Esma Gains Sweeping New Powers in Commission Review

The European Securities and Markets Authority (Esma) has received the greatest share of new capabilities under the proposal from the European Commission (EC). According to documents released on September 20, it will have the ability to directly supervise certain investment funds that carry the EU name, approve certain EU prospectuses and all non-EU prospectuses drawn up under EU rules.

The European Supervisory Authorities (ESAs) is the collective name for Esma, the European Banking Authority (EBA), and the European Investment and Occupational Pensions Authority (Eiopa). All will be required to promote sustainable finance by considering environmental, social and governance (ESG) factors in their decision-making, as well as prioritizing fintech by promoting innovation and cybersecurity.

“Financial markets are changing fast,” said Valdis Dombrovskis, the vice president of the European Commission, in a press conference held in Brussels on September 20. “We are seeing renewed cross-border integration, new opportunities in fintech and a boom in sustainable and green finance. The EU needs to act as one player so that we can stay ahead of the curve.”

Esma will also authorize and directly supervise so-called “critical benchmarks” in the EU, which includes reference rates such as the European Interbank Offered Rate, and it will be responsible for endorsing non-EU benchmarks for use within the Union. Endorsement is a critical plank of the European Benchmark Regulation, under which benchmarks calculated outside of the EU must be assessed for appropriate levels of governance and operational integrity before they are allowed to be used by EU firms.

By far the biggest change, however, comes in terms of market abuse. Under the proposals, Esma will have the ability to take a direct role in coordinating market-abuse investigations between national regulators. It will be empowered to act directly and recommend that national regulators initiate an investigation in cases where it has well-founded suspicions that market activity is abusive or fraudulent, and has cross-border implications.

“Esma welcomes these proposals and will now await the outcome of the co-legislative process, but stands ready to contribute if required,” says a spokesperson for Esma, who declined to answer specific questions about the proposals. “Esma’s Board had argued for strengthened powers in its submission to the Commission’s Review, and we believe these proposals, for the strengthening of powers, recognize the organization’s performance in enhancing investor protection and promoting stable and orderly financial markets since its establishment in 2011.”

More Money More Problems

Currently, the ESAs are funded by a combination of EU budgets and money from the national regulators of European nations, at a mix of 40 percent and 60 percent, respectively. However, all have frequently complained that the money received from the system has been insufficient to complete the tasks given to them, particularly in the post-financial crisis regulatory environment that has been unrivaled in modern history.

Esma has been one of the loudest and most persistent advocates for deeper funding and a change to the model under which the ESAs are financed. The agency, which has taken the brunt of technical work for legislation such as the revised Markets in Financial Instruments Directive, the European Market Infrastructure Regulation, and the Central Securities Depository Regulation, among others, has survived on a budget of between €30 to €40 million since its creation in 2011. By contrast, the annual budget of the UK’s Financial Conduct Authority in 2016 was over $400 million.

Esma and the other ESAs will now be funded entirely by the EU budget, and by industry fees across all sectors, which will be apportioned according to the size of the firm and its activities. National regulator contributions will fall to zero.

“The writing has been on the wall for some time,” says a regulatory expert at a UK bank. “We expected some sort of industry levy, so it doesn’t come as a major surprise, but we will have to see the detail of how these costs will be worked out in trialogue [the debate process between the Commission, Parliament and Council]. I suspect the industry will not accept a massive expansion in Esma’s budget at our expense, and we’ll be working with our trade associations extremely closely on this.”

‘A Non-Starter’

While the news was welcomed by the ESAs, not all were convinced. Some members of the European Parliament (MEPs), which has had a sometimes-fractious relationship in recent years with regulators such as Esma and the Commission over rulemaking progress, stressed that the supervisors should not be handed powers without sufficient oversight.

Markus Ferber, a German MEP and the vice-chair of the powerful Economic and Monetary Affairs Committee, tells WatersTechnology that while the proposals for a change in funding “point to the right direction,” this change “must not mean that the ESAs can do what they want to just because they get more money.”

Ferber also suggested that the Parliament would not allow ESG considerations to form a basis for regulatory decisions moving forward.

“The ESAs need a very clear mandate,” he says. “Attempts to include environmental or social considerations into the ESAs mandate are definitely a non-starter as this would only distract from the key objective of establishing financial stability. Direct supervision powers should only be introduced in areas where there is a clear European dimension and a definite benefit of European supervision. As the ESAs now receive more powers we will also have to think about how to increase the legislator’s scrutiny powers to make sure they actually stick to their mandate.”

Other MEPs, who declined to comment on the record, also suggested that the Parliament is minded to challenge certain aspects of the regulation—or at least, await further detail—before granting its blessing to enhanced funding and powers for the ESAs. The proposals will require approval from both the Parliament and the European Council before becoming effective.