling down into the answers provided, the picture was more nuanced. In particular, a few countries were singled out for non-compliance with a few key provisions’.⁹⁴ A CEBS mapping exercise relating to EU banking authorities’ objectives and powers, with special focus on early intervention measures and the actual use of sanctioning powers, was published in March 2009.⁹⁵ This exercise identified a very high degree of commonality with respect to the fundamental prudential objectives of supervisors and a high level of convergence with respect to the powers available to supervisors (but with a decreasing degree of uniformity with respect to intervention powers for weak or ailing banks). However, its attempt to compare actual practices ran into difficulties because of a lack of a common legal definition of ‘sanction’. CEBS also conducted a number of other surveys on a variety of topics.⁹⁶ On the more (p. 128) technical side, CEBS contributed to the streamlining and harmonizing of reporting templates.⁹⁷

5.33  Throughout its existence, fostering arrangements for the effective supervision of cross-border banking activity was one of CEBS’s key priorities.⁹⁸ The CRD provided the basic framework for the distribution of supervisory authority between home and host Member States,⁹⁹ for supervisory cooperation in respect of cross-border branch banking activity,¹⁰⁰ and for the consolidated supervision of cross-border banking groups.¹⁰¹ In pre-crisis Level 3 guidance, CEBS sought to flesh out the CRD requirements for practical application by supervisory authorities.¹⁰² It was also involved in the agreeing of memoranda of understanding between European banking supervisors, central banks, and finance ministers on cooperation in financial crisis situations.¹⁰³ During the crisis CEBS assumed a coordinating role, in particular by acting ‘as a facilitator between home and host supervisors in the current crisis relating to AIG, Lehman Brothers and the Icelandic banks, including conducting mapping exercises with a view to identifying the materiality of exposures held by other EU banks and facilitating exchanges of information and consistent supervisory practices’.¹⁰⁴ However, the crisis also exposed serious gaps in the CEBS’s effectiveness. With the management of cross-border issues in the eye of the storm generated by the financial crisis, it quickly became apparent that there were fundamental weaknesses in the European arrangements for supervisory cooperation, coordination, and information exchange and for crisis management that the softer methods for the promotion of convergence available to CEBS were inadequate to address. The de Larosière Group expressed a commonly-held view when it concluded that the fragmented and complex arrangements for supervision (p. 129) were flawed on both effectiveness and efficiency grounds,¹⁰⁵ and that the crisis prevention function of supervisors in the EU had not performed well and had been shown to be not fit for purpose.¹⁰⁶

5.34  The EU Institutions stepped in to revise the CRD supervisory framework by providing explicitly for the establishment of colleges of supervisors,¹⁰⁷ improving arrangements for information-exchange between supervisors among themselves and between supervisors and central banks, imposing comply or explain obligations in respect of CEBS Level 3 guidance, clarifying home/host Member State roles in relation to certain matters, and asserting the need for the mandates of national supervisors to take into account the Community dimension.¹⁰⁸ CEBS supplemented the revised CRD by issuing guidelines for the operational functioning of colleges.¹⁰⁹ By the end of 2009, 33 supervisory colleges had been established and the Members of CEBS had committed themselves to an action plan to enlarge the number of banking groups for which colleges would be operational.¹¹⁰

5.35  Like CESR in the securities field, CEBS had responsibility for micro-prudential analysis of risks and vulnerabilities of the EU banking sector.¹¹¹ It worked closely in this sphere of activity with the Banking Supervision Committee of the European System of Central Banks.¹¹² In 2009 and 2010 CEBS coordinated, in cooperation with the European Commission, the ECB and national supervisors, pan-European stress testing exercises in respect of the banking system.¹¹³ CEBS was also involved in considerable 3L3 work, including with respect to financial conglomerates.¹¹⁴ Internationally, CEBS had observer status on the Basel Committee on Banking Supervision and sought to coordinate aspects of its work programme with that of the Basel Committee; CEBS was also a point of contact for the exchange of information with supervisors from third countries.¹¹⁵

5.36  CEIOPS was composed of high level representatives from the insurance and occupational pensions supervisory authorities of the Member States. The authorities of EEA countries also participated. The organizational and decision-making set-up of CEIOPS, a body without legal personality based in Frankfurt, was broadly similar to that of CESR and CEBS. The CEIOPS Charter and accompanying Articles of Association provided specifically for a Management Board.¹¹⁶ The revenues of CEIOPS in 2009 were approximately €2.8 million, mostly from Members’ contributions.¹¹⁷ Like CESR and CEBS, in the latter part of its existence CEIOPS was able to receive funding from the European Institutions.¹¹⁸

5.37  CEIOPS had a number of permanent committees and working groups.¹¹⁹ It established a Review Panel in 2008.¹²⁰ The primary focus of much of CEIOPS’s work was the giving of technical advice to the Commission with respect to the legislative framework, in particular the Solvency II Directive, which stipulates solvency requirements for the insurance sector.¹²¹ In 2010 CEIOPS began issuing Level 3 guidance for Solvency II.¹²² CEIOPS worked with CEBS in relation to financial conglomerates and was also involved in other 3L3 activity.¹²³ CEIOPS was a point of contact for regulatory dialogues with third countries and was also actively engaged in dialogue with international standard-setting bodies.¹²⁴ CEIOPS monitored and reported periodically on main market trends within the insurance and occupational pensions sectors.¹²⁵

5.38  Since it is clear from the discussion in paras 5.11–5.37 that the EU’s supervisory model for the financial markets was in a continuous state of pragmatic adaptation to changing circumstances throughout the 2000s, one way of looking at the postcrisis (p. 131) reforms is to view them as just the latest stage in an on-going evolutionary process;¹²⁶ indeed, it is indisputable that many of the ideas that have now been put into effect are ones that were in the policy debate prior to the crisis as potentially useful additions to the supervisory ‘tool kit’.¹²⁷ However, to treat the institutional changes that have followed in the wake of the financial crisis as mere incremental developments would be to underestimate their significance: the package of reforms can properly be regarded as amounting to a watershed for financial regulation in Europe.

5.39  Chronologically, amendments made by the CRD II were among the first legal changes to the EU supervisory framework that can be directly linked to the financial crisis. As mentioned in para 5.34, the CRD II mandated colleges of supervisors, organized by ‘consolidating supervisors’, in order to strengthen the efficiency of the prudential supervision of banking groups.¹²⁸ Colleges are essentially collaborative and cooperative structures. Whilst the CRD II conferred on the consolidating supervisor certain powers with respect to the establishment and administration of a college, it expressly acknowledged that college arrangements were intended not to affect the supervisory rights and responsibilities of national authorities under the CRD.¹²⁹ Furthermore, whilst it referred to the ‘essential’ need for neutral and independent advice, mediation and conflict-resolving mechanisms at Community level, the CRD II did not equip CEBS with any binding powers in these respects.¹³⁰ (p. 132) In other words, the CRD II did not encroach on the ‘traditional’ approach, which locates primary responsibility for supervision with Member States. However, the CRD II was adopted in the shadow of impending changes to the EU-wide institutional architecture and, as such, its changes in respect of supervisory arrangements inevitably had a somewhat transitional feel. The Directive’s status as a stepping-stone, put in place while a more wide-ambitious package of institutional reform was also under development, was evident on the face of the instrument itself and also from background materials.¹³¹

5.40  The de Larosière Report, published in February 2009, marked the start of the new bolder phase in the organization of EU-wide financial market supervision.¹³² While continuing to give due respect to the axiom (which is protected in any case by the Treaty-enshrined principles of subsidiarity and proportionality) that day-to-day supervision of firms is a matter for national supervisory authorities, the de Larosière Group, exploiting the receptive political mood of the time, put forward a significant qualification by proposing to confer on the new ESAs certain powers to give binding directions to national supervisors, to make decisions that would be binding on firms directly, to write binding technical standards, and to be responsible for the licensing and direct supervision of some specific EU-wide institutions. The de Larosière Report contended that these proposals were not in conflict with fundamental principles because effective supervision of an increasingly integrated and consolidated EU financial market necessarily required certain tasks to be performed at the EU level.

5.41  New EU legislation was required to give effect to the proposals in the de Larosière Report. The text of Regulations establishing the EBA, the ESMA, and the EIOPA was finally agreed by the EU Institutions in September 2010.¹³³ As is more or less inevitable in any exercise involving the transformation of reform ideas into law, details changed along the way and compromises had to be struck in order to (p. 133) overcome sticking points. In broad terms, the European Parliament wanted to go further on certain aspects of the new arrangements than even the de Larosière Group has suggested, whilst the Commission and, especially, the Council were more cautious. Whilst the details of many of the twists and turns of the legislative process can now be glossed over, some of the more controversial points that emerged in the legislative process are referred to in the account of the new arrangements that follows next, where this background helps in understanding the shape of what was finally agreed.

5.42  The three ESAs are bodies with legal personality under EU law.¹³⁴ Each ESA has its head office in the same place as its predecessor Level 3 Committee (London (Banking), Frankfurt (Insurance and Occupational Pensions), and Paris (Securities and Markets).¹³⁵ During the legislative process there was support in the European Parliament for all three ESAs to be located in the same place (Frankfurt).¹³⁶ Locating all of the ESAs in the same place would be a significant practical step in the direction of a more integrated EU-wide supervisory architecture. However, any attempt to move the location of supervision away from two economically-powerful Member States would be highly controversial.¹³⁷ The approach that has prevailed for now has avoided wastefully time-consuming political quarrels and is therefore preferable on efficiency grounds. It is likely that the cross-sectoral aspects of the new structure will evolve over time, possibly in the direction of an objectives-oriented model, in which there are two separate supervisory authorities, one for prudential supervision (banking, insurance and other systemically relevant activities) and the other for conduct of business and markets supervision.¹³⁸ The Joint Committee of the ESAs, which has replaced the 3L3 arrangement, is the body that will take forward cross-sectoral work under the new arrangements.¹³⁹ It is the Joint (p. 134) Committee that will settle cross-sectoral disagreements, which could prove to be an especially significant power.¹⁴⁰

5.43  Each ESA has a Chairperson and an Executive Director, both of whom must be full-time professionals, a Board of Supervisors, and a Management Board.¹⁴¹ The heads of the relevant national supervisors are the voting Members of the Board of Supervisors.¹⁴² The Chair and a representative of each of the European Commission, the European Systemic Risk Board, and the other two ESAs are the non-voting Members of the Board of Supervisors.¹⁴³ The ECB is also represented (in a non-voting capacity) on the EBA.¹⁴⁴ The Executive Director may also participate in meetings of the Board without the right to vote.¹⁴⁵ Representatives of national central banks who are not bank supervisors may also attend meetings of the EBA Board of Supervisors in a non-voting capacity.¹⁴⁶ Representatives of the EEA countries may also be permitted to participate as observers.¹⁴⁷ The Board of Supervisors makes decisions by simple majority or, on specified matters, by qualified majority voting.¹⁴⁸ To appreciate the significance of the shift to decision-making by simple majority as the default position, it is useful to recall that the Level 3 Committees were originally set up on the basis that they would operate by consensus and that qualified majority voting was only introduced after some years of operation as a exception to allow for decisions on certain matters where consensus could not be reached. Some commentators have drawn attention to the fact that the voting arrangements will not reflect countries’ respective shares of financial market supervision and have claimed that this arrangement is heavily biased against the United Kingdom, which is home to more than 30 per cent of wholesale financial market activity.¹⁴⁹

5.44  The Management Board is a smaller group comprising the ESA Chairperson and six others elected by and from the voting Members of the Board of Supervisors, with the addition of a representative of the Commission and the Executive Director as non-voting participants.¹⁵⁰ The Management Board makes decisions on the basis of a simple majority.¹⁵¹ The founding texts require the composition of (p. 135) the Management Board to be ‘balanced, proportionate and reflect the Union as a whole’.¹⁵² One aspect of the balancing exercise will be with respect to representation from eurozone and non-eurozone countries.

5.45  Control over appointments to the key positions of ESA Chairperson and Executive Director lies mainly with the relevant Board of Supervisors but the European Parliament also has a role. Formally, the appointment of an ESA Chairperson is a matter for the Board of Supervisors but the Parliament can object to the designation of the person that the Board has selected.¹⁵³ Extension of a Chairperson’s term of office beyond the first five years (one extension is permitted) is subject to European Parliament confirmation.¹⁵⁴ The Parliament also has the final say on the formal removal of a Chairperson from office following a decision of the Board of Supervisors.¹⁵⁵ The Commission is to draw up the shortlist for the designation of the first Chairpersons of the ESAs but the arrangements thereafter have been left open.¹⁵⁶ The appointment of an ESA Executive Directive by the Board of Supervisors is subject to European Parliament confirmation.¹⁵⁷ However, the Board of Supervisors alone may extend an Executive Director’s term of office (once) or remove that person from office.¹⁵⁸

5.46  All individuals and Boards are required to act independently and objectively in the interest of the EU, and must not seek or take instructions from any government, authority, organization, or external person.¹⁵⁹ States, Union Institutions and bodies, and other public and private bodies must not seek to exert influence.¹⁶⁰

5.47  The ESAs are accountable to the EU Institutions via annual reporting obligations.¹⁶¹ In addition, annual and multi-annual work programmes must be transmitted to the EU Institutions and be made public.¹⁶² The ESA Chairpersons can be required by the European Parliament and the Council to make statements and to appear before the European Parliament to answer questions put by MEPs.¹⁶³ The Parliament may (p. 136) also request written reports from Chairpersons.¹⁶⁴ There are further reporting obligations in respect of the exercise of specific powers.¹⁶⁵ At its own initiative, or upon a request from the European Parliament, the Council or the Commission, an ESA may provide opinions on all issues related to its area of competence.¹⁶⁶ Obligations on the ESAs to meet and consult with formally-established Stakeholder Groups provide a further mechanism of accountability and control.¹⁶⁷

5.48  There is provision for administrative and judicial accountability. Natural and legal persons (including national supervisors) may contest an ESA decision by means of an appeal to the Board of Appeal, which is a joint body of all three ESAs.¹⁶⁸ Member States, Union Institutions, or any natural or legal person may also bring an action before the Court of Justice of the EU.¹⁶⁹ The possibility of ESAs being held liable to non-contracting parties to make good damage caused by its actions is open, with the Court of Justice having jurisdiction in any such dispute.¹⁷⁰

5.49  ESA financing is to come initially from Union funds and Member States’ contributions on the basis of a 40 per cent (Union)/60 per cent (Member State) split.¹⁷¹ This type of mixed funding arrangement is considered to be a helpful mechanism for ensuring the independence of the ESAs from Member States and also from the EU Institutions.¹⁷² There is provision for the ESAs revenues also to include fees, such as the fees to be paid by the CRAs that are supervised directly by the ESMA.¹⁷³ Budgets and accounts (audited by the Court of Auditors) must be published and general EU budgetary procedures, disciplines, and financial management practices apply.¹⁷⁴ Clearly, the resources available to the ESAs from public and private sources would need to increase dramatically in order for them to be able to act as direct supervisors.¹⁷⁵ BaFin, the German national supervisor, spent approximately (p. 137) €120.4 million in 2008¹⁷⁶ and the net core operating costs of the UK FSA for the financial year to March 2010 were £391.7m (approximately €448 million).¹⁷⁷ The total revenues of the Level 3 Committees for 2009 were just over €11 million. These figures put into sharp relief the paltry scale of the supervisory activity that presently can take place at the EU level. Whilst the ESAs’ budgets are expected to grow, their resources are likely still to be rather limited compared with the combined resources of the national supervisors. In practical terms, resources constraints (personnel and financial) could be a key determinant of the pace at which supervisory power shifts toward the centre.

5.50  The ESAs inherit all the functions that were performed by the Level 3 Committees.¹⁷⁸ Their responsibilities and powers thus include writing non-binding guidelines and recommendations,¹⁷⁹ conducting peer reviews,¹⁸⁰ mediating disputes between supervisors on a non-binding basis,¹⁸¹ promoting supervisory cooperation, convergence and coordination,¹⁸² facilitating home/host Member State relations, including fostering the coherent functioning of colleges of supervisors,¹⁸³ collecting information, establishing central databases, providing standard reporting formats,¹⁸⁴ monitoring market developments and conditions generally,¹⁸⁵ and providing opinions to the Union Institutions.¹⁸⁶ Like the Level 3 Committees before them, the ESAs have a role in external relations.¹⁸⁷ Reflecting lessons learnt from the crisis about the need for better understanding and more robust oversight of systemic risk, and for more thorough contingency planning (including recovery and resolution and orderly wind-down plans, crisis management procedures, bailout-burden sharing arrangements, deposit and investor protection schemes), the ESAs are now specifically charged with responsibilities in these areas.¹⁸⁸ They are also required to cooperate generally with the ESRB and to collaborate with it on certain specific matters including the development of common approaches to the identification and measurement of systemic risk and stress testing arrangements.¹⁸⁹ Particular activities aimed at fostering more effective nationally-based supervision, such as facilitating the delegation of tasks and responsibilities between national (p. 138) supervisors, are envisaged by the new founding texts.¹⁹⁰ The new framework also gives more prominence to consumer protection concerns: the ESAs are required to take a leading role in promoting transparency, simplicity, and fairness for consumer financial products and services.¹⁹¹ There is now a lively policy debate as to the wisdom of combining supervisory responsibilities for prudential over-sight and consumer protection in one organization because of differences in the required skill sets and cultures and of the existence of potentially conflicting priorities; even though the ESAs’ role is different from that of conventional market-facing supervisors, this debate is nevertheless of some relevance to them since they too will have to contend with the problem of juggling a large number of different responsibilities on a (particularly) limited budget.¹⁹²

5.51  It is in respect of their entirely new powers to take action with binding legal effect that the ESAs differ most from the predecessor Level 3 Committees. The ESAs are still able to use ‘soft’ enforcement tools, such as ‘naming and shaming’ supervisors who are failing properly to discharge their obligations under EU law, and those tools have been strengthened in certain respects. But there are now new weapons in the armoury as well. For legal and political reasons, many of these new powers are ‘last resort’ mechanisms that are subject to onerous conditions governing their use. This means that the loss of control to the centre that these new powers represent should not be exaggerated: within the ESFS formed by the ESAs and their Joint Committee, the ESRB and the national supervisors,¹⁹³ it is the national supervisors who remain predominantly responsible for day-to-day supervision of financial market supervision. Yet, whilst this distribution of authority is not under imminent threat, the conferral of these new powers on the ESAs does make a difference. The impact of the changes may be rather subtle and gradual but over time their cumulative effect could be paradigm-shifting. An analysis of the new powers follows.

5.52  Power has been conferred on the ESAs to develop binding technical standards in particular areas identified in specified EU financial markets legislation.¹⁹⁴ Existing EU legislation has been amended for this purpose¹⁹⁵ and it is clear from other (p. 139) proposals in the pipeline that the direction of travel is that technical standards developed by the ESAs will rapidly become an important and substantial part of the EU financial market regulatory framework.¹⁹⁶ That the ESAs’ powers in this respect will continue to expand is acknowledged in the Omnibus I Directive, which is the measure that made the first set of relevant ESA-empowering amendments to existing legislation: ‘This Directive should identify a first set of such areas and should be without prejudice to adding further areas in the future’.¹⁹⁷

5.53  Draft technical standards, which require a qualified majority vote from an ESA’s Board of Supervisors, acquire binding force through endorsement by the Commission. The rather complicated procedure governing the making of technical standards and the legal considerations that lie behind this procedure are outlined in more detail in paras 5.59–5.63. Once endorsed by the Commission, binding technical standards have the status of Regulations or Decisions in EU law, which means that they apply directly to financial firms and other private actors as well as to Member States and their public authorities. The direct effect of binding technical standards has implications for ESA enforcement, considered further in paras 5.64–5.68.

5.54  The Commission has set out four high-level principles to identify areas for technical standards:¹⁹⁸

• •  Technical issues: genuinely technical areas, where the development of standards is best left to supervisory experts.

• •  Practical issues/cooperation procedures: such as information exchange.

• •  Flexibility: where it is important to have flexibility to respond to market developments.

• (p. 140) •  Necessity: where detailed, technical and consistent rules are needed for financial stability, depositor, policy-holder and investor protection, to ensure market efficiency and integrity or to strengthen the single market.

Technical standards must not involve policy choices or strategic decisions and their scope is delimited by the legislation on which they are based.¹⁹⁹

5.55  Whilst much of the initial activity by the ESAs as regards technical standards will be in relation to highly technical matters, such as the detailed content of reporting requirements and the establishment of standard reporting formats and templates, or will have a primarily procedural and practical focus, such as by providing a consistent framework for supervisory information-exchange, it is already clear that the ESAs will also be able to develop standards with more wide-ranging effects on market-facing mainstream supervisory decisions. The amendments to the Prospectus Directive to enable the ESMA to develop technical standards provide an illustration: the ESMA will be able to develop standards on substantive matters such as prospectus exemptions, prospectus contents, and situations in which supplementary prospectuses are required, as well as more procedural standards on forms, procedures, and templates.²⁰⁰

5.56  One potentially controversial (especially from a UK perspective) area that technical standards could extend into in the future is the securities law aspects of takeovers. That the ESMA should be empowered to write technical standards in the area of takeovers was part of the original Commission proposals for the ESAs.²⁰¹ In the end, the Takeover Directive was omitted from the first group of existing legal instruments amended so as to confer power on the ESMA to develop technical standards in specific areas. However, the potential for future extension of its technical standards powers into this area remains, and the scheduled review of the Takeover Directive in 2012 may provide an opportunity for the matter to be raised.²⁰² There is already a legislative basis for the ESMA, like CESR before it, to play an active role in the field of takeovers.²⁰³

5.57  The more that regulatory requirements take the form of detailed technical rules written in such detailed and precise terms that all questions about what conduct is permissible are settled in advance leaving only factual issues for later judgment, the less room there is for the exercise of discretionary supervisory judgment. Narrowing the permissible scope for the addition of supplementary local rules that are more (p. 141) stringent that the common core also reduces the creative contribution that national supervisors can make.²⁰⁴ Vigorous pursuit of a centralized, rules-based regulatory approach thus carries with it the risk that national supervisors will increasingly be reduced to performing the role of mere administrative functionaries. In the immediate aftermath of the crisis, the possibility that the technical standards mechanism could, over time, prove to be a powerful indirect means by which the power and authority of national supervisors are eroded was rather overlooked, sidelined presumably by the force of a general political consensus around the need for a common EU rulebook particularly in relation to banking regulation. However, this concern has attracted attention more recently, because, for many, especially in the United Kingdom, one of the key lessons from the crisis has been the recognition of a greater need for supervision to be judgment-led.²⁰⁵ In March 2010 Hector Sants, the chief executive of the UK FSA, touched on the point when he noted that European developments meant that the extent to which any regulatory structure in the United Kingdom in practice would have ‘any meaningful discretion looks to be highly problematic’.²⁰⁶ He returned to the point in a later speech, remarking that ‘We must recognise that, going forward, particularly in respect of supervision, the national entities will increasingly become an arm of European policy’.²⁰⁷

5.58  A willingness to exercise supervisory judgment is a key component of the ‘intensive’ supervisory model that the UK FSA has recently adopted but the extent to which there will be room within the regulatory framework for supervisors to make judgments that go beyond rulings on what a specific legal rule requires could become increasingly constrained as a result of changes in European regulatory policy. Thus, the power to develop binding standards, despite appearing initially to be a rather natural, even perhaps inevitable, upgrade to the guideline-setting powers of the Level 3 Committees and not as attention-grabbling as other new powers which allow ESAs in limited circumstances to override national supervisors and impose decisions on financial firms, acquires much greater significance when it is examined more closely. An increasingly prescriptive style of EU regulation, of which binding technical standards will form an important part, could profoundly affect the way in which day-to-day financial supervision is conducted. If supervision does become more mechanistic, one consequence could be that employment (p. 142) in supervisory roles could become less appealing to highly-qualified and capable professionals.

5.59  Various aspects of EU law and inter-institutional governance have combined to make the procedures governing the making of binding technical standards rather complicated. There is a prohibition in EU constitutional law against the delegation to agencies of the general regulatory powers that have been conferred by Treaty on the EU Institutions.²⁰⁸ This restriction forms the background to the arrangement whereby the ESAs develop the standards but it is the Commission that formally adopts them. The Commission is able to perform this function because of Treaty provision for the delegation of legislative powers in respect of particular matters to the Commission, subject to inter-institutional controls. In the relevant Treaty provisions, a distinction is drawn between Commission delegated acts, which can supplement or amend certain non-essential elements of Union acts, and Commission implementing acts, which lay down uniform conditions for implementing legally binding Union acts.²⁰⁹ This distinction, which has implications for the ways in which the Commission’s exercise of the powers is controlled and scrutinized, is reflected in the framework for the ESAs, which makes provision for binding technical standards to take the form of either regulatory technical standards (which are delegated acts) or implementing technical standards (which are implementing acts).

5.60  Commission endorsement of technical standards developed by the ESAs is a pragmatic solution to a legal impediment to delegation to EU agencies that many regard as outdated but it gives rise to delicate questions about the independence, authority, and technical expertise of the ESAs, and about the need for their decisions to be shielded from bureaucratic and political interference whilst still ensuring that the process is bounded by robust accountability controls. On the one hand, endorsement must not be a rubber stamp as that would be to make a form-over-substance mockery of the legal restriction on delegation of discretionary powers and could open the door to regulatory excess driven by out-of-control ESAs keen on building up their own powers. On the other, the Commission and the main EU legislative bodies are not well-qualified to second-guess experienced supervisors’ views on what will often be very complex matters on which those who are in closer proximity to the markets can be expected to have superior knowledge and understanding.²¹⁰ Whilst striking a balance between such considerations is not something that is unique to financial market regulation nor is it a fundamentally new problem for the EU, timing has not been especially kind in that the development of the ESA framework has taken place during a period of general constitutional transition for (p. 143) the EU, including the adaptation of its so-called ‘comitology’ decision-making procedures for secondary legislation to align them to the new EU Treaty framework.²¹¹ Putting in place the ESA structure ahead of the general re-ordering has, of necessity, required context specific, case-by-case thinking about how to achieve this realignment.²¹²

5.61  The first important constraint is that an ESA can only develop a technical standard in circumstances where this is specifically provided for in EU legislation. The fact that the ESAs cannot act on an autonomous basis in the writing of technical standards is a factor that mitigates against the risk of the ESAs becoming too powerful; if anything, an alternative scenario in which the ESAs are weighed down by the burden of meeting a level of demand for technical standards that is disproportionate relative to the resources available to them is rather more plausible. Given the influence that it enjoys by virtue of writing the first draft of legislative proposals, it is the Commission that could really be in the driving seat.

5.62  Under the ESA framework, the Commission is subject to certain restrictions in relation to the adoption of technical standards that are required by a particular legislative instrument.²¹³ The submission of an ESA draft standard to the Commission is the normal start of the process for the adoption of technical standards required by a legislative act; it is not for the Commission itself to take the initiative at this stage of the process.²¹⁴ The procedure proceeds on the basis that standards developed by an ESA should be subject to amendment only in ‘very restricted and extraordinary circumstances’ because the ESA is the body in close contact with the markets.²¹⁵ Whilst the Commission is not bound to accept the draft as presented to it, if it is minded to reject a draft standard prepared by an ESA or to endorse it only in part or with amendments, it must liaise and coordinate with the ESA in accordance with a specified procedure involving the giving of reasons by the Commission, the issue of formal opinions by the ESA, and keeping Parliament and the Council informed.²¹⁶ Endorsement only in part or with amendments is only ever permissible where the Union interest (p. 144) so requires.²¹⁷ The Commission is specifically required to give reasons for non-endorsement or amendment of a draft regulatory technical standard and the responsible Commissioner, together with the relevant ESA Chairperson, may be called before the European Parliament or the Council to present and explain their differences.²¹⁸ Either body can object to a regulatory technical standard adopted by the Commission and thereby stop it from entering into force; reasons must be given.²¹⁹ Either body can also revoke the delegation to the Commission of power to adopt regulatory technical standards.²²⁰ The ESA framework itself does not give Parliament and the Council equivalent controls in respect of implementing acts—the explanation for a different approach being that implementing acts operate in a different context and do not involve the Commission exercising powers that the primary legislative body could have exercised itself—but general decision-making procedures for the adoption of implementing measures apply.²²¹

5.63  ESAs are subject to further procedural requirements relating to consultations, cost-benefit analysis and transparency in the development of draft standards.²²² ESAs must also seek the opinion of their Stakeholder Groups.²²³

5.64  Promoting compliance with EU law was part of the remit of the Level 3 Committees. The new structure strengthens the position of the ESAs by giving them a formal power to ensure compliance with clear and unconditional obligations in EU financial markets law. The power applies only in a quite narrow range of circumstances and it involves following a rather time-consuming and laboured process.²²⁵ These considerations mean that instances of full use of this power are likely to be rare. Nevertheless, the fact that this power exists and could be called upon if needed certainly has the potential to disturb the existing supervisory order.

(p. 145) 5.65  An alleged breach of, or failure to apply, specified²²⁶ EU financial market laws (including binding technical standards) by a national supervisor is the trigger for the commencement of the ESA enforcement process.²²⁷ The ESA may act on its own initiative or upon request from one or more national supervisors, the European Parliament, the Council, the Commission or the relevant Stakeholder Group.²²⁸ The stages of the process are as follows:

1. 1. Stage 1: ESA investigation (can take up to two months);²²⁹

2. 2. Stage 2: ESA compliance recommendation addressed to the national supervisor; national supervisor must give its initial response within 10 days and comply within one month;²³⁰

3. 3. Stage 3: Commission compliance formal opinion addressed to the national supervisor; formal opinion to be issued within three months (extendable to four) of the ESA’s adoption of a recommendation; national supervisor has 10 working days to respond to the Commission’s formal opinion and must comply within period specified in that opinion;²³¹

4. 4. Stage 4: ESA compliance decision in conformity with the Commission’s formal opinion addressed directly to financial market participant; decision to be made public unless such publication would be in conflict with the legitimate business interests of financial market participants in the protection of their business secrets or could seriously jeopardize the orderly functioning and integrity of financial markets or the stability of the EU’s financial system.²³²

5.66  Stage 2 recommendations and Stage 4 decisions are to be adopted on the basis of a simple majority in the ESA’s Board of Supervisors.²³³ An appeal against an ESA decision can be made to the Board of Appeal of the Joint Committee of the ESAs and an action can also be brought before the Court of Justice of the EU.²³⁴ Persons other than the person to whom an individual decision was directed can launch an appeal provided the decision is of direct and individual concern to that person.²³⁵

5.67  Stage 4 is especially significant as a boundary-crossing step towards the ESAs assuming a direct supervisory role in relation to market participants (albeit that, because of sensitivities surrounding the EU constitutional constraints in relation (p. 146) to agencies, the ESA is obliged to follow the Commission’s opinion on the matter in question). A Stage 4 decision, in effect, sets a precedent that must prevail over any previous decision adopted by national supervisors on the same matter and which competent authorities must follow when taking action in relation to the issues addressed.²³⁶ There are, however, several significant formal constraints on proceeding to Stage 4 of the procedure.²³⁷ First, the legal requirements to which the breach relates must be directly applicable to financial market participants (but, as noted earlier, this will include binding technical standards). Secondly, the adoption of the ESA decision must be necessary to remedy in a timely fashion non-compliance in order to achieve neutral competitive market conditions or to ensure the orderly functioning and integrity of the financial system.

5.68  Unanswered questions remain about the practical enforcement steps that an ESA could take if a financial market participant were to fail to comply with a decision addressed to it. This apparent gap in the framework may not matter unduly if the prediction that, in the ordinary course of events, matters would be resolved before they have escalated to the point where serious consideration has to be given to the possibility of resorting to a Stage 4 decision is correct. Circumstances in which a national supervisor would persist in holding out against the combined views of the Commission and an ESA on what compliance with directly-applicable EU law requires are hard to envisage. National supervisors have a general obligation to cooperate with the ESAs,²³⁸ as well as specific obligations with respect to information-sharing and assisting the ESAs in carrying out their duties.²³⁹

5.69  The ESAs have a general power to facilitate and coordinate national supervisory responses in emergency situations.²⁴¹ In addition, they have a new power to intervene formally. This new power is triggered by a determination by the Council, in consultation with the Commission, ESRB and, where appropriate, the ESAs, that an emergency situation is in existence.²⁴² An ESA may then adopt (by a simple majority in the Board of Supervisors) individual decisions requiring national supervisors to take whatever action is necessary to ensure that financial market (p. 147) participants and supervisors comply with specified EU financial market laws.²⁴³ If a national supervisor does not comply with the ESA’s decision, the ESA can in certain circumstances address an individual decision to a financial market participant.²⁴⁴ There is some overlap between this procedure and the direct enforcement power considered previously but a key difference is that in an emergency situation, and provided the other conditions are fulfilled, an ESA can intervene on a more expedited basis and without the need to go through the Commission.

5.70  However, the conditions and restrictions that apply in respect of this emergency power are onerous. First, the determination of an emergency situation by the Council is a necessary but not sufficient precondition for an ESA to intervene. In addition, there must exist exceptional circumstances requiring coordinated action to respond to adverse developments which may seriously jeopardize the orderly functioning and integrity of financial markets or the stability of part or all of the EU financial system.²⁴⁵ Secondly, the ESA must confine itself in its decisions, whether addressed to competent authorities or to firms, to requiring such action as needs to be taken to ensure compliance with requirements laid down in the specified EU financial markets legislation; whilst much depends, therefore, on the scope for discretionary decision-making within said requirements, an ESA does not acquire under this procedure an open-ended power to order whatever it takes to avert or minimize a crisis.²⁴⁶ Thirdly, a decision addressed directly to a financial market participant must relate to directly-applicable legal requirements which the national supervisor has either failed to apply or applied in a way that is a ‘manifest’ breach, and urgent remedial action must be necessary in order to restore the orderly functioning and integrity of financial markets or the stability of the EU financial system.²⁴⁷ Finally, there is also a fiscal safeguard: a decision must not impinge in any way on the fiscal responsibilities of a Member State.²⁴⁸ If a Member State considers that a decision does so impinge, it can refer the matter to the Council and, if the first decision in Council goes against it, then ask for a re-examination.²⁴⁹ In all, the fiscal safeguard procedure could take up to around six weeks (or even up to 10 weeks in certain cases), an incredibly long period given the speed with which events could develop in a financial crisis situation.²⁵⁰

5.71  Some Member States (in particular the United Kingdom) stressed the importance of a robust fiscal safeguard in the deliberations on the legal framework for the ESAs. (p. 148) The arrangement that was finally secured does leave open at least a theoretical risk that protracted discussions over whether fiscal responsibilities are affected could, in effect, neutralize the impact of a decision addressed to a national supervisor under this power. However, given all of the other hurdles that have to be overcome before an ESA can act and also the fact that the ESA can only specify action that is necessary to comply with the law, not more generalized discretionary rescue or bailout steps, the existence of circumstances in which the fiscal safeguard clause is actually relevant could turn out to be a quite rare event. Arguably, the considerations that drove certain Member States to place so much stress on the fiscal safeguard clause were more to do with the potential political gains from being seen stoutly to resist an apparent threat to taxpayers’ money than by close analysis of the real magnitude of that threat.

5.72  The mediation and conciliation function that was performed by the Level 3 Committees has been reinforced by the conferral of a new power on the ESAs allowing them in certain cross-border situations to impose a binding settlement decision on national supervisors if attempts to resolve a disagreement through conciliation fail and, ultimately, to direct a decision to a financial market participant.²⁵¹ Special procedural requirements govern the development of proposals for the adoption of a decision under this mechanism but the final decision is made by the Board of Supervisors on the basis of a one-Member, one-vote simple majority (subject to blocking minority rules which apply in situations involving consolidating or group supervisors).²⁵²

5.73  The cross-border disagreement must relate to the procedure followed by or the content of the action/inaction required of a national supervisor in particular cases identified in specified EU financial markets law.²⁵³ Amendments have been made to existing legislation to identify areas in which the ESA binding mediation procedures can operate and, as with the technical standards power, it is possible that provisions to such effect will become the norm in EU financial market legislation in the future.²⁵⁴ By way of illustration, the ESMA can intervene if a competent authority fails to cooperate in supervisory activities, on-the-spot verifications or investigations under the Markets in Financial Instruments Directive or if it fails to exchange information with other supervisors under that Directive.²⁵⁵ Also (p. 149) under MiFID, the procedure for a host country to take precautionary measures in respect of an investment firm operating within its territory under a passport now allows the host state to bring the matter to the ESMA’s attention in order for the ESMA to consider using its binding mediation powers.²⁵⁶ This could be the type of situation in which the ESA ‘last resort’ power to direct a decision directly to a financial market participant if a national supervisor fails to comply with a settlement decision could be relevant (although an ESA can only proceed to this stage where the decision in question relates to an obligation under EU law that is directly applicable).²⁵⁷ An ESA decision directed to a financial market participant may specify whatever action is necessary to comply with obligations under Union law, including the cessation of any practice.²⁵⁸

5.74  There is, again, a fiscal sovereignty safeguard, although, in this case, the first round in an appeal is for the ESA itself to reconsider the matter, with a further appeal to the Council after that.²⁵⁹ If there is an appeal, the ESA’s decision will be terminated if it is not maintained by the Council (on the basis of a simple majority of votes).²⁶⁰

5.75  In symbolic and political terms the creation of a binding mechanism to resolve disagreements between supervisors—or, putting it in a more ‘headline grabbing’ way, a mechanism that will allow for national supervisors to be overruled—is significant. It means that a supervisor’s judgment on what EU law requires could be overridden, potentially even on a matter in which the relevant EU legislation confers supervisory discretion (albeit only if the discretion has been exercised in a way that is not compliant with EU law).²⁶¹ There is an overlap between this power and the new enforcement power under Art 17 but ESAs may prefer to make use of this power where it is available because it keeps everything within the supervisors’ domain and does not require formal Commission involvement. From a more practical perspective, however, the question is whether the upgrading will in fact transform the weak and ineffective mediation procedures that operated within the Level 3 Committees. Only time will tell, but the view that giving the ESAs power to ‘settle the matter’ among supervisors could all make the difference has support.²⁶² Whether, however, there will be a real need to make much use of the power to impose decisions directly on financial market participants is open to question; as before, it is hard to envisage circumstances—other than a catastrophic breakdown (p. 150) in the ESFS—in which a national supervisor would maintain its defiance to the point where the last resort option has to be pursued.

5.76  The Commission’s original draft framework for the ESAs included an enabling provision that would have provided the basis for the ESMA to exert exclusive supervisory powers over entities or economic activities with Community-wide reach. The Commission had in mind in particular the supervision of CRAs, in respect of which the de Larosière Report had recommended centralized supervision in order to rationalize an over-cumbersome home-host state arrangement already in place and to improve efficiency and effectiveness.²⁶³ However, the Commission’s drafting left open the possibility of the ESMA having a direct supervisory role in other areas as well.²⁶⁴ Leaving open the possibility of extending ESA direct supervision into areas other than CRAs was opposed in the Council. On the other hand, there was support in the European Parliament for going beyond the Commission’s original draft and introducing new powers for direct EU-level supervision by the EBA of systemically-important cross-border financial institutions (with accompanying EU deposit guarantee and bail out funds).

5.77  The EU constitutional restrictions on delegation to agencies that have been alluded to already in this chapter are often mentioned as an obstacle to equipping the ESAs to act as direct supervisors; indeed since supervision is generally a Member State responsibility, there are special complexities here because any steps in this direction involve the introduction of multiple principals into the chain of delegation.²⁶⁵ In summary, the restrictions are: agencies can be granted the power to take individual decisions in specific areas but cannot adopt general regulatory measures; agencies cannot be given responsibilities for which the Treaty has conferred a direct power of decision on the Commission; and agencies cannot be granted decision-making power in areas in which they would have to arbitrate between conflicting public interests, exercise political discretion or carry out complex economic assessments.²⁶⁶ But the legal technicalities can be worked around—as indeed the new arrangements for the pan-European supervision of rating agencies that are described below demonstrate. The more substantial factors militating against this development may be political. Acute tensions are inherent in any attempt to reconcile the functional need for greater coherence in pan-European supervision with due respect for the position of national supervisors and for the sacrosanct principle (p. 151) of non-encroachment on Member States’ fiscal autonomy. Rating agencies are relatively unthreatening in this respect because the nature of the industry makes any future need to call upon European taxpayers’ funds to finance a bailout an unlikely prospect. However, going much further than this is politically contentious.

5.78  The differences between the EU Institutions on this matter have, for now, been addressed by empowering the ESMA to supervise rating agencies via amendments to the Regulation on CRAs, rather than through the general ESMA founding instrument.²⁶⁷ These amendments include provisions authorizing the ESMA to develop technical standards in this field. They also begin the process of equipping the ESMA with some of the powers that it will require if it is to operate effectively as a ‘real’ supervisor. The ESMA has rights to conduct investigations and on-site-inspections including dawn raids, to gather information from market participants and to take a range of supervisory measures, including requiring a CRA to bring an infringement to an end, suspending the use of ratings, temporarily prohibiting a CRA from issuing ratings and, as a last resort, withdrawing a CRA’s registration. The ESMA is allowed to charge fees to the rating agencies that it supervises.

5.79  However, there are some features that will continue to distinguish the ESMA from an ‘ordinary’ supervisor. One such area is in relation to enforcement. The Commission’s starting position was that it, rather than the ESMA, should have the power to impose periodic penalty payments and fines. The constraints of EU constitutional law with respect to delegation and institutional balance were alluded to in explaining this proposed allocation of enforcement functions.²⁶⁸ However, the final text empowers the ESMA directly to impose fines and penalties, albeit within quite tight limits. Among Member States there were different reactions to the imposition of such restrictions on the ESMA’s room for manoeuvre. On the one hand, the Portuguese government expressed concern that the enforcement powers being given to the ESMA were seemingly weaker than the enforcement powers currently granted to national competent authorities and warned against limiting its powers to a quasi-mechanical application of criteria and amounts set out in the legislation. On the other, the United Kingdom was concerned to ensure a tight legal framework and cited doubts about the legality of delegating broad discretionary powers in support of this view. Another distinctive feature is that whilst there is provision for the ESMA to exercise its supervisory powers in premises within Member States’ territories, it is also permitted to delegate supervisory tasks to local supervisors. Delegation may prove to be the most efficient and least disruptive way (p. 152) for the ESMA to discharge many of its supervisory responsibilities, at least in its early years of operation. National supervisors are able to request the ESMA to consider taking supervisory measures. National supervisors remain responsible for the supervision of the use of credit ratings by financial institutions and other entities, and the use of credit ratings in prospectuses

5.80  Is this supervisory arrangement in respect of rating agencies best regarded as an isolated and special case or the first step in the process whereby the ESAs become real supervisors of large parts of cross-border financial market activity? The amending Instrument in respect of rating agencies includes a recital to the effect that there is no intention to create a precedent for the imposition of financial or non-financial sanctions or penalties by ESAs on financial market participants or activities. However, this will not necessarily hold back the tide. Looking at EU regulatory developments in the round, there are already fairly compelling indications that the early steps to equip ESMA with direct supervisory powers in respect of CRA was the start of a trend. The failure to secure inclusion in the ESAs’ founding texts of a wide legal basis for the transfer of direct supervisory powers certainly was not a permanent closing of the door to this possibility because scope remains for introducing provisions to this effect via reviews of the ESA instruments or in new legal instruments relating to specific aspects of financial market activity.²⁶⁹ Thus, for example, under new legislation on OTC derivatives, central counterparties and trade repositories that is expected to be adopted in 2012 (known as the European Market Infrastructure Regulation or EMIR) ESMA will assume direct responsibility for the registration and surveillance of trade repositories and it will also become the single entry point for third country clearing houses. This introduces a ‘gatekeeper’ role in respect of access to the EU from third countries that could become a significant part of the ESAs’ role in future. EMIR will also give ESMA an important (though not formally decisive) role, in consultation the European Systemic Risk Board, in determining which derivatives contracts should be subject to mandatory clearing through a central counterparty.²⁷⁰

5.81  The sense of ‘mission creep’ with respect to direct market-facing activity is reinforced by the new Regulation on short selling, which was proposed by the Commission in September 2010²⁷¹ and agreed in 2011.²⁷² Under the Short Selling Regulation, ESMA has been given not only a significant coordinating role with respect to (p. 153) measures with respect short selling by national competent authorities²⁷³ but also direct power itself to restrict or prohibit short selling in limited circumstances.²⁷⁴ The chaotically fragmented response of national supervisors to the perceived destabilizing effects of short selling activity during the financial crisis can be seen to be the driving force behind this conferral of power on ESMA, but it brings the position perilously close the boundaries of the permissible constitutional scope of delegation.²⁷⁵ The possibility of ESMA playing a key role in the future in determining when a derivative would be sufficiently liquid so as to be traded on organized platforms has been raised.²⁷⁶ A potential role for ESMA in an EU-wide regime for the banning of products or their distribution is also under active consideration.²⁷⁷

5.82  The Alternative Investment Fund Managers Directive further confirms the trend in that it allows the ESMA to intervene (by way of a request to national competent authorities) with respect to the imposition of restrictions on non-EU fund managers or prohibitions on the marketing of non-EU funds in certain circumstances.²⁷⁸ For now, this Directive leaves key responsibilities for administering the third country passport regime with national authorities but the possibility of ESMA playing a direct role in this area has been mooted and it is an idea that could gather momentum in the transitional period up to 2018 when that passport regime is expected to come fully into effect.²⁷⁹

5.83  These developments serve to demonstrate how rapidly the new institutional supervisory arrangements have become embedded within the EU policy framework and the strong predilection towards making as much use as possible of the new supervisory authorities. The cumulative effect is quite significant. One plausible interpretation of the current position is that the main immediate stumbling block to the further transfer of direct supervisory power to the ESAs is not so much technicalities arising from the position of agencies in EU law and governance, because pragmatic solutions to address these issues are emerging, but rather fiscal considerations: where taxpayers money could be at risk (as it could be in relation to central counterparties where it is conceivable that a need to provide financial (p. 154) support could arise), the ‘he who pays the piper calls the tune’ principle²⁸⁰ for now mandates a national supervisory approach.²⁸¹ Such considerations ensured strong Member State opposition to (the eventually unsuccessful) efforts by the European Parliament to insert provisions into the ESA founding texts empowering the ESAs to conduct direct supervision of significant cross-border financial firms.

5.84  The future development of fully-fledged supervision conducted at the EU level is therefore closely connected to other important ongoing strand of European policy debate relating to financial services and markets.²⁸² There is now a broad consensus that national fiscal anchoring hindered efficient cross-border crisis management of European banks that found themselves in difficulties as a result of the turmoil in the markets; the crisis made the tension between increasingly transnational financial institutions and national financial stability arrangements ever more apparent.²⁸³ Orthodox thinking right at the heart of policy formation at the European level has now recognized a need for change. A wide-ranging debate about improving bank crisis management arrangements, including the establishment of ex ante resolution funds, funded by a levy on banks and investment firms, which would help to wean the financial system off its dependency on public funds, is now underway.²⁸⁴ Much controversy surrounds these initiatives and the out-come is hard to predict.²⁸⁵ The additional complications flowing from the euro area sovereign debt crisis have slowed progress. However, it is already possible to say that the arrangements that are eventually adopted in this regard could have profound implications for the ESAs in that they could begin to erode the key impediment to fully-fledged financial market supervision at the EU level.²⁸⁶ In time, such arrangements could (p. 155) also strengthen the ESAs’ hand in other ways as well, in that they could put in question the legitimacy of any attempt to resist the use of the ESA mandatory enforcement or supervisory dispute resolution powers through opportunistic recourse to the fiscal safeguard.²⁸⁷

5.85  The former French President has been quoted as saying of the new structure for financial market supervision in Europe that:²⁸⁸

We have agreed a European system of supervision with binding powers…It is a complete sea-change in the Anglo-Saxon strategy…We could have gone further, but I believe that it will widen [its powers] through experience and practice, the way it’s always happened.

The analysis in this chapter supports the description of the new structure as a ‘sea-change’. The claim that further expansion can be confidently expected is also credible. It is supported by the short history of the Level 3 Committees, which this article has reviewed. When the Level 3 Committees were first established, they were consensus-based networks with limited formal mandates and there were only rather vague expectations as regards their role in promoting supervisory coordination, cooperation, and the promotion of supervisory convergence. The Level 3 Committees quickly established themselves as useful additions to the supervisory scene and showed a strong propensity to adapt effectively to changing circumstances and growing expectations. Their success fostered receptiveness to filling those gaps in their powers that became apparent from practical experience. Within just a few years, the Level 3 Committees had evolved into much more complex organizations, able to make some decisions by a majority vote, and equipped with a number of ‘soft’ enforcement powers.

5.86  The new post-crisis round of institutional reform can be viewed as a continuation of the evolutionary process. But it is a moment in the evolution of EU financial market regulatory policy that merits being described as simultaneously transformative and transitional.²⁸⁹ The new arrangements described in this chapter (p. 156) constitute an evolutionary leap forward in that the new authorities are structured in a more formal way (as legal entities), are able to operate on a more efficient basis (usually by simple majorities), and have much more detailed mandates and powers. Significantly, their powers include the right to develop binding technical standards and the ability, albeit in quite limited circumstances, to impose binding decisions on national supervisors and, as a last resort, directly on financial market participants. It is also of considerable significance that direct supervision of market activity and market participants by an EU-level authority has moved from theoretical possibility to practical reality. The fact that an EU authority can intervene (albeit only in limited circumstances) to restrict or halt certain types of financial market activity further underscores the importance of the recent supervisory upgrade.

5.87  Wymeersch has referred to ‘The creation of the authorities, although initially with relatively limited powers…’²⁹⁰ (author emphasis added). That the ESAs will follow their predecessors, the Level 3 Committees, in accumulating significantly more power and influence over time, either through scheduled reviews of their founding texts or through the adoption of new or revised substantive measures, seem like a safe bet.²⁹¹ Indeed, as is evident from new EU legislation that has been under development since completion of the main research for this chapter, this accretion of power and responsibilities is already apparent. Indeed, it started whilst the ESAs existed only in shadow form and before formal commencement of their operations. The claim that powers will ‘widen’ thus did not have to wait long for validation. Whilst considerations of pragmatism, practicality, and efficiency have continued for now to prevail over grand visions for institutional redesign, the direction in which the step-by-step approach is leading is becoming increasingly clear. Crisisdriven structural reforms have brought the destination—pan-European authorities with real supervisory power and national supervisors increasingly acting as implementation agents rather than as principals—closer (barring a completely catastrophic collapse of the euro, in which case all bets are off). As the then French Finance Minister, Christine Lagarde, was quoted as saying in response to the outcome of the political negotiations over the new supervisory arrangements, the recent reforms are best viewed as part of the ‘process of creating a real European supervisory authority’²⁹² (author emphasis added).

5.88  But what of the claim that ‘We could have gone further’? Was a crisis-induced opportunity to move closer to full-blown supervision conducted at the EU level not (p. 157) fully exploited? Any suggestion to this effect is not persuasive. The analysis in this chapter indicates that the recent round of institutional reform was at, or near, the limits of current feasibility. There are still some formidable obstacles blocking the way, and also some factors that militate in favour of continuing to adopt a gradual, incremental approach.

5.89  First, there are practical considerations in that the ESAs are not yet ready to be full-blown supervisors. The ESAs have inherited from the Level 3 Committees small organizations with limited resources and even when the new arrangements are fully up and running (expected to be in 2014), the ESAs’ resources will still compare unfavourably to the combined resources of the national supervisors. The ESAs will need to adapt and grow into their role, and the resources available to them will need to increase accordingly. Arrangements for industry financing through the payment of supervisory fees, which will be pioneered by the ESMA in relation to the supervision of rating agencies, will need to mature. It is appropriate to allow those arrangements to bed down before extending them into other areas.

5.90  Secondly, issues of budget and financing link into sensitive questions relating to governance and accountability. There are, as yet, unresolved institutional tensions at the EU level with respect to the steering and control of agencies.²⁹³ Whilst this is not the place to go into the detail of that debate, the dubious merits of rushing ahead to equip EU authorities to act as financial market supervisors whilst doubts remain about the existence of a clear and robust system of accountability that can properly balance the need for effective lines of control with due respect for the supervisory independence that is a fundamental prerequisite for effective financial market supervision can be highlighted.²⁹⁴ The complications of EU law on delegation are also relevant here. This chapter has described various creative ways around the EU constitutional limits on delegation to agencies that have been employed in the setting up of the ESAs. It has suggested that these restrictions have proved to be less of an impediment to the progress to date than might have been expected. However, it is one thing to accept, for example, the rather cumbersome arrangements and tight frameworks for supervision and enforcement in respect of rating agencies and trade repositories, which are highly specialized financial market actors, another to contemplate it being extended across wide swathes of financial market activity. In short, the pragmatic arrangements that have been engineered (p. 158) to date are adequate for the limited purposes they address, but they are unlikely to be suitable for general application in respect of the range of operations that ‘real’ supervisors typically perform. Ultimately, some Treaty changes may be required to address these matters.²⁹⁵

5.91  Thirdly, there is the highly significant matter of Member States’ domestic politics. While the crisis has changed the political mood, it has not delivered a carte blanche from all of the Member States for institutional reform in the direction of immediate EU centralization of supervisory responsibility. Any full-frontal attempt to take power away from national supervisors would thus run into strong objections from some influential quarters. The United Kingdom, in particular, stands out as an opponent of further accretion of power to the centre. Its politicians are maintaining a line that is consistent with the views of key market participants in maintaining this stance: according to one study, although more than half of the 606 companies, asset managers, and pension funds across Europe surveyed were in favour of the ESAs having direct supervisory powers in respect of banks and financial firms, over 90 per cent of those in the United Kingdom were opposed.²⁹⁶ The recent experience of having to use public funds to shore up failing financial institutions adds ballast to the case in favour of supervision remaining a mainly national competence. However, emerging plans for more robust crisis management and resolution arrangements could start to chip away at the basis of that line of argument. Moreover, the outcome of the euro area sovereign debt crisis has the potential to change the position quite significantly for the relevant Member States.

5.92  In fact, the gradual, step-by step approach that has been employed in the setting up of the ESAs may already have gone further in shifting the balance of power towards the centre than may be initially apparent. Even the most ardent advocates of centralization would surely accept that constructive progress is preferable to deadlock, especially when it is recalled that institutional structure, though not unimportant, is a second-order problem compared to ensuring overall effectiveness and efficiency in the achievement of regulatory objectives.²⁹⁷ Care needs to be taken not to pursue an over-ambitious agenda that could rapidly descend into unproductive, time-consuming political quarrels and lengthy debates about intractable legal questions. Those who favour EU-level centralization of supervisory responsibilities can take comfort that the longer-term prognosis is their favour. Meanwhile, cautious pragmatists who prefer incremental advances must find a better way of ensuring that their approach does not result in institutional supervisory structures falling dangerously far behind market realities.