The review of ESMA, EIOPA & the EBA: (very) high stakes?


By Victor van Hoorn

On March 21, 2017, the European Commission launched its Public Consultation on the operations of the European Supervisory Authorities (ESAs).  The consultation, focussing on the powers, governance, structure and funding of the ESAs, is very timely considering the institutional and political developments within the EU and internationally.

One of the Commission’s flagship projects – the Capital Markets Union (CMU) – is facing some headwinds, as much caused by Brexit as by the inherent limitations of the current institutional setup in successfully delivering such an ambitious project.

Regulatory and supervisory convergence – necessary for a functioning single market with a level-playing field – seems difficult to achieve. Brexit is also laying bare the keen competition amongst EU Member State regulators to attract UK-based businesses by loosely interpreting requirements – this just a decade after the global financial crisis. And the new US administration, with its publicly stated deregulatory agenda, is also triggering questions about mutual recognition of rules and whether the current system of ‘equivalence’ present in many pieces of legislation is fit for purpose.

Increasing power to the ESAs to address some of these challenges will only be meaningful if accompanied by the necessary funding and resources. This is shaping up to be a very difficult discussion, especially in the context of Euroscepticism, a string of national elections, and open mention of a downsized or multi-speed EU in the White Paper on the Future of the EU. So rather than being an obscure EU institutional question, the review of the ESAs becomes critical.

In order to effect most of the changes mentioned, this will require legislative proposals amending the respective ESA regulations, some form of Omnibus legislative proposal amending a large number of pieces of legislation to change the institutional powers therein and maybe some legislative proposals transforming certain directives into regulations to avoid diverging national implementations. We expect some of these to emerge towards the end of 2017.



  • Regulatory and supervisory convergence

The limitations in pursuing an ambitious CMU agenda, the regulatory competition by Member States to attract UK-based businesses post-Brexit and the current implementation challenges for critical pieces of legislation such as MiFID II are just a few examples that show the need for – as well as the limitations in – achieving true regulatory and supervisory convergence.

The objective of supervisory and regulatory convergence is ultimately linked to the idea of creating a European single market with a similar regulatory framework for firms operating across several Member States to ensure a level-playing field.

In the current set-up, the ESAs have occasionally struggled to push regulatory convergence – a critical pre-condition for a functioning CMU – as far as needed. Instead they often have had to rely on non-binding Guidelines and Questions & Answers (Q&A) which has resulted in the opposite of convergence: a patchwork of regulatory requirements and interpretations across EU Member States which businesses have had to deal with.

In the absence of more formal rules in legislation or delegated acts, these Guidelines and Q&A are, however, the best tool available for interpreting vague rules.
To remedy this, the European Commission is floating the idea of giving the ESAs – and in particular ESMA – a more direct role in supervising market participants and enforcing certain EU legislation.

A more direct role for ESMA in supervising Data Providers and post-trade infrastructure, for example, is essential to ensure the MiFID II & MiFIR rules are applied throughout the EU in a similar way and may reduce the need for non-binding Guidelines and Q&As.  Similarly, giving ESMA rather than the National Competent Authorities (NCAs) of EU Member States, a more direct role in applying fund and asset management legislation is a way to address some of the barriers to the cross-border distribution of funds identified by the European Commission in its work.

In the context of Brexit, ESMA has repeatedly indicated that a closer scrutiny and harmonisation of fund delegation rules should be conducted to avoid an excessive ‘race-to-the-bottom’ by EU Member States in a bid to attract UK-based asset managers. Incidentally, ESMA made this one of its priorities on investment management in its 2017 work programme  and ESMA Chair Steven Maijoor recently announced ESMA would be publishing an opinion on this very issue in the spring.

Finally, a more harmonised and unified supervision of auditing firms and accounting standards has on regular occasions been flagged as a pre-condition for a proper level-playing field in the context of the CMU and the Banking Union.

The consultation therefore floats the idea of giving ESMA a more direct role in the supervision of this sector.


  • Increased role in consumer & investor protection

The European Commission also seems keen to give the ESAs more powers on consumer and investor protection. Over the past few years, many NCAs have increasingly sought additional powers to control and restrict the sale and advertisement, mostly through digital means, of financial services and products.

The Commission recently expressed in its Consumer Financial Services Action Plan its concern that national regulatory differences and ‘gold plating’ by Member States may distort competition to the detriment of new entrants and undermine the European system of ‘passporting’ for regulatory licences.
The Commission illustrated this potential new role for ESAs by involving ESMA and EIOPA in the current investigation into the fees, costs and real performance of long-term retail investment products.

Giving new powers in the area of consumer protection is, however, at the limits of EU law as consumer protection is a shared competence between the EU and Member States.  This area may therefore be one of the most complex ones in the review of the ESAs.

  • International dimension – a formal role in equivalence?

While the ESAs are currently involved in international dialogue with other supervisors, international organisations and third countries, their formal role in this is not very well defined. The Commission is suggesting that ESAs should be given a more important role in the initial assessment of the equivalence of third countries’ legal frameworks. They should also be given the responsibility for conducting a continuous monitoring of legislative and regulatory developments that may impact the equivalence decisions adopted.

The Commission already raised this issue earlier in its own work on the equivalence process and how it has worked until now. This is particularly relevant in the current international context where the new US administration is sending mixed messages about its intention to review and repeal some of the post-crisis reforms.

Equally, this is critical in the context of Brexit where the EU27 are wondering which direction UK financial regulation will take once Brexit is consummated.



  • A new governance

Along with the new powers given to the ESAs, there is a need to rethink the relationship between the ESAs and the NCAs. Currently, key decisions are taken by the Board of Supervisors (BoS) of each of the ESAs where all NCAs are represented. As the Commission noted, the ESAs have very rarely made use of their powers to investigate and pursue breaches of EU laws by NCAs. A plausible explanation for that is the reluctance of the BoS to authorise the launch of investigations and proceedings against one of their peers.

Without changes to this setup it will be difficult to achieve meaningful regulatory and supervisory convergence. It will also place limitations on the ability of the EU or Eurozone to present a unified front in international regulatory fora such as the Basel Committee, the IAIS, the FSB and IOSCO. The Commission consultation reveals though that, despite the known problem, there are no obvious solutions to giving ESAs more powers over NCAs to ensure supervisory convergence.

This particularly complex issue needs to be examined against the backdrop of the high-level discussions in the Commission and the Council. On March 1, 2017, the Commission unveiled its White Paper on the Future of Europe amid discussions amongst EU Member States in the Council about the need for a two- or multi-speed Europe. Under most of the five scenarios presented in the White Paper, increased powers and funding for the ESAs could be perceived as being at odds with the future direction of European integration.

Finally, one issue seemingly missing from the Commission’s consultation is a closer look at the procedure for adopting Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS), the various outcomes of this process in case of adoption or rejection by the Commission, and information sharing with the Commission and particularly the co-legislators in the Council and the European Parliament. The latter point and other issues such as the ‘(un)bundling’ of Level 2 measures to reduce the chances of ‘objections’ were repeatedly raised by the co-legislators in the context of PRIIPS and MiFID II. While the process in these files showed a need to reflect on the current setup, the Commission seems reluctant to tackle this issue and has excluded this from the consultation.

  • Supervisory architecture

With the triggering of Article 50 TEU by the British Government and Brexit on course to happen, it also became clear that the EBA will have to be relocated. Nearly all EU Member States have expressed interest in hosting the agency. Beyond the location of the EBA, this brings back the discussion on whether financial supervision should be sectoral (banking, insurance, capital markets) or more topical (prudential regulation vs. market conduct).

The Commission suggests as a possible merge of the prudential responsibilities of the EBA and EIOPA, while simultaneously transferring consumer protection powers to ESMA.
While that may be politically more acceptable from a budgetary consideration, this could be rather unwelcome news in some corners of the financial industry, such as the insurance sector, which may fear a spill-over of banking regulation and supervisory practices into insurance regulation.



Probably the thorniest issue at stake and not surprisingly the last element of the consultation, is the question of how to fund the ESAs adequately so they can effectively exercise their existing tasks and their potential new powers. The Commission’s favoured option is to reduce the share of public funding – from the EU budget (likely reduced post-Brexit) and NCA contributions – in the overall ESA budgets and to complement that with a significant share of industry funding.

In current political times, EU politicians may be tempted to shift as much of the costs of regulation and supervision onto the financial sector.
On the other hand, retaining a share of EU funding could be appealing to co-legislators as a way of maintaining some budgetary authority over the ESAs and therefore potential leverage during political negotiations over Level 2 rules involving the ESAs.

One of the key challenges in designing an industry-funded model is linked to the access and availability of data. Currently, ESAs do not have full access to the data on supervised entities that would be essential to design a comprehensive, transparent and predictable industry funding model. Therefore, one of the new powers the Commission wishes to have transferred to the ESAs is access to data. Here, options range from getting data directly from market participants and supervised entities to granting ESAs more powers to force NCAs to share the necessary data.


Increased powers, a new supervisory architecture and changed funding may have an impact on existing and expected legislative proposals

  • STS Securitisation (November 2015)
  • EU Risk-Reduction Package for banks (November 2016)
  • Recovery & Resolution of CCPs (November 2016)
  • Legislation on the revision of EMIR (expected June 2017)
  • Pan-European Personal Pension (expected June 2017)
  • EU prudential framework for Investment Firms (expected end of 2017)
  • AIFMD/UCITS review (expected 2018)
  • Review of Solvency II (expected 2018)



While the consultation already covers an extensive and comprehensive range of issues, a few key dimensions should be borne in mind to make the discussion complete.
First, the ESA review should be seen in the wider context of the EU legislative and rulemaking process in general. When developing Level 2 rules and Level 3 guidance, the ESAs have often had to work with legislative texts that were far from optimal due to the absence of clear mandate for Level 2 rules.

Moreover, the ESAs have occasionally faced the challenge of having to define what turns out to be essential elements of the legislation in their Level 2 rules – much to the ire of the co-legislators and in clear contradiction with the European Treaties (Article 290 TFEU). In some cases, it is arguable that the ESAs have even had to define essential elements in Level 3 Q&As to answer the industry’s implementation challenges. Involving the ESAs earlier on in the Level 1 negotiations may offer some solutions.

Secondly, FinTech and digitisation are mentioned briefly. These developments may, however, have significant consequences for the division of competences amongst NCAs and between the ESAs and NCAs. In a future environment where many financial services will be advertised and sold digitally, and where geographical boundaries play less of a role, what does it mean to offer or sell securities, services and funds in a particular Member State?

In such an environment, transferring powers from NCAs to the ESAs to coordinate regulation and supervision across the entire EU single market may make a lot of sense and become technologically necessary.

The ESA review will only be effective if the discussion is conducted in the broader institutional context and takes full account of technological developments.
The European Commission is incidentally consulting on its FinTech agenda at the same time.


Comments & questions: Email Victor van Hoorn,  Account Director,