FSC Report on Financial Supervision - Draft - Hoofdinhoud

European Union Brussels, 20 July 2005

Financial Services Committee

__________ PUBLIC

The Secretariat

FSC 4155/1/05 REV 1

LIMITE

NOTE

from : FSC Secretariat

to : Members of the EFC

Subject : FSC Report on Financial Supervision - Draft

Delegations will find attached a report on financial supervision, as prepared by the FSC

subgroup chaired by Mr. Thierry Francq. This report was discussed at the informal FSC

meeting on 8 th July .

FSC 4155/1/05 REV 1 JLF 1 FSC - Report on Financial Supervision – Draft

Executive Summary ........................................................................................................................... 3

Introduction ........................................................................................................................................ 5

Section 1. Objectives, context and structure of the report .............................................................. 6 1.1 Objectives ...................................................................................................................................... 6 1.2 Context .......................................................................................................................................... 7 1.3 Structure of the report ................................................................................................................... 8

Section 2. Overview of the present framework within the perspective of current market trends... 8 2.1 Financial integration is set to increase significantly in the years to come .................................... 8 2.2 Overview of the current legislative framework ............................................................................ 9

2.2.1 The division of powers between supervisors ………………………………………….. 9 2.2.2 Information exchange ………………………………………………………………. 10 2.2.3 The home/host principle …………………………………………………………….. 11 2.2.4 The supervision of financial groups …………………………………………………. 12 2.2.5 Enforcement powers ………………………………………………………………... 13

2.3 Cooperation has intensified within the Level 3 committees ....................................................... 13 Box 1 Some examples of cooperation under Lamfalussy arrangements …………………...… 14

Section 3. Assessment of challenges facing the current supervision framework ......................... 15 3.1 Ensuring effective day-to-day cross-border supervisory cooperation ........................................ 15 3.2 Enhancing supervisory convergence............................................................................................ 16 3.3 Improving cost-efficiency for firms and investors ...................................................................... 18 3.4 Finding the right balance between more centralised prudential supervision and the location of

responsibilities at the national level ............................................................................................. 18 3.5 Ensuring accountability in the current institutional context ..................................................... 19

Section 4. Developing supervisory tools ......................................................................................... 20 4.1 Fostering supervisory cooperation .............................................................................................. 20

Box 2 Suggestion for a mediation mechanism ……………………………………………… 21 4.2 Promoting supervisory convergence ........................................................................................... 23 4.3 Enhancing the cost-efficiency of the EU supervision system ..................................................... 23 4.4 Improving cross-border supervision ........................................................................................... 25

Box 3 Delegation of tasks and responsibilities ……………………………………………. 26 4.5 Furthering accountability ............................................................................................................ 28 4.6 Suggestion for a timeframe for action ......................................................................................... 28

Conclusion ........................................................................................................................................ 29

Annex I Timeframe for action ...................................................................................................... 31 Annex II FSC Mandate to the subgroup ....................................................................................... 34 Annex III Hearings ........................................................................................................................ 35

Section 1- Analytical summary of the hearings ……………………………………………. 35 Section 2- List of hearing interviewees …………………………………………………… 37 Section 3- Questionnaire …………………………………………………………………. 38

Annex IV Overview of the legislative framework .......................................................................... 41 Section 1- Key components of the current framework ……………………………………... 41

Section 2- Prospective view on EU legislation and its implementation …………………….. 53

FSC - Report on Financial Supervision – Draft

Executive Summary

I. The Council (ECOFIN), in its 7 December 2004 conclusions, invited the FSC to provide

strategic overview on how the framework for financial regulation and supervision

should be developed over the next few years. The FSC entrusted a small group of its

members with the task of providing a practical contribution to the debate on developing

supervisory cooperation and convergence.

II. The efforts deployed in the last five years have overhauled the institutional framework for

financial services, laying the ground for an enhanced contribution of the European financial

system to the Lisbon objectives. The FSAP has widened the scope of common rules,

rationalised and updated the traditional division of powers among supervisors, while

strengthening the obligation to cooperate. The Lamfalussy reform has established the basis

for addressing the challenge of supervisory convergence, through the work of the Level 3

committees.

III. Some challenges however need to be addressed in order to achieve greater consistency

and efficiency of financial supervision, as well as to ensure that the decentralised

supervisory structure is able to attain its prudential and consumer protection goals.

Cooperation and convergence between supervisors is not an easy task and the Level 3

committees need clear and renewed political support by EU institutions to make the

available tools effective, and subject to an appropriate accountability framework.

Furthermore, it is imperative to analyse possible ways of reconciling the demand by some of

the industry for more centralised group prudential supervision with the location of

responsibilities at the national level. To help address these challenges, the report sets out a

number of practical proposals to enhance the operation and efficiency of the existing

supervisory framework:

IV. Fostering supervisory cooperation: there is significant scope within the existing legislative

framework for more effective cooperation, including joint inspection teams, staff

exchanges/secondment schemes and common training programmes. It is also suggested to

explore setting up a (non-binding) mediation mechanism among supervisors for

cooperation issues.

V. Promoting supervisory convergence: the use of peer review and moral persuasion ought to

be encouraged, including through the use of the above mentioned mediation mechanism.

Possibilities of allowing market participants to trigger the mediation mechanism for

issues related to the application of rules should be explored. A prerequisite also consists

in all supervisors sharing fairly similar powers: a careful analysis of any missing

competences in the harmonised minimum set of supervisory powers should be conducted.

VI. Enhancing the cost-efficiency of the EU system: supervisors need to work together to

streamline data processes and define common data requirements for firms, as well as to

create common data bases. One goal should be for firms to be able to supply data in a

specific area to only one supervisory authority, which shares it with the other supervisors.

VII. Reflecting on ways to improve prudential cross-border supervision: all parties involved

(Level 3 committees, Commission, Parliament, FSC) could explore different options to deal

with streamlining the supervision of groups, keeping in mind the need to align powers with

responsibilities. Delegation would be a useful tool to explore further, including in

combination with a collegial approach where relevant.

VIII. Ensuring accountability within the present institutional framework: Level 3 committees

should report to the European Parliament, the Council (FSC) and the Commission on

a regular basis about their achievements in terms of supervisory cooperation and

convergence, pending more in-depth analysis on what an accountability system could be.

IX. Suggested time frame: proposals for exchange of staff, joint inspection teams, secondment

schemes as well as the streamlining of data collection and exchange could be made

before the middle of 2006. Concrete proposals for mediation and delegation could be

developed by early 2007.

Introduction

• 1. 

  Over the past five years, the EU Financial Services Action Plan (FSAP) has contributed to

modernize and develop the legislative framework designed to stimulate and accompany the

emergence of a Single Market in financial services. At the end of May 2005, 39 out of the 42

FSAP measures had been adopted.

• 2. 

  In taking stock of this near-completion, the Council (ECOFIN) stressed, in its June and

November 2004 conclusions, that it supported an approach to further integration of the financial

sector where the emphasis should be on convergence of supervision and implementation. It

further stated that full and consistent implementation as well as effective enforcement by the

Member States must have top priority.

• 3. 

  After carrying out a public consultation on the basis of the four sectors expert groups 1 reports,

the Commission has recently published a Green paper 2 for public consultation on its

intended course of action. This latter document highlights, inter alia, the key role of supervisory

cooperation in underpinning financial integration and calls for greater clarity in the roles and

responsibilities of supervisors and further convergence of supervisory practice.

• 4. 

  Substantial contributions to the debate have also been provided by some national authorities 3

and, at the European level, by the Committee of European Securities Regulators (CESR) 4 . The

Committee of European Banking Supervisors (CEBS) and the Committee of European

Insurance and Occupational Pensions Supervisors (CEIOPS) are also in the process of doing

substantial work on this issue.

• 5. 

  Against this background, the Council (ECOFIN), at its 7 December 2004 meeting, invited the

FSC to provide strategic overview on how the framework for financial regulation and

supervision should be developed over the next few years. In particular, this overview should be

1 European Financial Integration: progress and prospect - Reports of four independent groups of experts, DG Internal Market, 2004,

http://europa.eu.int/comm/internal_market/finances/actionplan/stocktaking_en.htm

2 This document is available from the Commission website at the following address:

http://europa.eu.int/comm/internal_market/finances/actionplan/index_en.htm#actionplan

3 E.g. more recently, Supervising financial services in an integrated European Single Market: A discussion paper, January 2005,

jointly published by UK's HM Treasury, FSA and Bank of England; or Supervising European Financial Groups and Institutions: a discussion paper(March 2005) by Erkki Sarsa, Ministry of finance (Finland)- both documents are available on the respective

websites.

4 "Which supervisory tools for the EU securities markets? Preliminary Progress Report" ("Himalaya Report"), published on 28

October 2004 and available on CESR's website. Public consultation ended on 31 January 2005.

used as a basis for the EFC discussion on supervision in the September 2005 Financial

Stability Table (FST).

• 6. 

  The FSC therefore mandated a subgroup of its members and observers to develop FSC's

analysis of the issues and submit a draft report for discussion and adoption at the FSC’s July

meeting and subsequent submission to the EFC-FST in advance of their September

meeting.

• 7. 

  It was agreed this subgroup report would provide overview of the functioning of the current

supervisory framework, taking into account the ongoing regulatory preparations, and would

identify the key challenges to be overcome and the possible tools in order to ensure EU

supervisory convergence 5 .

Section 1. Objectives, context and structure of the report

1.1 Objectives

• 8. 

  The Council mandate to the FSC is based on the consideration that political declarations

insisting on supervisory convergence and enforcement by the Member States must effectively

be followed up by a concrete assessment of the underlying supervisory framework and the

subsequent analysis of evidence-based proposals to enhance it, so as to make it deliver its full

potential and address any possible flaws.

• 9. 

  The objective of the report is therefore to identify and analyze the supervisory tools

necessary to effectively and efficiently implement financial legislation, especially the

recently adopted FSAP measures. This should allow the European supervision system to fully

play its role in underpinning the contribution of an integrated, open, efficient and competitive

EU Single Market for financial services to the Lisbon process of economic reform. In order

to achieve this goal, the supervisory framework must seek to attain three objectives:

  Effectiveness in the fulfilment of the two main economic functions which warrant its very

existence: prudential soundness as the basis for financial stability and consumer protection;

  Make the Single Market work, by contributing to the exercise of the basic freedoms enshrined in

Community law and ensuring a level playing field;

  Minimise the costs of supervision and as a result, the supervisory burden on business, in

particular for those institutions which carry out cross-border business.

• 10. 

  The report should be considered as a contribution towards the overall objective of enhancing

  supervision. Further complementary work will be necessary, alongside the progressive buildup

of additional experience drawn from the application of recent or forthcoming legislation.

• 11. 

  It is also worth pointing out that, since this report aims to focus on enhancing supervisory

cooperation and convergence within the EU, it does not intend to cover issues related to

cooperation with third-country authorities. Nor does it purport to cover specific arrangements

related to financial crisis management 6 .

1.2 Context

• 12. 

  The work of the FSC subgroup is complementary to the on-going reflection process on the

future of supervision in Europe (above) and is focussed on developing an assessment of relevant

issues from the viewpoint of Finance Ministries.

• 13. 

  The analysis and conclusions drawn by the FSC sub-group have benefited from informal

individual hearings held in May 2005 by the members of the subgroup in cooperation with the

Level 3 committees. These hearings, spanning the securities, banking and insurance and

occupational pensions sectors, have made it possible to better evaluate concrete problems and

possible solutions in light of the views expressed by a selected number of industry members 7 , on

a number of topics including cost-efficiency and competitiveness issues. Institutional issues 8

were outside the remit of these hearings.

5 See the complete FSC mandate to the subgroup in Annex II.

6 The MoU recently endorsed by the ministers of Finance, Central Banks and national supervisory authorities aims to address the

threats of possible systemically relevant crises originating in the banking sector.

7 See Annex IV- section 1 "Analytical summary of the hearings".

8 Specific institutional issues, such as the use of supervisory vetting powers in the context of cross-border take over bids, were also

considered as outside the remit of the subgroup mandate.

1.3 Structure of the report

• 14. 

  Section 2 begins with a presentation of current market trends and provides an analytical

presentation of the present framework: European legislative rules, insofar as they underpin

supervisory competences in key prudential areas, Level 3 committees functioning and more

generally, voluntary cooperation arrangements.

• 15. 

  Section 3 briefly assesses the effectiveness and efficiency of this framework. It lists out the key

challenges that the European supervision system has to face, or will be confronted to, in a

context where recently adopted, or forthcoming, legislation will come into application.

• 16. 

  Section 4 identifies a number of existing practical tools, which, subject to further testing where

relevant, could be further developed to enhance the working of the current framework, and

proposes arrangements for organising further work, including a suggestion of time frame.

Section 2. Overview of the present framework within the perspective of current market trends

2.1 Financial integration is set to increase significantly in the years to come

• 17. 

  As for now, progress in financial integration differs between market segments: a snapshot

of the current state of play, with all the drawbacks of such a limited picture, reveals a

heterogeneous image.

• 18. 

  Moreover, intra-EU market access takes place in direct and indirect ways: establishmentbased

trade is relatively widespread and a number of groups with significant presence in more

than one EU-countries have emerged for now, mainly through the use of subsidiaries. Direct

cross-border activity largely takes place in big volume markets. Delivery of many products to

the end-user continues to be organized through local distribution networks (branches or local

intermediaries).

• 19. 

  Nonetheless, financial integration is accelerating and is therefore set to increase significantly

in the years to come, thanks to the action of driving forces such as the search for

consolidation-based efficiency gains, including through cross-border mergers;

centralisation and outsourcing of key business functions and the emergence of the Internet

as a prominent element in distribution channels, within the emerging EU regulatory

framework.

• 20. 

  These developments must be seen within the broader picture of increasing international

competition and innovation in a global market, all of which provide incentives for EU

financial service providers to increasingly enhance innovation and efficiency so as to compete,

both within the EU and beyond. However, this process alone would fail to deliver its full

benefits to investors and consumers and to the business community. International

competitiveness also requires top-class regulation and supervision within the EU, which

allows for robust global competitors to emerge.

2.2 Overview of the current legislative framework 9

• 21. 

  The FSAP has revamped financial legislation, widening the field of high-quality common rules,

removing obstacles to the Single Market and adapting the traditional supervisory model to the

needs of each market segment.

2.2.1 The division of powers between supervisors 10

• 22. 

  In general, the supervisory duties and powers assigned by the EU legislation fall within two

main categories, which broadly reflect the differences between the objective of ensuring the

prudential soundness of financial institutions (which are subject to licensing and quantitative

requirements, i.e. on solvency, liquidity, large exposures, qualifying holdings…) and those of

promoting consumer/investor protection as well as the transparency and the good

functioning of the markets (i.e. institutions' conduct of business, information provided by

issuers and individual conduct in securities markets).

• 23. 

  In the case of financial institutions, the "competent authorities" in charge of granting

authorisation have broadly comparable powers in terms of, e.g. vetting the fit-and-proper

nature of shareholders/ directors, accessing all necessary information, carrying out on-site

inspections within their jurisdiction. Sector-specific powers are of course noticeable, such as the

9 Eleven Directives are being analysed -- see tables in Annex IV--, namely: in the banking sector, the Consolidated Banking

Directive currently in force and the draft Capital Requirements Directive; in the insurance and occupational pensions sector, the Recast Life Directive, which contains provisions comparable to those of the Non-Life Insurance Directives, the Insurance Groups Directive, and the Occupational Pensions Directive; in the securities and asset management sector, the UCITS Directive (as last amended in 2002) and the four "Lamfalussy Directives" on Market Abuse, Prospectus, Transparency, Markets in Financial Instruments; last, the Financial Conglomerates Directive. However, implementing legislation for the MiFID is still under preparation; a number of Level 2 provisions will therefore complement substantially the EU regulatory framework for financial

regulation and supervision. These measures are expected to be adopted by the beginning of 2006.

10 Specific powers of consolidating supervisors, host MS supervisors, and supervisors of the "Member State of the commitment" in

the insurance sector, are in separate sections ("home/host" and "Group") below.

margins of assessment provided to supervisors by the draft Capital Requirements Directive in

the banking sector, or the authorisations of portfolio transfers and other powers related to the

disposal of assets in the insurance sector.

• 24. 

  Nearly-identical provisions concern the extensive list of minimum powers conferred upon

supervisors of securities markets across the Lamfalussy Directives (e.g. access to all relevant

information, carrying out on-site inspections, freezing/sequestration of assets), thus similar to

the prerogatives of banking/insurance supervisors. However, it is worth recalling that these

powers should be "in conformity with national legislations".

2.2.2 Information exchange

• 25. 

  In banking, insurance and asset management (UCITS), provisions on cooperation and

information exchange ensure that, in the respect of professional secrecy rules, competent

authorities may exchange information and use them. This legal capacity to exchange

information intertwines with a general duty to cooperate as provided also by the same sectoral

Directives.

• 26. 

  In order to further clarify the scope of this duty, the draft banking Capital Requirements

Directive defines the "essential information" that the consolidating supervisor 11 has a duty to

gather and disseminate. In general, the legislation confers a particular role of dissemination to

the home Member State authority (also in the insurance sector), consolidating supervisor (see

above) or coordinator (for the supervision of financial conglomerates).

• 27. 

  In the securities sector 12 , the Lamfalussy Directives contain a general obligation to cooperate

and exchange information. This is further qualified in the Market Abuse Directive, which lists

out specifically defined cases where the obligation to supply information to another authority

does not apply. This directive also foresees a mediation role for the concerned Level 3

committee (CESR) in case of non compliance with a request of information. The Markets in

Financial Instruments Directive provides for extensive cooperation and exchange of information

requirements and specifies that information should be exchanged via single contact points.

Moreover, in the context of the preparation of implementing legislation for the MiFID, the

11 See below section 2-2-4.

12 Outside asset management.

Commission is exploring effective ways of transaction reporting and exchange of all relevant

information among competent authorities.

2.2.3 The home/ host principle

• 28. 

  Practically all the legislation under consideration assigns a prominent role to the home

Member State authority in the prudential supervision of an individual institution, which it has

authorised 13 .

• 29. 

  Insofar as consumer protection is concerned, conduct of business is typically the host Member

State authorities' legal responsibility in the context of banking and insurance Directives. On

the contrary, in the securities/asset management field, the MiFID and UCITS Directives have

established home country control as a general principle, subject to limited exceptions 14 . Where

the service is provided on a cross-border basis, home Member State contractual rules may also

apply in extensive areas. The supervision of financial information of issuers is eventually

assigned to the home Member State authority, determined on the basis of the type of securities

issued and, in some cases, depending on issuer's choice.

• 30. 

  As regards the supervision of branches in other Member States, branches are covered by the

authorisation granted by the home Member State supervisor. Subsidiaries are, in general,

treated as domestic firms and are therefore authorised and prudentially supervised by their local

supervisor (see below).

• 31. 

  Further general considerations have to be added. First, the counterparty to this prominent role

assigned to the home Member State authority consists in an obligation for it to cooperate and

transmit relevant information to the host Member State authorities.

• 32. 

  Second, practically all the legislation concerned with the supervision of financial institutions

contains residual prerogatives for the host member State authorities; nevertheless these

prerogatives have been largely abolished in the MiFid, where derogations to the home

country principle for reasons of "general interest" will not be possible anymore. Host

authorities may impose statistical reporting requirements to foreign banks, investment firms and

13 In the concerned Directives (Prospectus and Transparency), this will depend on the type of securities concerned, i.e. whether

shares or bonds.

14 Under the MiFID, the host Member State's authority retains competences for a branch's compliance with a restricted number of

local rules, e.g. on conduct of business, conflicts of interest or order handling rules.

UCITS management companies operating within their territory provided they are treated on the

same footing as locally registered institutions. Moreover, there are circumstances in which the

host member State authority has the legal capacity to take emergency measures, when,

following notice by the host member State authority, the home authority has failed to address

properly a breach to which these emergency measures apply. Host Member States are competent

for the enforcement of local rules 15 on foreign branches.

• 33. 

  Last, home/host cooperation is also crucial in the inspection of host Member State branches

by the home member State authority, which is subject to prior information of the host member

State authority (and its possible participation in the case of life insurance undertakings).

2.2.4 The supervision of financial groups

• 34. 

  The progressive emergence of a consolidating supervisor cooperating with foreign

supervisors has strong implications for the definition of a group-wide supervisory strategy,

including inspections of foreign branches and subsidiaries, and the collection and dissemination

of information.

• 35. 

  In the banking sector, the draft Capital Requirements Directive would further extend the role

of the “consolidating” supervisor, towards validation of internal models (as a fall-back to a

collegial decision). It would also confirm the possibility to delegate tasks from one supervisor to

another (which is already provided for in existing banking legislation, although this provision

has never been put into effect) and further specify that additional tasks may be entrusted to the

consolidating supervisor.

• 36. 

  In the insurance sector, consolidated supervision appears to be less formalised. The Directive

on supplementary supervision of insurance groups specifies that the competent authorities "may

reach agreement" as to which of them will be responsible for such supervision. Furthermore,

the Recast Life Assurance Directive contains a specific provision for third-country undertakings

with a network of branches in several Member States (incl. e.g. Community "consolidated"

calculation of the solvency margin) and a central role for the competent authority which is to

supervise the solvency of the entire business of agencies/branches throughout the Community.

15 These local rules include e.g. minimum liquidity ratios in the banking sector or labour and social rules for the running of

occupational pensions schemes.

Importantly the aforementioned Insurance Groups Directive allows for sub-consolidation, but

does not clarify its rules of application.

• 37. 

  As noted above, international cooperation with third-country authorities is beyond the remit of

this report. It is nonetheless worth noting that the supervision of risks borne by third-country

components of EU-based groups remains a challenge to effective group supervision, in light of

constant financial innovation and of the importance of off-shore operations.

2.2.5 Enforcement powers

• 38. 

  Another general cross-sector feature in the supervision of financial institutions is that

competent authorities must have the power to take measures to address breaches of legal

rules, which can go as far as withdrawing the authorisation 16 .These powers are essential to allow

competent authorities to comply with their responsibility on the soundness of financial

institutions.

• 39. 

  In the case of securities markets, all four "Lamfalussy" Directives contain a series of identical

provisions in this respect: they refer to Member States for the imposition of "proportionate and

dissuasive penalties". A clear preference for administrative sanctions has been expressed in all

Lamfalussy directives.

2.3 Cooperation has intensified with the Level 3 committees

• 40. 

  It is worth recalling that supervisory cooperation between national supervisory authorities

did not start with the Lamfalussy structure and is not restricted to activities within the Level

17

3 committees . Indeed, before the establishment of CESR, CEBS and CEIOPS, national

supervisory authorities were already co-operating both bilaterally and multilaterally, in

formalised and informal ways, including through the use of MoUs, sets of principles and

protocols. The Siena and Helsinki Protocols 18 in the insurance sector and the FESCO MoU on

16 See Annex IV.

17 Consider the Memorandum of Understanding on cooperation between payment systems overseers and banking supervisors in

Stage 3 of the Monetary Union (January 2001), or the MoU on high-level principles of cooperation between banking supervisors and central banks in crisis management situations (March 2003), which has been recently supplemented by a second MoU

involving Ministries of finance-- see footnote 6.

18 The Siena Protocol (October 1997) mainly focuses on the exchange of supervisory information and mutual assistance in case of

cross-border onsite inspections, whereas the Helsinki Protocol (May 2000) focuses on the co-ordination of committees with respect to the relevant cross-border insurance groups.

the exchange of information and the surveillance of the securities markets (January 1999), are

good examples of such pre-existing multilateral cooperation arrangements.

• 41. 

  The Lamfalussy reform was conceived as a way of delivering a Single Market while keeping the

decentralised supervisory structure. A key part of the four-level architecture was the creation of

committees of national supervisors entrusted with ensuring more consistent and timely day-today

 application of Community legislation in Member States 19 , through improving coordination

and cooperation among the EU’s national supervisory authorities. These Committees

of national supervisors operate as a network, which, through consensus and peer group debate,

can enhance co-ordination and cooperation among them. As a result, a few practical illustrations

of such cooperation are listed below.

Box 1:

Some examples of cooperation under Lamfalussy arrangements

CEIOPS is expected to finalise this year a Memorandum of Understanding (MoU) for the

cooperation between competent supervisory authorities in the implementation of the IORP

Directive, as well as a MoU for the implementation of the Insurance Mediation Directive.

CEBS will propose common reporting guidelines (under the Capital Requirements Directive).

CEBS will propose guidelines and/or identify best practices for co-operation between home and

host supervisors.

CESR has developed preliminary guidance regarding certain operational requirements of the

Market Abuse Directive (MAD).

CESR is developing a database which sets out decisions by national enforcers on the application of

EU financial information requirements.

CESR has developed a specific mediation system under the MAD and considers developing a more

general mediation system.

CESR has developed Level 3 recommendations for the consistent implementation of the Prospectus

Directive.

19 The charters of CESR, CEBS and CEIOPS specify that they contribute to common and uniform day-to-day application of

Community legislation: issuing guidelines, recommendations and standards that the members will introduce in their regulatory practices on a voluntary basis; undertaking reviews of supervisory / regulatory practices within the single market.

• 42. 

  Even if their track record is relatively short, the work of Level 3 committees has already

contributed significantly to supervisory convergence. Yet, as the Himalaya Report suggests,

they may well encounter problems to achieve their goals in the next five years if the available

tools are not underpinned by a reinforced political and institutional impulse.

Section 3. Assessment of the challenges facing the current supervision framework

• 43. 

  The current framework of supervision still has to become fully established. The Lamfalussy

arrangements, still relatively new, have been extended to banking, insurance/occupational

pensions and asset management (UCITS) quite recently, while some of the measures contained

in the Financial Services Action Plan will only be implemented in coming years.

• 44. 

  It must therefore be emphasised that the present analysis is based on an "interim shot" of the ongoing

evolution of the EU supervision framework, and that further benefits are expected from

the concrete application of the most recent, or forthcoming, legislative measures of the FSAP.

Looking ahead to further developments, it is useful to stress the need for continued

monitoring of the evolution of this framework.

• 45. 

  This being said, five main challenges can already be identified at this stage: ensuring

effective day-to-day supervisory cooperation; enhancing supervisory convergence; improving

the cost-efficiency of the supervision framework; finding the right balance in the functioning of

the home/host cooperation; and ensuring appropriate accountability within the present

institutional context.

3.1 Ensuring effective day-to-day cross-border supervisory cooperation

• 46. 

  Financial integration increases the risk of cross-border contagion during or following

financial crises and hampers the effectiveness of consumer protection and market transparency

rules. This is reinforced by the fact that financial groups increasingly organise themselves across

business lines (and not along legal or national boundaries).

• 47. 

  The FSC believes that effective supervision of these cross-border risks and consistent

application of conduct of business and financial information supervision are essential to maintain consumer confidence, financial stability and market integrity, for the credibility of the

Internal Market. While financial integration is not a new phenomenon, a change in the level of

this integration can be expected in the years to come 20 , thus requiring a similar change in the

level of cooperation between national supervisors. There is a need to go beyond existing pre

Lamfalussy arrangements in terms of concrete benefits for daily supervisory cooperation, e.g.

improvements on information collection and sharing or cross-border investigations.

• 48. 

  Enhanced cooperation will, of course, be facilitated by the implementation of the FSAP, which

extends the range of tools available to supervisors in the discharge of their duties. Once the

FSAP is fully implemented, EU legislation will allow for a range of models of cooperation,

including coordination, collegiate discussions, and some forms of delegation. Supervisors will

want to ensure criteria are in place in order to select the form of cooperation they deem most

appropriate for a given situation. Moreover, the effective and widespread application of the

tools will require a strong commitment on the part of the supervisors to utilise the full

range tools at their disposal and support on the part of the Member States to ensure that

their national supervisors have the resources and incentives needed for active cooperation.

• 49. 

  Another prerequisite for that enhancement of supervisory cooperation is that all supervisors

should undertake to get a clear and common understanding of the comprehensive array of

tools they have at their disposal to further supervisory cooperation. Experience shows that this

precondition is not equally met in all constituencies and the role of Level 3 committees is

crucial in going through this step.

3.2 Enhancing supervisory convergence

• 50. 

  Differences in the application of rules shared by the Member States are often reported to

hamper cross-border activities and undermine the level playing field between market

participants. Therefore, the FSC unreservedly supports the initiatives already undertaken by the

Commission in this area, such as transposition working groups, network of single contact points,

transposition tables.

• 51. 

  Yet, this is only a first step towards convergence of supervision, which may be defined as

more consistent and common decision-making and enforcement practices among

supervisors. The reports of the four independent expert groups published by the European

20 See section 2 "The pace and forms of financial integration".

Commission in May 2004 as well as recent feedback from industry leaders in the context of the

aforementioned hearings show that many financial firms with cross-border activities or

multi-jurisdiction issuers request a more consistent approach to decision-making and

enforcement by the supervisory authorities.

• 52. 

  In order to enhance convergence, a prerequisite consists in all supervisors sharing fairly

similar powers, noting that concerns on a potentially hindering disparity of the supervisory

competences needed have been raised by CESR regarding the supervision of the securities

sector. The FSC welcomes the mapping and clarification efforts undertaken in this respect by

the Commission, noting that Member States have the duty under the EC Treaty to provide their

competent authorities with all the necessary powers, and in keeping with the objective of full

and consistent implementation of EU legislation. Without prejudice to further continued

monitoring alongside the adoption of future legislation (Levels 1 and 2), the FSC notes that this

should be further completed by a careful analysis, lead by the Commission and involving

Level 3 committees, of any missing competences in the harmonised minimum set of

powers. Any new legislative initiative would, of course, have to be initiated by the Commission

and gather the consensus of both the Council and the European Parliament.

• 53. 

  In the securities sector, CESR's "Himalaya paper" has raised the issue of what is

considered as the inability of supervisors to effectively abide by common application

guidelines adopted within Level 3 committees. Without national arrangements that enable

supervisory authorities to voluntarily abide by such interpretations or appropriate Minister's

commitment to help their supervisory authorities do so, Level 3 networks' agreements could fail

short of ensuring true supervisory convergence. Moreover the FSC believes the effectiveness of

such non-binding standards can be optimised by:

• the greater use of the “comply or explain” principle when implementing standards so that a lack

of implementation of such standards by a Member State is fully explained in a transparent

manner;

• the greater involvement of market participants in the development of such standards, where

relevant;

• the setting-up of colleges of supervisors (in cases where several supervisors share responsibility

for supervising a cross border entity) sharing information and views and adopting common

understandings about how to implement the non-binding standards.

3.3 Improving cost-efficiency for firms and investors

• 54. 

  As expressed in the independent expert group reports and recalled by industry leaders in the

aforementioned hearings, cross-border groups favour rationalisation of the European

supervision system in order to reduce supervision costs and lighten the regulatory burden.

• 55. 

  They first expect policy makers and supervisors to ensure that the national structure of the

European supervision system does not prevent an organisation based on business lines and

centres of expertise. They also look for a rationalisation of information collection processes

based especially on single contact point ("one stop shopping") and standard reporting and

disclosure formats. They would welcome common reporting templates, provided this brings

about real streamlining, and does not merely aggregate national requirements. They eventually

want to ensure that the EU supervisory arrangements in general are as cost-efficient as possible

and avoid regulatory duplication. It is also crucial for market participants and investors to

have access to financial information at competitive rates.

• 56. 

  The FSC stresses the importance of having an efficient system of supervision for Europe’s

financial services markets in terms of costs and regulatory burdens for market participants.

Costs need to be kept under control to prevent the European supervision system from

becoming an obstacle to integration and competition within the EU. At least, authorities should

have a clear idea of the economic impact of any significant measures taken (especially as

regards those that entail important IT investments). Efficiency, as well as the avoidance of

regulatory duplication, are key to keeping Europe's financial market competitiveness

compared with other major financial markets. Here again, the credibility and the

attractiveness of the European regulatory and supervisory system are at stake.

3.4 Finding the right balance between more centralised prudential supervision and the

location of responsibilities at the national level

• 57. 

  The home-host principle, underpinned by the concept of mutual recognition, and the additional

principle of consolidated supervision are at the core of the European supervision system,

but there are perceptible tensions in both, and faster integration of the financial sector could

well test the operation of this system.

• 58. 

  On the one hand, the demand of market participants for a rationalised supervision system and

  the need for identifying growing cross-border risks related to the supervision of groups call for

streamlining arrangements to give increased powers to the parent company's supervisor 21 .

• 59. 

  On the other hand, there is a fundamental obstacle to this trend in the present institutional

  framework, due to the responsibility of local supervisors for maintaining financial stability

  in their own jurisdiction, which entails controlling the soundness of the concerned local

  entities.

• 60. 

  In the case of branches, there might be a need to increase the information available to, and to

  provide for better participation of the host supervisor under certain circumstances, in

  particular where the activity of the branch is systemically significant. Yet, in this case,

  incentives are better aligned, as the problems in a branch will directly affect the balance sheet of

  the company in the home Member State and the deposits would be covered by the Deposit

  Guarantee System of the home Member State. It is also worth noting that some players might

  convert a large number of subsidiaries in other Member States into branches, helped by

  Community law.

  3.5 Ensuring accountability in the current institutional context

• 61. 

  National supervisory authorities are already accountable to their respective Member States,

  according to national rules. As regards the Level 3 committees, some transparency and reporting

  mechanisms also exist: the FSC has for instance decided to question the Level 3 committees

  every year about progress in the area of supervisory cooperation and convergence.

• 62. 

  However, since the guidelines that the Level 3 committees produce have significant potential

  effects on markets and firms - though legally non-binding - the question has been raised of

  ensuring that the Level 3 committees function with the necessary transparency and that

  they provide adequate information by reporting to the concerned EU institutions.

21 Whether this supervisor is labelled as "consolidating", "coordinating" or sometimes, though this is legally inaccurate, "home

supervisor".

Section 4. Developing supervisory tools

4.1 Fostering supervisory cooperation

• 63. 

  The FSC believes there is a need to develop a set of indicators, illustrating how cooperation

increases over time. These could be developed in cooperation with Level 3 Committees, so as to

allow regular reporting to Ministers on progress in this field.

• 64. 

  Furthermore, the FSC would stress that trust among supervisors, and between firms and

supervisors is key to the development of a supervisory environment adapted to the Single

Market. The FSC fully supports initiatives to promote a deeper culture of trust and cooperation.

In particular, the FSC encourages CEBS, CESR and CEIOPS to investigate and jointly report

back on establishing secondment schemes among their members and on any outstanding

obstacle to the creation of inspection teams staffed by supervisors from different Member

States. Further lasting benefits may also be expected from the establishment of common

training systems, so as to promote a genuine European supervisory culture 22 .

• 65. 

  When disputes and disagreements arise 23 , appropriate mechanisms have to be in place to

resolve them and mediation can be an effective tool in this regard. For instance, in the

financial markets sector, the Market Abuse Directive (MAD) already provides for the

introduction of a mediation mechanism designed to facilitate cooperation between supervisors.

The FSC therefore believes consideration should be given to the idea of arranging a Level 3

mediation process between supervisors to settle cooperation problems.

• 66. 

  By definition, mediation mechanisms are non-binding and should respect the institutional

boundaries set by the EU Treaty. However, through effective peer pressure and common trust

and understanding between supervisors, they may have a considerable impact. The FSC

stresses the importance of a strong voluntary commitment on the part of the supervisors and

support by their Member States to ensure the effectiveness of such a procedure. In its own

22 It is worth noting that some limited common training programmes already exist, which should be encouraged and brought more

systematically to a European scale. Moreover, there is no overestimating the importance of building trust and cooperation reflexes, not only among senior managers, but also between operational interlocutors such as heads of division and their officers. This is especially crucial in the sectors where supervisory practice is being influenced by recent legislation (as is currently the case for securities), or still has to palliate, for a number of years, the obsolescence of the EU legislative framework whilst avoiding

uncoordinated national stances (as is the case in the insurance sector).

23 The aforementioned hearings have provided a number of concrete cases, such as, e.g. 3-year long -unresolved- divergences on the

eligibility of assets pooled into the European treasury structure of a given insurance group.

sectoral remit, CESR is examining the possibility to extend the mechanism foreseen under the

MAD (see above) to other areas requiring cooperation between supervisors.

• 67. 

  By taking into account their different needs and timing, the FSC invites the Level 3

committees to work on how a mediation mechanism could be developed within the existing

legal framework to produce rapid and effective solutions in the case of cooperation

shortcomings or implementation problems. The following box presents some suggestions on

how such a mediation mechanism might work, which should not be considered as

foreclosing further progress on this debate.

Box 2:

Suggestions for a mediation mechanism

• 68. 

  Mediation could prove useful in two different situations. In the first case, the mediation

mechanism would address purely cooperation issues between supervisors; in the second

case, the mechanism would be focused on the application of rules, concerning cross-border

issues. In this latter case, and whilst fully respecting the existing institutional framework,

possibilities of allowing market participants to trigger the mechanism under certain

conditions should be explored. In both situations, the Commission would need to be

appropriately informed of all the cases subject to mediation.

• 69. 

  In the first situation, the mediation mechanism, to be triggered only by supervisors, would be

established to address cooperation issues among supervisors on the basis of peer assessment.

That mediation mechanism would concern practices and enforcement, and would need to be

carefully articulated with the work and prerogatives of Commission services, whilst leveraging

24

on experience built with existing peer-group pressure mechanisms, such as CESR-Pol . Its

strength would be based on the shared principle of a duty to cooperate loyally, against which

supervisors involved in a "cooperation failure" would have to explain themselves. This

mediation would be more suited to remain in a "peer context". Nevertheless, Ministers of

Finance could be requested to provide some political "underwriting" to the aforementioned

principle of loyal cooperation.

24 CESR- Pol was set up in 2002.

• 70. 

  In the second situation, the mediation mechanism would be focused on the daily application of

the rules to market participants – especially as regards cross-border operations - and

could be triggered by the private sector under certain conditions.

• 71. 

  Private operators are often best placed to detect harmful diverging interpretations. As a

preliminary suggestion, the FSC proposes to consider a way to give a role to the private

sector, under strict conditions that guarantee the correct functioning of the mediation. The

FSC is aware that at the beginning, firms may be reluctant to trigger this mediation process.

• 72. 

  The mediation mechanism could rely on a "filter" in order to ensure that the mediation is

only requested for cross-border issues (and not for purely national issues). The mediation

procedure would guarantee the necessary degree of confidentiality of the information

provided.

• 73. 

  The final decision, after the "filter" decision, would be taken by a college of supervisors, based

on the peer principle. Despite its non-binding status, it is expected that possible publication

could further reinforce its moral suasion effect.

• 74. 

  As noted above, any mediation initiative should of course respect the limits of the

institutional framework, including the four-level Lamfalussy approach, and therefore should

not be seen as interfering with the competences of the EU institutions (e.g. the Commission’s

enforcement competences and those of the European Court of Justice in terms of interpretation

of EU law).

• 75. 

  It is also essential that the mediation mechanism provides for efficient reporting of the

submission of cases to mediation and the outcome of the mediation process to the

European Commission. There should be adequate reporting, including a constant

communication channel between the mediation panel and the Commission regarding the cases

brought into mediation, so as to allow the Commission services to make an efficient assessment

on the legality of those cases.

• 76. 

  A rapid and clear decision-making process would be needed to ensure that mediation can be

seen as a credible dispute settlement tool. The different sequential steps of the procedure, with

their respective deadlines, should be set out in detail.

4.2 Promoting supervisory convergence

• 77. 

  The FSC is in favour of deepening the functions of Level 3 committees. The use of peer

reviews to measure the degree of convergence needs to be encouraged. The FSC urges the

Level 3 committees to use this type of mechanism and to report regularly to the FSC on the

results of these peer reviews.

• 78. 

  Mediation in the context of the application of rules should also be fostered, as explained in

the box above. The FSC believes that resorting to mediation offers an interesting way to

promote not only cooperation but also convergence in the supervisory decision-making

process.

• 79. 

  Further analysis of missing competences in the harmonised set of minimum powers should

also be promoted. A comprehensive mapping of the powers provided under the Directives

compared to those that Member States have granted to their authorities should be undertaken.

This mapping could be monitored and reviewed on a regular basis by the FSC.

• 80. 

  The FSC strongly supports carrying out a "read-across exercise" lead by the Commission

and involving the Council (FSC) and the European Parliament with the assistance of Level

3 committees, which would help detect and prevent inconsistencies in financial services

legislation 25 .

4.3 Enhancing the cost-efficiency of the EU supervision system

• 81. 

  Streamlining the provision and supply of data is one of the measures intended to lower

supervision costs for the business community and thereby enhance efficiency. Supervisors need

to work together – through the Level 3 committees – to define common reporting and

disclosure templates and develop common data languages. In addition, supervisors should

also work together through the Level 3 committees to develop arrangements that avoid or

minimise the duplication of reporting.

25 This is also foreseen in the concept of "dynamic consolidation" enshrined in the Commission Green Paper on its post

PASF strategy, on which the FSC is also entrusted with advising the EFC-FST and Finance Ministers.

• 82. 

  As regards common data templates, the FSC encourages the Level 3 committees to continue

their efforts to standardise the format, content, timing and frequency of the reporting from firms,

in cooperation with the Commission. Bearing in mind this objective, the FSC supports the work

undertaken by CEBS to standardise inspection and audit data and to develop common

reporting templates such as common reporting on banking solvency ratios. The FSC also

invites CEIOPS to analyse whether greater opportunities for data streamlining – for instance,

within the context of the Solvency II project – may be envisaged, and put into practice in the

medium term.

• 83. 

  In the same direction, the FSC strongly encourages the Commission, in collaboration with Level

3 committees, to achieve effective and efficient data collection and exchange, and develop

common supervisory databases (e.g. on transaction reporting; cases of disclosure infractions

regarding listed companies etc.) depending on the needs and deadlines for implementation of

each Lamfalussy directive involving the creation of such a database. A number of questions will

need to be solved for that purpose, in identifying those responsible for paying, arranging and

running/maintaining the concerned databases. In order to avoid blockage in the process, there is

a need for strong political impetus. The issues raised, in this respect, by the implementation of

the MiFID and of the Transparency Directive will need to be addressed in a timely manner, on

the basis of forthcoming Level 2 measures clarifying data collection and dissemination

requirements in the specific circumstances provided for by these Directives.

• 84. 

  Against this background, the FSC would like to point out that greater streamlining and

convergence of data provision should, insofar as possible, be in line with the technological

standards in use by the industry and that it should lead to real and genuine efficiency gains for

market participants, thus avoiding to add a further layer of standards.

• 85. 

  The FSC also invites the Commission, working in collaboration with the Level 3 committees, to

investigate ways to simplify reporting procedures. One area for further study would be how a

firm could supply a single set of data to a single supervisor, and for that data to be shared

seamlessly among supervisors. The aim should be progressively to eliminate as much as

possible information requests other than those from the competent authority responsible for an

institution.

4.4 Improving cross-border supervision

• 86. 

  The FSC stresses the importance of analysing possible adjustments to the legal division of

powers and responsibilities between the consolidating supervisor and the subsidiaries'

supervisors, with a view to defining a common and consistent prudential approach able to assure

soundness at reduced compliance costs.

• 87. 

  In the short term, the practical application of the provisions in the Draft Capital Requirements

Directives will offer a useful insight on the problems and options, which can serve as an input

in the process leading to the future Solvency II regime for insurance. To deal with this sensitive

issue, the FSC recommends to bear in mind the following principles:

  Balance between the objectives of cost-efficiency, on the one hand, and prudential soundness

and financial stability, on the other hand;

  Respect the alignment of powers with responsibilities, in order to provide the right incentives

to supervisors;

  The legal structure of cross-border groups should be left to their managers and

shareholders to decide. In particular, there should be no impediments to switching to a

branch-structure using the European Company Statute.

• 88. 

  There are at least two (possibly complementary) ways to make headway in the short to medium

term. The first one is delegation of tasks, which could enable authorities to take advantage of

proximity and local knowledge ("delegation of the home to the host") but also help minimize

duplication and ensure better efficiency and consistency of supervision ("delegation of the

host to the home"). The terms of delegation would need to be clear and published, preferably in

generic form so as to avoid moral hazard. The delegation could also rely on a college of

supervisors, in order to have a common understanding and a global approach. This delegation

of tasks would be revocable at any time and monitored by the delegating authority.

Box 3:

Delegation of tasks and responsibilities

• 89. 

  Where tasks are delegated, the decision-making responsibility would remain with the

  delegating competent authority, but the other authority would carry out processes on its behalf

  and report the outcome back to the delegating authority or other interested authorities. This

  delegation of tasks would have to go beyond that of trivial tasks if it were to reduce the

  regulatory burden. In this case, the delegating supervisor would retain full political

  responsibility for all decisions made.

• 90. 

  Where responsibilities are delegated, the delegating authority would delegate the power to

  make decisions on its behalf to the other authority. These arrangements would need much more

  study and elaboration. They would probably require legislative change, perhaps establishing a

  general legal framework in which delegation might take place. In this latter case, the delegating

  supervisor would be held legally and politically accountable of the decision to delegate and its

  on-going monitoring (which assumes it would keep the effective capacity to do so), but not

  accountable of the single decisions taken by the mandate recipient.

• 91. 

  In both cases – delegations of tasks and of responsibilities – the regulator delegating would need

  to be assured that the supervisor to whom tasks and responsibilities were delegated had the

  necessary powers to achieve the agreed outcomes.

• 92. 

  The second option would consist in a collegial approach, with a division of powers depending

  on the nature of the decisions. Building on the concept of a college of supervisors, this approach

  would attribute to the consolidating supervisor the final say in powers which are not essential

  for the subsidiaries' supervisors to discharge their responsibility (e.g. assessment of capital

  adequacy and internal control systems), while keeping enforcement powers in the hands of the

  latter.

• 93. 

  A further consideration is that both these approaches are actually included in some parts of

  the current EU legislation. The option of a collegial approach would deepen the approach

  already adopted in the Financial Conglomerates Directive and in the Draft Capital Requirements

  Directive. As regards delegations of tasks, they are foreseen in the Banking Consolidated

Directive – though, significantly, the concerned provision has met with little or no success –

and in the draft Capital requirements Directives. The EU legislation also provides for possible

delegations of responsibilities in some specific cases. But this latter type of delegation is more

complex to put in place, since it requires precise matching of the transferred powers and

responsibilities as well as solid legal bases

• 94. 

  Therefore, the FSC would recommend adopting a step-by-step approach. Without prejudice to

the practical implementation of the collegial approach under the aforementioned banking and

conglomerates Directives, opportunities for delegating tasks could be developed in the short

to medium term, on the basis of existing legislation. The FSC invites the Level 3 committees

to develop a framework dedicated at making these delegations work within the legal limits set

by the EU directives.

• 95. 

  The FSC would also invite the Level 3 committees to analyse whether there are legal, practical

or accountability obstacles to the operation of a system to delegate the supervision in the

sectors where this delegation does not exist yet. In the area of securities, this possibility can

be developed under the Prospectus Directive.

• 96. 

  In a longer term perspective, the final solution to the problem of the prudential supervision of

groups is linked to progress in developing a satisfactory framework to determine the allocation

of legal and financial responsibilities in case of a distressed institution. Delegation of

responsibilities (see above) could prove to be a useful tool in this regard. The FSC recalls that it

will address conflicts of interest issues in the incoming crisis simulation exercise and that the

Commission has expressed its intentions to review the Directive on Deposit Guarantee

Schemes.

• 97. 

  It is also important to monitor the operation of the combined home/host and

parent/subsidiary supervision system in the years ahead, particularly by developing

indicators to assess the rise of distortion phenomena between the responsibilities of supervisors

and the systemic or political importance of certain activities for their home Member State.

Indicators linking the responsibilities of supervisors to the share of an issuer's activities carried

on in their home territory could also be developed.

4.5 Furthering accountability

• 98. 

  Depending on the relevant political context, different levels of "accountability" may exist. In

some instances, "accountability" may only refer to informal reporting. In others, accountability

relates to a general duty to formally report to related stakeholders. At its utmost level,

accountability may even imply the capacity to call into question the responsibility of the

accountable institution and have it change its procedures and policies, where relevant. At this

stage, and in consideration of the rather recent set up of Level 3 committees in the banking and

insurance/occupational pensions sectors, it would appear premature to decide on a final policy

line regarding the assessment of their accountability. The FSC would therefore stress the need

for conducting a careful analysis in this respect and to define a common approach on this

issue.

• 99. 

  In any case, supervisory convergence, which is a major European objective, will mainly rely in

the present institutional framework on Level 3 committees. It is therefore necessary that these

committees report regularly to the relevant EU institutional parties – the European

Parliament, the Council (FSC) and the Commission - on their achievements in the

performance of their European tasks of supervisory convergence and cooperation.

4.6 Suggestion for a timeframe for action

• 100. 

  Systems to encourage and facilitate training, exchange of staff and secondment could be put

in place, under the aegis of the Level 3 committees, as soon as the middle of 2006. Precise

proposals by the Level 3 committees, in cooperation with the Commission, for more effective

streamlining of data supply and more efficient collection and exchange of data could also be

encouraged by that same deadline.

• 101. 

  Concrete proposals to develop mediation and delegation mechanisms could be made by the

Level 3 Committees, the Commission and the FSC by early 2007. A more detailed timeframe is

provided in Annex I.

Conclusion

• 102. 

  The EU has reformed its framework for financial regulation and supervision in a rather

smooth and rapid way. Importantly, this evolution has largely been an institutional response to

market developments rather than precipitated by some form of financial crises.

• 103. 

  This accomplishment is a necessary precondition for reaching the goal of an integrated market

for financial services in Europe, – a sound and globally competitive market, where all players

are on an equal regulatory footing.

• 104. 

  Nevertheless, there is still much to be done, in order to fully optimise the potential for

supervisory cooperation contained in the present system of supervision. This challenge is,

maybe, the most difficult, since it lies in daily supervision and cooperation. It necessitates

enhanced trust between supervisors, and progressive convergence of their practices. It is not

surprising that such kind of progress should take some time. But it should not take too much

time either: Europe shouldn't wait for too strong tensions to emerge in the system, before

putting in place the necessary tools to facilitate its functioning.

• 105. 

  These proposed tools are described in the report. They rely on important prerequisites, such

as fairly similar minimum powers for supervisors. They basically consist of prudential data

streamlining; the creation of a mediation mechanism that the private sector could trigger under

certain conditions; support to delegation of tasks and responsibilities between supervisors and

finally developing a series of staff exchanges and training between supervisors to enhance

mutual understanding and develop trust.

• 106. 

  The European financial services market is evolving. To cope with the expected upsurge of

integration, it could prove necessary to adapt the present institutional system of financial

supervision. It is therefore desirable to undertake regular assessments, like this one, and to

be ready to prepare reactions - further new tools or adaptations of the system – to any further

challenging market developments.

• 107. 

  In any case, setting up these tools will not be enough. What will make a difference, is their

effective use. The outcome will therefore depend, first of all, on the capacity and the will of

every concerned institution – the supervisors, the Commission, the Member States, the

European Parliament – to dedicate real efforts to further progress in supervisory

convergence and cooperation.

• 108. 

  The European financial industry and markets are evolving. The supervisory system must adapt

and work effectively to meet the new challenges in its daily functioning. Strong political

impetus is therefore needed, at the EU level as well as in the Member States.

____________________________

Annex I: Timeframe for action:

Objective n°1: foster supervisory cooperation

Tools Leader(s) in coop. with Deadline Deliverables

• 1. 

  Secondment schemes joint L 3 committees'

• 2. 

  Common training systems L 3 committees mid-2006 report to Commission, FSC

• 3. 

  Cross-national inspection L 3 committees mid-2006 - joint L 3 committees' teams report to Commission,

  FSC on obstacles

  end-2006 -first pilot projects + indicators

• 4. 

  Mediation L 3 committees Commission (mid-2006) (- possible joint L 3 committees' interim report to Commission, FSC on outstanding obstacles)

  early 2007 - start-up

  end 2007 -first comprehensive report on the functioning of the mechanism to FSC and Commission

• 5. 

  Monitor progress in - Commission, - Commission, L 3 - end 2006 - indicators

cooperation FSC committees

• - 

  FSC, - early 2007 - first reporting by L 3

Commission committees incorporating these indicators

Objective n°2: promote supervisory convergence*

Tools Leader(s) in coop. with Deadline Deliverables

• 6. 

  Read-across exercise on Commission Member States, L3 yearly - yearly findings report

FSAP Directives committees first one: end on progress from the

2006 Commission

( following

adoption of Level 2 implementing measures for

MiFID )

p.m. 4bis. Mediation L 3 committees Commission see above see above +

(see above) proposals & first report on the functioning of the mechanism to clarify

preconditions to possible trigger mechanism for industry

(*) without prejudice to existing initiatives under the aegis of:

• - 

  the Commission: e.g. transposition workshops, etc.

• - 

  Level 3 committees: e.g. CESR-Pol/CFESR-Fin meetings & hearings

Objective n°3: enhance cost-efficiency of the EU supervision system

Tools Leader(s) in coop. with Deadline Deliverables

• 7. 

  Common data templates for L 3 committees Commission, - mid-2006 - first presentation to firms' reporting to supervisors Member States Commission and FSC of + streamlining of timing & comprehensive action frequency of such reporting programme, identifying

• - 

  final target areas (e.g. solvency ratios) *

N.B. this concerns both regular completion reporting + data requirements for will depend

inspections on sectoral - complete sets of data legislation: templates; agreed

e.g. end-2006 common timing and for securities? frequencies?

end-2007 for

banking? - 2006/7 indicators of

reduced regulatory costs for firms

• 8. 

  Common/streamlined L2 legislation + - mid-2006 - first presentation to systems for supervisory data

exchange L 3 committees Commission

FSC of comprehensive action programme,

• 9. 

  Common supervisory prioritising target areas databases in view of pilot projects

  • - 

    mid-2007 - progress report to Commission, FSC on pilot projects

• * 

  taking stock of action already undertaken by L 3 committees, e.g. CEBS in the context of the preparation for the entry into force of the Capital Requirements Directives, and identifying outstanding issues.

Objective n°4: improve cross-border supervision

Tools Leader(s) in coop. with Deadline Deliverables

• 10. 

  Delegation of tasks L2 legislation + Commission, (mid-2006) (- possible joint L 3

  L 3 committees Member States committees' interim report to FSC on

  outstanding obstacles)

poss. 10.bis Delegation of L2 legislation early 2007 -proposals by L 3 c ttees

responsibilities with timetabling

dependent on sector/legislation

end 2007 -first comprehensive

report on the functioning of the mechanism to FSC and Commission

• 11. 

  Monitoring functioning of L 3 committees FSC and (mid-2006) (- possible joint L 3 home/host and Commission committees' interim parent/subsidiary supervision report to FSC on system outstanding obstacles

  and indicators)

  end-2006? - first report by L 3

  (yearly) committees to FSC Objective n°5: further accountability for Level 3 committees

Tools Leader(s) in coop. with Deadline Deliverables

• 12. 

  Enhanced reporting by L 3 -each concerned EU Institution: Council -yearly - L 3 committees annual committees to EU institutions (FSC), European Parliament, Commission reports to be published

+ increased transparency indicating activitiesthereof report (public)

• - 

  Inter-Institutional Monitoring Group* - yearly

• * 

  whose 6 members have been appointed by the three Institutions, with a mandate running up to end-2007.

Annex II - FSC Mandate to the subgroup

Mandate for the "Supervisory tools" subgroup as adopted by the Financial Services Committee

at its 7 th April's meeting:

The EcoFin Council, in its conclusions of 7 December 2004, invited the FSC to, inter alia, provide

‘strategic overview on how the EU framework for financial regulation and supervision should be

developed over the next few years from the finance ministries’ viewpoint.

The EFC plans to hold an orientation discussion on how to develop the framework for financial

regulation and supervision over the next few years in the September 2005 Financial Stability Table.

The FSC invites the subgroup to prepare the FSC’s contribution to this orientation discussion in the

EFC-FST. For this purpose, the subgroup is invited to present by 20 th June to the FSC, in view of the

July 2005 meeting, a draft document, which should provide overview of the functioning of the current

supervisory framework, taking into account the ongoing regulatory preparations. The document

should set out the FSC's analysis of the key issues relating to supervisory practice, spanning the

securities, banking and insurance sectors, and identify challenges to be overcome in order to ensure

EU supervisory convergence. In particular, the document should include:

• - 

  a reaction from Ministries of Finance's viewpoint to the main issues raised in CESR's analytical

paper on “Which supervisory tools in the securities sectors” 26 , building on and reflecting the outcome

of the FSC’s discussion at its meetings of 21 January 2005 and 7 April 2005;

• - 

  a reaction to the contributions to the FSC 7 April 2005 meeting by CEBS and CEIOPS on strategic

supervisory challenges in their sectors;

• - 

  suggestions for organising further work.

The FSC welcomes the plans of the Chair and members of the subgroup to jointly sound out the views

of market participants in the securities sector and, insofar as possible, already in the other financial

sectors. The objective is to get market participants’ views (i.e. combining the financial industry's and

users'/consumers' perspectives) on how the current EU framework for financial regulation and

supervision functions, to identify obstacles to supervisory convergence and supervisory challenges to

further sizeable progress in financial integration.

FSC 4155/1/05 REV 1 JLF 34

Annex III- Section 1

Analytical summary of the hearings

Organisation of the hearings

Two sessions of hearings were held on 20 th and 25 th May by the members of the FSC sub-group on supervision. Sixteen high-level industry representatives 27 were interviewed during one hour each, based on a questionnaire elaborated by the subgroup 28 .

Outcome of the hearings

The hearings focused on two main topics: the challenges and obstacles to full and consistent application of EU legislation and the possible tools that may be developed.

Challenges and obstacles to full and consistent application

A number of participants started with the fact that supervisors have differing mission statements: while some Member States appear to favour consumer protection, others give priority to enhancing market capacity to function efficiently. Moreover, supervisors tend to have differing implementation powers.

Many participants stressed that implementation and enforcement would be easier if the legislation were more precise and consistent : "problems should not be avoided at Level 1 and 2 and systematically transferred to Level 3". Participants also highlighted that in certain sectors, like insurance, the degree of harmonisation is currently too limited, thus providing national supervisors with excessive leeway.

For Level 3, the question of non-binding standards was often raised from two different points of views: for some, the non-binding nature of the standards agreed within CESR, CEBS and CEIOPS is a good point, insofar as these standards come from consensus and might, if relevant, be later upheld by the Commission. On the other hand, some participants stated that the non-binding nature of standards hampers financial integration because of the large interpretation margins they leave to national supervisors.

The question of the home-host and parent/subsidiary supervision principles was also often raised: some participants highlighted the discrepancies in the application of the Directives and in the behaviour of the national supervisors. As a result, some participants referred to the idea of transforming subsidiaries into branches, despite the importance of the related challenges.

A number of high-level representatives also expressed concern about national supervisors choosing to interpret EU legislation and regulations in a heterogeneous and inconsistent manner, and the regulatory burden this places on firms.

Although this was not raised in the questionnaire, the question of political accountability was also brought up, especially as regards Level 3 committees.

27 The list of the 16 persons is included at the end of this annex.

FSC 4155/1/05 REV 1 JLF 35

Supervisory tools that could be further developed

Streamlining in the supply and sharing of data is supported by a majority of participants . . They pointed out that common formats should use standard technology or at least be in line with the formats currently in use in the industry. New formats must be exclusive of the existing ones, and should not correspond to the mere aggregation of national requirements. Common reporting templates would help curb compliance costs and ensure that the industry and supervisors share a common approach in terms of economic capital, especially in the insurance sector.

Mediation is also a suggestion that got significant support. Most participants made a clear distinction between two forms of mediation: a first one, which should take place only between supervisors, and a second one, which might also involve the private sector on cross-border issues. However, some markets participants expressed doubts as to whether the private sector would really dare to trigger the mediation mechanism against the supervisor which is supervising it on a daily basis. Some participants suggested that for the second kind of mediation – which would provide for a possible right to appeal from the private sector – a mechanism of filter, possibly a "wise men committee", could be put in place in order to avoid unjustified requests.

Delegation of tasks as well as delegation of responsibilities were also suggested as useful tools. Delegation of tasks was, for example, mentioned as regards cross-border investigations (and the subsequent collecting of all the relevant information) or as regards the assessment against CPSS/IOSCO standards. Delegation of responsibilities would represent a large step forward.

Most market participants agreed that the institutional balance should be maintained as it is now. Some participants pledged for an increase in the Commission resources dedicated to controlling the application of the European legislation (Level 4), which would require a significant reallocation of resources.

Eventually, many participants outlined the need for a clear time-frame, in order to give some visibility to the industry.

Annex III- Section 2

List of hearing interviewees:

Banks and investment firms:

Mr. Dominique HOENN, BNP Paribas, Senior Adviser

Dr. Siegfried JASCHINSKI, Landesbank Baden-Wurtemberg, Chairman of the Executive Board

Mr. José PÉREZ FERNÁNDEZ, Intermoney, Presidente

Dr. Bernard SPEYER, Deutsche Bank Research, Head of Banking, Financial Markets, Regulation

Mr. Radek URBAN, Erste Bank, Director asset management

Mr. Freddy VAN DEN SPIEGEL, Fortis, Chief economist

Insurance groups:

Mr. Mel CARVILL, Generali, Head of strategic planning and corporate finance

Mr. Denis DUVERNE, AXA, Director general finance, strategy and control

Dr. Adrian GLAESNER, Allianz, Syndikus, Group Legal Services

Exchanges and market infrastructure:

Mr. Adam KINSLEY, LSE, Head of Regulatory Policy

Mr. Olivier LEFEBVRE, Euronext, Member of the Managing Board

Mr. Poul Erik SKAANNING-JORGENSEN, OMX Exchanges, Senior Vice-President, Head of EU Regulations

Sir Nigel WICKS, Euroclear, Deputy Chairman

Asset managers (investment funds):

Mr. Wolfgang MANSFELD, Union Investment, Managing Director

Issuers:

Mr. Philippe CAMUS, EADS, (former) Chief Executive Officer

Mr. Santiago FERNANDEZ VALBUENA, Telefonica, Chief Financial Officer

Annex III-Section 3:

Questionnaire ("guidelines for discussion") for these hearings

Foreword for hearing participants:

Ministers of Finance have requested the EU Financial Services Committee to provide a strategic overview on how the EU framework for financial regulation and supervision should be developed over the next few years. Once completed the extension of the so-called "Lamfalussy process" to the banking and insurance sectors, the main challenge is now supervisory convergence. National regulatory authorities cooperate within sectoral networks (the so-called Level-3 committees: CEBS in the banking sector, CEIOPS in the insurance and occupational pensions sector and CESR in the securities sector), which have been entrusted, inter alia, with the functions of contributing to consistent application of EU law and supervisory co-ordination. The smooth performance of these functions is paramount for the achievement of an efficient,

well supervised and integrated European financial services market.

In building on the current framework, the purpose of the foreseen exchange of views is to assess with key market participants from all sectors (securities, banking, insurance, pensions) and users' representatives the extent to which it meets their expectations (in terms of e.g. regulatory costs and administrative burdens) as well as the objectives of supervisory convergence and market

integration.

Participants' views are especially invited on the following set of issues. Views on other issues they consider relevant to the debate would also be welcome. Participants should also note that this questionnaire, and the subsequent hearing, are dedicated to looking at the issues about how best to enhance the convergence of supervisory practice within the current institutional

framework, and are not aimed at bringing about institutional or legislative change.

Questions:

Ensuring full and consistent application of EU legislation

Over the last year, the Council of Finance Ministers (ECOFIN) has stressed repeatedly that priority should be given to full and effective implementation and enforcement of EU legislation

in financial services.

• 1. 

  Based on your own experience, what are the main challenges/obstacles to reaching the objective

  of full and consistent application of EU legislation?

  Ensuring a level playing field in applying EU legislation through CESR's / CEBS' /

  CEIOPS' adoption of common standards

A core aspect of bringing about greater convergence of supervisory practice between the national supervisory authorities is the adoption of common standards and practices. These standards and

practices are adopted through a common agreement and are non-binding.

In the securities sector, according to CESR's analysis, the process of adopting non-binding common standards could, in certain circumstances, hinder the objective of supporting a truly integrated market. Non-binding standards have clear advantages in terms of flexibility, but they might also entail drawbacks in terms of ensuring compliance and legal certainty for market

participants..

• 2. 

  How can the effectiveness of these non-binding common standards and practices be optimised?

  What is the scope for mediation mechanisms and for peer pressure?

  Reducing the regulatory costs for market participants and users

The need to boost the streamlining of regulatory/supervisory requirements (e.g. on disclosure formats) has already been brought to the attention of EU institutions, especially the European Commission, and made the target of coordinated improvement planning with the Member States. In general, there is wide awareness among EU institutional stakeholders that more needs to be done on this front, but clear indications of the amounts at stake and of the related priorities are

needed from industry.

• 3. 

  Where do you see the major opportunities to reduce cross-border regulatory costs?

  Home/Host issues

The current European supervisory framework relies on the backbone concepts of home Member State (where a company has its registered office) and host Member State (where a company conducts a particular business through the establishment of a branch or by free provision of services). Community legislation assigns different supervisory tasks and responsibilities to

supervisory authorities, depending on whether they are home or host competent authorities.

Recent conferences and publications, including CESR's Himalaya paper for the securities sector, have raised the awareness of challenges for both the supervisors and the supervised entities. These challenges stem from the concrete application of the home/host supervisory framework to

particular activities/corporate cases.

• 4. 

  What is your experience of dealing with a combination of home /host supervisor(s), especially as

  regards possible differences in supervisory powers?

• 5. 

  What is the impact of the current practical implementation of the home/host framework in

  respect of the optimisation of your business organisation (e.g. foreign branches vs. subsidiaries)?

• 6. 

  Are there significant examples of practical gaps/overlaps, which better "home/host" cooperation

  could contribute to address?

• 7. 

  Could you rank the major challenges which your organisation faces in terms of supervisory

  compliance?

  Ensuring better supervisory cooperation through better use of existing tools

Optimising the current supervisory tools available to Europe’s supervisors, within the current institutional arrangements, is imperative to the creation of efficient and effective supervisory arrangements. Recent papers, which inter alia include the CESR paper on supervisory tools, set out a number of areas where the possible range of tools potentially available within the present

EU framework could be enhanced, i.e. beyond the current supervisory practice.

In the securities sector, CESR's Himalaya paper mentions more than 20 tools, which may be

regrouped as follows:

  Tools for consistent application:

• - 

  developing peer pressure and mediation within the Level 3 Committee, to foster convergence;

• - 

  developing transparency tools (databases of enforcement decisions, common information pools available to groups or colleagues of regulators…);

• - 

  introducing pre-clearance processes within the Level 3 Committee.

  Tools for supervisory co-ordination:

• - 

  data centralisation and standardisation (transactions report, regulatory information);

• - 

  co-ordinated /joint investigations, whether or not under the umbrella of the Level 3 Committee;

• - 

  secondment of staff between supervisors;

• - 

  ad-hoc or standard MoUs to organise cooperation and delegation (where legally possible) of powers between authorities involved in the supervision of multijurisdictional market players;

• - 

  where this is grounded in EU legislative texts, a "co-ordinating supervisor" mechanism.

• 8. 

  In your view as a market participant / users' representative, which of the (potentially) available

  tools should be further developed as top priority within the present EU framework?

  The present framework and your needs

As explained in the foreword, this exchange of views is building on the current EU framework. Nonetheless, there might be concrete cases where your key expectations as to the necessary convergence of supervisory practice and standards cannot be met with the tools in use by the

competent authorities, or, in general, available to them within this framework.

• 9. 

  If you believe that the expected benefits of supervisory convergence your organisation needs

  cannot be attained within the present institutional framework, explain why and which particular options could then be considered?

  Annex IV - Overview of the legislative framework:

  Section 1 - Key components of the current framework (incl. pending enhancements expected to be brought about by would-be Capital Requirements Directive)

  Banking (consolidated banking Additional provisions Key direct Insurance Dir.: non Occupational Pensions UCITS Directive (i.e. Directive in force) brought forward by draft Life Directives & recast Life Directive harmonised investment BCD Capital Requirement (taking the latter, 2002/83/EC, as funds) as last amended by Directives (as of a the main reference) + Dir. 2001/107/EC and 07.12.2004) insurance groups Directive 2001/108/EC i

Harmonised

minimum Articles 4-8; 53-54, 56: The intended new legislation e.g. Recast Life Directive (mutatis Articles 9(5) and 20 provide Article 4-5h, 13a-13c, 21,

supervisory would strengthen requirements mutandis, the same remarks apply to that, in the case of cross 49-50

powers No particular list of minimum on internal non-life legislation, except in one border activity (i.e. an powers, but competent authority in organisation/controls and risk minor point which is mentioned institution wishing to accept No particular list of

charge of authorisation (Art.4&53) management processes within below): sponsorship from a sponsor minimum powers, but shall be provided with all necessary the supervised institutions (new undertaking located in general principle that the information (Art.5-8) and be drafting of Art.22(1)), thus Articles 4, 5-7; 8; 10, 13; 14; 15: another MS), the conditions competent authorities must satisfied with the quality of providing supervisors with of operation of the be granted all the necessary shareholders and the group more powers and margins of competent authority in charge of institution shall be subject powers to carry out their structure (Art.7); this is monitored assessment in their supervisory authorisation (Art.4), i.e. the home to prior authorisation by the task (Art.49). on an on-going basis (control of review process (Art.124). MS authority, has investigation competent authorities of the The competent authority in qualifying holdings in a credit powers, and shall be provided with home MS. charge of authorising the institution, Art.16). all necessary information (Art. 5-7); UCITS (Article 4) must be

Competent authorities have a it also has to be satisfied of major Article 13 provides the satisfied with the fit-andgeneral duty to exchange shareholders and group structure competent authority with proper quality of the UCITS information as needed (Art.28), prior to the authorisation (Art.8); powers to access management company's subject to professional secrecy this is monitored on an on-going information and carry out director also in respect of the

(Art.30). basis (control of qualifying holdings on-site inspections. type of UCITS to be in an assurance undertaking, There are additional managed and of the

The home Member State authority Art.15). information requirements in depositary's directors, as has the right to carry out on-the Adaptation of Art.29 in the Furthermore, the home MS the case of cross-border well as the suitability of the spot verification of the information case in the context of authority is also competent to activities (Art.20(3)). management company's re Art.28 in foreign branches consolidated supervision (see authorise transfers of portfolio shareholders. following prior information of the "Group" below, Art.129(1)) (Art.14), after consulting the host Article 14 sets out a number The recent harmonisation of host Member State's competent MS in the case of a branch, and of powers of intervention conditions for taking up authority (Art.29); obtaining the agreement of the and duties of the competent business and operating

Without prejudice to the procedures competent authorities of the authorities: conditions for management for the withdrawal of authorisations Member States of the commitment companies has beefed up the

and the provisions of criminal law, (see below); these include, inter alia, the harmonised set of prudential the competent authority must have power to restrict or prohibit rules and principles, both of power to adopt/ impose penalties or Article 13 sets out a number of the free disposal of the a quantitative and qualitative measures aimed specifically at minimum supervisory powers for institution's assets in certain nature, the compliance of ending observed breaches or their the home MS authority, including conditions; transferring the which must be monitored by causes (Art.32); on the basis of accounting, power to run the institution competent authorities. (This

the competent authority in charge prudential and statistical to a special representative; EU-harmonised set of rules of exercising consolidation on a information. prohibiting or restricting the was, until the 2002 consolidated basis, in general that activities of an institution. legislative update, mostly in charge of the parent's Regarding on-the -spot verification limited to investment limits authorisation (Art.53), may in some of foreign branches, Article 11 of and rules for UCITS cases decide on the form and extent the Recast Life Dir. contains the Article 15 on technical themselves).

of consolidation (Art.54); same provision as in BCD's Art. 29, provisions: the actuarial except that it is here specified that method on the basis of Competent authorities have

in the case where the parent is a the host MS auth. may participate in which their calculation shall a general duty to collaborate mixed-activity holding company, the verification. be executed and certified closely and communicate to information relevant to the must be recognised by the each other all information supervision of its banking The Directive also contemplates the competent authority. required (Art.50). subsidiaries may be required from powers of the host MS (see below, it or from them, and be subject to home/host) and a of an entity, which Article 16(3) on the funding Regarding specifically the on-the-spot inspections (Art.55); is specific to insurance legislation: of technical provisions: the case where a management

precisions on powers for the the "Member State of the home MS authority shall company operates in host exercise of consolidated commitment", i.e. where the policy intervene in accordance MS through the provision of supervision (Art.56): see below holder has his/her habitual residence with powers of Article 14, services or by the

("group"). or the establishment to which the where an IORP acting on a establishment of branches, contract relates. cross-border basis does not the competent authorities of

The authorities of that latter MS have its technical provisions all the MS concerned have a have a general competence and fully funded. The authority duty to "collaborate closely"

responsibility as to the contractual may require ring-fencing of (Art.52a). law (without prejudice of possible assets and liabilities. waivers), and the application of Regarding on-the -spot general good principles to the verification of foreign marketing of services within their branches, Article 52b territory. The authorities of the MS contains the same provision of the commitment have a right and as in BCD's Art. 29. duty of alert re the home MS authority when they consider that the activities of an assurance undertaking might affect its financial soundness (Art.10 - worth noting this explicit duty is specific to life assurance). They can also be super-equivalent for consumer information on essential parts of a contract (Art.36(3)).

Information Articles 28& 30 and 56 above. e. g. in the Recast Life Directive: exchange No special provision, Articles 22(4); 50; 52a

Article 28: the information to be Article 129(1) provides that the except: exchanged covers: consolidating supervisor shall Article 16 (similar to Article 30 of Regarding the product

• - 

  the management and ownership of coordinate the "gathering and the BCD): - Art. 20 on the cooperation (UCITS), provisions concern

  the credit institution; dissemination of relevant or between home MS's and mostly home-host essential information in going subject to professional secrecy rules, host MS's authorities in the cooperation (below),

  • - 

    inter alia, information regarding concern and emergency competent authorities may case of cross-border except the general principle the liquidity, solvency, deposit situations" nonetheless exchange information sponsorship of an that competent authorities guarantee, the limiting of large between themselves and with other institution; must exchange all exposures, administrative and public authorities and bodies; information required to carry accounting procedures and internal Art. 132 provides, in particular, conditions for the use of such - Art. 21(1) providing that out their supervisory task control mechanisms. that competent authorities shall information are listed. MS shall ensure the uniform (Art.50(1)), and specific communicate on their own application "through regular information on certain Article 30: subject to professional initiative all "essential Article 49 also provides for the exchanges of information categories of bonds, which secrecy rules, competent authorities information", which is defined home MS authority to collect and, and experience with a view UCITS may invest in up to a may nonetheless exchange in that same Article. "within a reasonable time and on an to developing best practices derogatory (higher) limit -- information between themselves aggregate basis", disseminate to the in this sphere and closer which the Commission and with other public authorities other MS authorities information on cooperation…" collects (Art 22(4)) and puts and bodies; conditions for the use cross-border transactions. on its website. of such information are listed. See also under "Group" below Regarding specifically the Article 56: see precisions below case of management ("group") companies' operation through the provision of services or through branches, MS authorities must supply one another on request with information on management/ownership and "all information likely to facilitate the monitoring of such companies" (Art.52a).

Home/host Article 1(6)&(7): definitions Article 1a (5) & (6):

cooperation planning on-site verifications of e. g. in the Recast Life Directive: Article 20: definitions

Articles 13 & 26: foreign branches as part of As a general principle, prudential overall supervisory activities: General principle of home MS An institution wishing to Art. 6 (for the management rules are set by the home MS, see Art. 129(1) under "Group" supervision (Article 10) , but the accept sponsorship from an company) and 49 (for the whose authorities have the below. host MS authority maintains undertaking located in product-UCITS) lay own the competence of control. certain prerogatives. another MS must notify its general competence of the intention to the competent home MS, except residual Article 20: right of establishment is In particular, Articles 40-42, 46 and authorities of its home MS host MS competences, in subject to successful completion of 49 : which will transmit the particular on marketing and notification procedure. information to the advertising the product - notification requirement to the host authorities of the host MS (Art.44& 49(3)). Article 22: host Member State may MS to set up a branch (Art.40) and impose reporting requirements on to work under free provision of The institution shall be branch for statistical purpose services (Art.42); subject to: Following the 2002 (subject to non-discrimination)s; in - possible application of conditions - the relevant host MS's legislative update, the case of irregularities, host MS in the interest of the general good by requirements of social and UCITS Directive now authority may take emergency the host authority; labour law, contains two notifications precautionary measures in case - possible adoption of measures in - any information procedures: home MS authority fails to act, and case of breaches of obligations by requirements imposed by - relating to the product subject to Commission ex-post the host MS authority; the host MS's competent passporting (Art.46); validation. - possibility to request any authorities; - relating to the management information that is requested from - if identical or stricter rules company's passporting (Art. Article 26: host MS retains locally-registered undertakings are applicable in the host 6a-6b). responsibility for liquidity (Art.46). MS, investment rules and supervision in cooperation with the ring fencing requirement as That latter procedure is home MS authority + measures Note that there is no similar laid down in Art.18(7), for largely modelled on the resulting from implementation of provision to e.g. BCD's Article 22, the concerned part of their mould that inspired e.g. monetary policy. i.e. reporting requirements by host activity. BCD's Art.20. MS authority. Here, the host MS For that host MS part of its authority has to depend on the home activity, the institution is Art. 6c: also related to the MS authority (re: Art.49 above on under the supervision of the management companies' "Information exchange"). host MS competent cross-border operation, authority., which may ask similar prerogatives to those the home MS's authority to in BCD's Art.22, i.e. Worth noting that, in the special decide on the ring-fencing possible reporting case of transfers of portfolio (re of the concerned assets/ requirements and steps Art.14) from branches/agencies liabilities. towards emergency whose head offices are outside the precautionary measures in Community, the MS of the Article 20(9)-(10) provides case of irregularities. transferring branch/agency must for breaches to the host also obtain the prior agreement of MS's labour and social law the competent authorities of the MS to be first reported the host of the commitment, where different. MS's competent authority to the home MS's one. If the latter's action proves insufficient/ineffective, the host MS's authority may take measures, including preventing the institution from operating in the host MS for the sponsoring undertaking.

Enforcement Article 14: Article 136: E.g. in the recast Life Directive See Article 14 above. On the product -ÚCITS:

(2202/83/EC): The home MS authority has the A minimum list of measures Article 52 splits the power to withdraw the available to competent p.m. Article 13(3) allows the competence to take action authorisation, by motivated authorities is provided, competent authority to take any between the home MS, decision, against a precise set of including a specific own funds measures with regard to the where measures may go up preconditions. requirement in excess of the undertaking, its directors/managers to withdrawal of

standard minimum level when or persons who control it, to ensure authorisation via suspension Article 22(5)-(8): other measures alone are compliance with laws /regulations of repurchase or redemption,

unlikely to prove effective … and prevent or remedy any and, for its residual area of The host MS authority retains the enough. irregularities prejudicial to policy competence, the host MS. power to take measures to prevent It is worth noting that this is holders. or punish irregularities, incl. by related to a widened scope for preventing further transaction the supervisory review process Articles 37-39 & 46: On the management within their territory. (re: Art. 124 above) and the prudential measures to be taken in company:

prudential requirements particular cases, i.e. when applicable to supervised policyholders' rights are threatened Article 5a(5) provides an institutions, both quantitative or when an undertaking fails to exhaustive list of 6 possible (own funds requirements under comply with its obligations: grounds on which Art.75) and qualitative (Art. authorisation may be 22(1) above). - limits to the free disposal of assets; withdrawn. - examination of financial recovery plan (when policy holders' rights are threatened)/ plan for the restoration of a sound financial position - imposition of a short-term finance scheme - imposition of higher required solvency margin or downward revaluation of the available solvency margin - withdrawal of authorisation refusal of authorisation and prohibition to conclude new contracts in case of non compliance with the right of establishment /freedom to provide services.

Groups Article 12: prior consultation of Section 2, subsection 1 of the e.g. in the recast Life Directive Article 5b applying to competent authority in other draft Re-casting banking (2202/83/EC): management companies' Member State for the authorisation Directive (Art. 68-73) governs authorisation: similar to of a credit institution which is a the level of application of Competent authorities have an BCD's Art.12

subsidiary of credit prudential requirements on the obligation to cooperate and institution/parent of a credit minimum level of own funds, exchange information in checking a Qualifying holdings in institution authorised in that MS or internal risk-management group structure prior to management companies are controlled by the same persons processes and large exposures. authorisation: first introduced by the monitored by the home MS In particular: Financial conglomerates Directive, authority (Art.5e). exercise of consolidated - Art. 69 introduces a waiver to the scope of the obligation will be supervision: individual application subject extended with the Reinsurance to preconditions, notably on the Directive, i.e. Art. 59(2) introducing Article 52(1)-(4): defines its parent; new Art.9a in the Recast Life Dir. personal scope, incl. the power for - Art. 70 provides for possible (re: Art.57(1) of the Reinsurance the Member state or responsible subconsolidation, subject to a Dir. for non-life): competent authority to adjust such partly similar set of prior consultation before granting an scope by excluding entities. Article preconditions. authorisation where the insurer is 54 is concerned with the form and subsidiary of a reinsurer, a extent of consolidation. Articles 125-127 further flesh subsidiary of the parent undertaking out the personal scope of of a reinsurer of an insurance Article 52(5)-(7): defines its consolidated supervision and company, is controlled by the same material scope: the main principles for person who controls an insurer or a - supervision of solvency, the appointing the consolidating reinsurer, or is s subsidiary of a adequacy of own funds to cover supervisor (particularly in the credit institution or an investment market risks and control of large case of parent bank holding firm,… exposures: on a consolidated basis; companies). - non-financial qualifying holdings: Article 56: special treatment for EU on a consolidated or branches of third-country subconsolidated basis By adapting Art.29 of the BCD, institutions - possibility of waiving, as a Article 129(1) entrusts the counterparty, application of the consolidation supervisor with An insurance undertaking which has concerned rules on an individual or planning and coordinating requested/obtained authorisation in subconsolidated basis; supervisory activities, incl. for several MS may benefit from the on-site inspections of branches following prudential advantages: Article 52(8)-(9) clarifies le role of in cooperation with the host - Community "consolidated" the foreign subsidiary's supervisors: MS authorities. calculation of the solvency margin; - application of the rules on - central pooling of assets individual/subconsolidated basis to Article 129(2) gives a representing the guarantee fund; a subsidiary in another MS; prominent role to the - central lodging of the amount of nonetheless, possibility to delegate consolidating supervisor the minimum deposit (in respect of supervision to the parent insofar as the validation of the required solvency margin) in the undertaking's supervisors group internal models is MS which is to supervise the concerned. solvency of the entire business of Article 53 sets out some rules for the agencies/branches within the determining the competent Article 131 includes a Community. authority responsible for requirement on written consolidating supervision. coordination and cooperation The competent authority selected arrangements, and specifies shall obtain from the other Member Article 54: that competent authority that additional tasks may be States the information necessary for may in some cases decide on the entrusted to the consolidating the supervision of the overall form and extent of consolidation. supervisor. solvency of the agencies and branches established in their In the case of groups with a mixedterritory. activity holding company (Art.55), special cooperation is foreseen Directive 98/78 i on the according to the rules laid down in supplementary supervision of Art.56 (below) for insurance insurance undertakings in an subsidiaries and entities situated in insurance group: another Member State. Article 4: in case the insurance Article 56: undertakings belonging to the same the competent authorities must group are authorised in different have the capacity to exchange MS, the concerned competent information (Art. 56(2)-(3)); this authorities "may reach agreement" includes cooperation with the as to which of them will be competent authorities/supervisors responsible. of insurance undertakings and authorised investment providers Article 6: the concerned competent within a group subject to authority(ies) shall have access to consolidated banking supervision any relevant information, may carry (Art.56(4)); in this context, the out on-the-spot verification in their organisation of verifications on a territory and ask the competent auth.

cross-border basis depends on the of another MS to have verification other Member State's competent carried out. authorities (Art.56(7)). Article 7: The competent authorities of each MS shall communicate to one another on request all relevant information and shall communicate on their own initiative any information which appears to them to be essential for the other competent authorities.

(see Art. 129(1) of the draft CRD)

Article 8: Competent authorit(ies) exercise general supervision over intra-group transactions.

Crisis (nothing, except emergency powers (Article 129(1) entrusts the (nothing, except: (nothing, except emergency (nothing, except: management under Art.22 see above, which consolidating supervisor with - emergency powers for the host MS powers for the host MS - emergency powers for the

provide for some cooperation) planning and coordinating authority: see above home/host; authority: see above host MS authority: see above supervisory activities also in home/host) home/host;

emergency situations) - Art.37 on assurance undertakings

Article 130 provides that in in difficulty provides that the home - Art.52 provides that any emergency situations with MS authority will inform other decision to withdraw stability implications, the concerned MS authorities of any authorisation of a UCITS or consolidating supervisor shall measures taken and the latter will, any other serious measure … alert other authorities, using on its request, take the same must communicated without "where possible, existing measures.) delay to the authorities of defined channels of the other MS where it is communication" marketed )

Level 2/ N/R (to be completed by N/R N/R Possible Comitology

Comitology Commission / CEBS) measure(s) clarifying a measures number of definitional foreseen points on assets eligible for

UCITS investment.

Market abuse Directive Prospectus Transparency MIFID Financial conglomerates

Harmonised Article 12 (2) Article 21(3) Article 24 (4): Article 50 (2) Article 16 minimum supervisory Extensive list of minimum A list of minimum powers Extensive list of minimum Extensive list of minimum Obligation for the coordinator powers powers, including at least the for competent authorities powers for competent powers for competent (mixed financial holding

right to: approving a prospectus, authorities including at least authorities including at least companies) or the competent access to any document, including at least the right to: the right to: the right to: authorities to take the demand information from any require supplementary require supplementary access to any document, necessary measures. person, carry out on-site information from a defined information from a defined demand information from any inspections, require existing range of persons, suspend or range of persons, person, carry out on-site Article 17 telephone and existing data prohibit a public offer or suspend, prohibit, or request inspections; require existing traffic records, require the advertisements, suspend suspension of, trading, telephone and existing data Pending further cessation of any practice that trading and make public any monitor the disclosure of traffic records, require the harmonisation of sectoral is contrary to the Directive, infringement. information, make public any cessation of any practice that rules, competent authorities suspend trading ,request the infringement, take appropriate is contrary to Directive, shall have the power to take freezing and/or sequestration Where necessary under measures in case of request the freezing and/or any supervisory measure of assets and to request national law, the competent infringement and carry out the sequestration of assets, deemed necessary to avoid temporary prohibition of authority must ask the on-site inspections. request temporary prohibition circumvention of sectoral professional activity. relevant judicial authority to of professional activity; as rules. decide on the use of some of Where necessary under well as require information Some of these powers may be these powers. national law, the competent from auditors, adopt any type Member States shall ensure exercised by other authorities authority may use this power of measure to ensure that that penalties may be or by application to the Article 21(4) by applying to the relevant investment firms and imposed. competent judicial authorities. judicial authority. regulated markets continue to A list of minimum powers comply with legal Article 14 for competent authorities Article 28 requirements, require the which have approved a suspension of, or removal Member States must be in prospectus, including at least Member States must be in from trading in a financial position to impose the right to: require disclosure position to impose instrument, refer matters for proportionate and dissuasive of material, suspend trading proportionate and dissuasive criminal prosecution, allow penalties. and carry out on-site penalties auditors or experts to carry inspections in its territory in out verifications or accordance with national law, investigations. where necessary under national law, by applying to Some of these powers may be the relevant judicial authority exercised by other authorities and/or in cooperation with or by application to the other authorities. competent judicial authorities.

Article 25 Member States must be in Article 51 position to impose proportionate and dissuasive Member States must be in penalties position to impose proportionate and dissuasive penalties

Information Article 16: Article 22(2): See Article 25 below. Article 58 Article 11 exchange

 An obligation to cooperate An obligation to cooperate An obligation to exchange Defines the tasks of the and to supply information, and to supply information. information via single contact coordinator (coordinating except in specially defined points competent authority for a cases. conglomerate) CESR mediation role in case of non compliance with a request for information.

Home/host Article 2 Article 2 Essentially responsibility for Article 12 cooperation supervision rests with the

Different definition of the Different definition of the home Member State, but the Imposes on an obligation to terms Home/Host member terms Home/Host member Directive assigns some cooperation and exchange of state for shares and bonds. state for shares and bonds. competences to the host information between Article 25(2): Member State, e.g. Article 32 competent authorities Article 17: (7). supervising the regulated General obligation to entities in a conglomerate. Approval of prospectus sole cooperate and render Article 56 The cooperation shall at least responsibility of Home assistance to each other. provide for the gathering and member state. General obligation to the exchange of information cooperate and render regarding the issues specified Article 18: assistance to each other, via a in the Directive. single designated contact Obligation for Home MS to point, notify host MS (where the share/bond in question is to Article 59 be offered or traded) within short time limits. A competent authority may refuse to cooperate in a Article 22 (2): request only in certain Cooperation between home defined circumstances. and Host competent authority in case of suspension or Article 61 prohibition of trading Host Member States have the powers to carry out their assigned tasks, see below.

Article 62

Host Member State must notify home Member State of any breach and may act in the absence of effective measures taken by the home Member State.

Enforcement Article 16 Article 23 Article 26 Article 57 Article 15

(3) Notification of suspected Where host MS finds a breach Where host MS finds a breach A competent authority may A competent authority may cases of market abuse it notifies home MS. If home it notifies home MS. If home request the cooperation in demand that the competent (4) Request to other MS does not react, the host MS measures inadequate, the supervisory activities, on-theauthority in another Member competent authorities to carry MS may act to protect host MS may act to protect spot- verifications or in State where an entity in a out an investigation. investors investors investigations. conglomerate is situated, CESR mediation role in case carry out a verification. of non compliance with a request for an investigation.

Groups Article 60 The Directive only applies to financial conglomerates as

Obligation to consult before defined in the Directive. granting an authorisation to an investment firm which is part of a group.

Crisis management (nothing, except emergency

powers for the host MS authority: see above home/host)

Level 2 Article 1 (definitions) Article 2 (definitions) Article 2 (definitions) Article 13 organisation Article 20 measures (still Article 6 (disclosure of inside Article 4 ( exemptions) Article 4 (6) (content of requirements partly under information) Article 5 (format of annual report) Article 15 (3) ( suspension of Commission may adopt discussion) Article 8 (trading in own prospectus) Article 5 (6) (content of semirequest for authorisation by technical adaptations to

shares) Article 7 (minimum annual report) third country entities) definitions and may Article 14(2) (drawing up of information) Article 9 (7 ) ( notification of Article 18(3) conflicts of coordinate measures adopted list of sanctions) Article 8 (Omission of major holdings) interest by Member States on risk Article 16(5) (exchange of information) Article 12 (8) ( procedure for Article 19 (10) conduct of concentration and intra-group information and cross border Article 10 (published notification of major business rules exposures. inspections) information) holdings) Article 21(5) best execution Article 11 (Incorporation by Article 14 (2) (procedure for of client orders reference) publication of own shares Article 22(3) client order Article 13 (time limits for holdings) handling rules approval) Article 17(4) (Information Article 24 (5) eligible counter Article 14 (publication) requirements for shares parties Article 15 (advertising) admitted to trading on a Article 25 (7) market Article 20 (prospectuses from regulated market) integrity, transaction third countries) Article 18(5) (Information reporting and record keeping requirements for bonds Article 27 (7) specification of admitted to trading on a certain criteria for regulated market) internalisation Article 19(4) (notification of Article 28 (3) Post trade Home Member State) disclosure Article 21 (4) (Access to Article 29 (3) Pre-trade regulated information) transparency requirements for Article 22 (2) ( Implementing MTFs measures to facilitate Article 30 (3) Post trade compliance with Article 19 transparency requirements for and 21) MTFs Article 23 (4) Treatment of Article 40(6) Admission of third country issuers) financial instruments to trading Article 45(3) Post-trade transparency requirements for regulated markets Article 58(4) exchange of information

Annex IV - Section 2: Prospective view on EU legislation and its implementation: - state of play of on-going implementation of recent securities legislation

Directive Market Abuse Prospectus Markets in Financial Transparency

Instruments

Level 1

Commission proposal 30/05/2001 30/05/2001 (original) 19/11/2002 26/03/2003

09/08/2002 (amended)

1 st reading EP 14/03/2002 14/03/2002 25/09/2003 30/03/2004

Council common 07/05/2002 24/03/2003 07/10/2003 - position (political agreement

reached 12/05/2004)

2 nd reading EP 24/10/2002 02/07/2003 30/03/2004 Not applicable

Date of adoption 28/01/2003 29 04/11/2003 30 21/04/2004 31 15/12/2004

Date of publication in 12/04/2003 31/12/2003 30/04/2004 O.J. 31/12/2004 OJ/ Enters into force

Implementation 12/10/2004 01/07/2005 30/04/2006 20/01/2007 deadline/measure comes into effect

Level 2

Mandate to CESR 18/03/2002 (first set of 18/03/2002 (first set of measures, 20/01/2004 25/06/2004 (formal) measures, provisional) provisional) (provisional)

20/12/2002 31/01/2003 (second set of 25/06/2004 (formal) (first set of measures, formal) measures, provisional) 31/01/2003 (second set of 31/03/2003 (deadline extended measures) for first set) 01/10/2003 (first and second set, formal) 25/06/2004 (third set, formal)

CESR advice to 31/12/2002 (first set of 31/07/2003 (first set of measures) 31/01/2005 and 30/06/2005 Commission measures) 30/09/2003 (second set of 30/04/2005

31/08/2003 (second set of measures – 1) measures) 31/12/2003 (second set of measures – 2)

Commission working 10/03/2003 (first set of 07/11/2003 (first and second sets - - document measures) of measures, excluding second

10/11/2003 (second set of set - 2) measures)

Formal Commission 09/07/2003 (first set of 20/01/2004 - - draft implementing measures) (first and second sets of measures 22/12/2003 (second set of measures)

measures) Agreement in 29/10/2003 (first set of 30/03/2004 (first and second sets - - European Securities measures) of measures) Committee 19/04/2004 (second set of

measures) Adoption by 22/12/2003 (first set of 29/04/2004

Commission measures) 32 (first and second sets of

29/04/2004 measures) 34 (second set of measures) 33

Publication in 23/12/2003 for the first 30/04/2004 - -

OJ/Enters into force Regulation and 24/12 i/03 for the (first and second sets of first two Directives measures)

30/04/2004 (second set of measures)

Implementation 12/10/2004 01/07/2005 30/4/2006 - deadline/measure comes into effect

29 Directive 2003/6/EC i of the European Parliament and of the Council of 28 January 2003 30 Directive 2003/71/EC i of the European Parliament and of the Council of 4 November 2003 31 Directive 2004/39/EC i of the European Parliament and of the Council of 21 April 2004 32 Commission Directive 2003/174/EC, Commission Directive 2003/175/EC and Commission Regulation (EC) 2273/2003 i of 22 December 2003

33 Commission Directive 2004/72/EC i of 29 April 2004

FSC 4155/1/05 REV 1 JLF 53

• - 

  further (i) coming, (ii) announced and (iii) possible Directives likely to affect the competences of EU supervisory authorities

(i) Coming legislation:

• - 

  p.m. In the banking sector: the Capital Requirements Directives, expected to be adopted by end-2005 (see table in Annex II Section 1);

• - 

  In the insurance sector: Reinsurance Directive (which will also amend direct Insurance Directives

73/239/EEC, 92/49/EEC and Directives 98/78/EC i and 2002/83/EC)

(ii) Announced legislation:

In the insurance sector: Directive Proposal on a new Insurance solvency framework ("Solvency II"), expected to be presented in October 2006;

(iii) Possible legislation:

In the securities sector: - poss. Directive Proposal on post-trade financial services, whose impact assessment is expected to be completed by autumn 2005;

• - 

  poss. Directive on capital requirements for regulated markets (poss. Commission Proposal foreseen in order for the measure to coincide with the application of the Capital Requirements Directives).

(Source: Commission Green Paper, Annex II)

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