Having fought for more than a year in favour of a radical reform of European financial supervision, the European Parliament on Wednesday gave the final seal of approval to a package of reforms which will see a fundamental shift in the way banks, stock markets and insurance companies are policed as of 2011.
Three European supervisory authorities (ESAs) will be established to replace the current supervisory committees. Their powers will stretch much further than the advisory nature of the current system and their potential to gain further competences will be considerable thanks to a strong review clause. A European Systemic Risk Board (ESRB) will also be established with the task of monitoring and warning about the general build-up of risk in the EU economy.
This new system should be able to provide better protection from events such as the Fortis bank crisis weekend, Germany's unilateral naked short-selling ban and the losses faced by life insurance policyholders in the UK, Ireland and Germany with the collapse of Equitable Life. It should at the same time strengthen the EU single market for financial services and provide much better investor protection.
Cosmetic or root and branch reform
A number of Member States, particularly those with large financial centres, favoured the limited reform approach. This led to a significant reduction in the scope of the Commission proposals, themselves considered by the EP as not going far enough. Parliament's rapporteurs from the beginning argued that the system needed serious reform so that risk would be better understood, primarily through much improved communication between national supervisors.
The final deal sees the transformation of advisory committees into watchdogs with a bite. The ESAs are set to get tough new powers to settle disputes among national financial supervisors and to impose temporary bans on risky financial products and activities. If national supervisors fail to act, then the authorities may also impose decisions directly on financial institutions, such as banks, so as to remedy breaches of EU law. The daily work of the ESAs will see them drive coordination within the current system of colleges of national supervisors set up to watch over cross-border financial institutions.
ESA firefighting powers
In the event of disagreements between national supervisors, ESAs will be able to impose legally-binding mediation and, if no agreement can be reached within the relevant college of supervisors, to impose supervisory decisions on the financial institution concerned ESAs will be able to intervene as mediators at their own discretion, rather than only at the request of one of the national supervisors.
The ESAs will be able to monitor how national supervisors implement their obligations under EU law. If these obligations are implemented incorrectly, the ESAs may issue instructions to the national supervisor concerned and, if these go unheeded, directly instruct the financial institution to remedy any breach of EU law.
Consumer protection a central goal
In response to the ever more complex world of financial services, MEPs successfully pushed for consumer protection to be at the very heart of the ESAs' work. ESAs will have the power to investigate specific types of financial institution, or financial products such as "toxic" products, or financial activities such as naked short selling, to assess what risks they pose to a financial market and issue warnings where necessary. Where specific financial legislation so provides, ESAs may temporarily prohibit or restrict harmful financial activities or products and may also ask the Commission to introduce legislative acts to prohibit such activities or products permanently.
ESRB: faster and better warning about risk
MEPs inserted provisions to enable the ESRB to communicate rapidly and clearly. The ESRB will develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks they carry. The ESRB will also be responsible for establishing colour-coded grades to reflect different risk levels. When making warnings or recommendations on risk build-up, the ESRB is to use the colour-grade to indicate the level of risk.
To enhance the ESRB's ability to predict risk build-up, a broader range of skills and experience, including academics, will be represented on its Advisory Scientific Committee. Finally, to improve visibility and credibility from the outset, the ECB President will preside over the ESRB for the first five years.
Powers that may grow
Both the ESAs and the ESRB will be able to grow as events require. Particularly for the ESAs, MEPs ensured that the Commission will report back every three years on whether it is desirable to combine the separate supervision of banking, securities, and insurance on the benefits of having all the ESAs headquartered in one city and on whether the ESAs should be entrusted with further supervisory powers, notably over financial institutions with pan-European reach.
Role of the European Parliament
MEPs also succeeded in improving democratic oversight of the whole supervisory system. The EP will be able to veto the appointment of ESA chairpersons and will have a say in the development of the technical standards and implementing measures. Moreover, the ESRB President will keep the chair and vice-chairs of the EP's Economic Affairs Committee updated on ESRB activities through confidential discussions.
The legislative texts empower the Commission, the ESAs and the ESRB to ask the Council to declare an emergency. But the Parliament will also be able to ask the Council to declare an emergency through resolutions and questions, in the same way as it has a right to make requests to the Council and the Commission in any other matter.