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Strengthening mutual trust between European financial supervisors

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ERA Forum Aims and scope

“We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of light.” Plato

Abstract

This paper posits the view that mutual trust between national financial supervisors in the EU is presently weak. This has an impact on the level of cooperation and coordination between these supervisors, resulting in barriers to cross-border business and failures in the supervision of cross-border financial group structures. The central argument of the paper is that these serious concerns may be addressed if mutual trust between national financial supervisors is strengthened through specific measures, such as: (i) broader and better initiatives for supervisory convergence, including convergence of the institutional models for national financial supervision, preferably by more direct involvement of central banks in micro-prudential and conduct supervision; and (ii) the setting up of a European Academy for Financial Supervisors.

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Notes

  1. The author is the Director of the Securities and Markets Supervision Unit of the Malta Financial Services Authority and has 17 years of experience in the field of regulation and supervision of the financial services sector.

  2. Mayer/Davis/Schoorman [59]; Schoorman/Mayer/Davis [75].

  3. Regulation EU No. 1095/2010, Recital 39 explains: Delegation of tasks means that tasks are carried out by the Authority or by a national supervisory authority other than the responsible authority, while the responsibility for supervisory decisions remains with the delegating authority. By the delegation of responsibilities, the Authority or a national supervisory authority (the delegate) should be able to decide upon a certain supervisory matter in its own name in lieu of the delegating authority. Delegations should be governed by the principle of allocating supervisory competence to a supervisor which is best placed to take action in the subject matter. A reallocation of responsibilities would be appropriate, for example, for reasons of economies of scale or scope, of coherence in group supervision, and of optimal use of technical expertise among national supervisory authorities. Decisions by the delegate should be recognised by the delegating authority and by other competent authorities as determinative if those decisions are within the scope of the delegation.

  4. Mayer/Davis/Schoorman [59]; and Schoorman/Mayer/Davis [75].

  5. Solmsen [77].

  6. Mayer/Davis/Schoorman [59], 710.

  7. See by way of example Directive 2014/65/EU, Arts. 34 and 35, and Directive 2009/138/EC, Arts. 145, 146, 147 and 148.

  8. Supra fn. 1.

  9. See by way of example Directive 2014/65/EU, Title VI, Chapter II and Directive 2009/138/EC Title I, Chapter IV, Sect. 5 and Art. 195 and 248.

  10. Supra fn. 1.

  11. Mayer/Davis/Schoorman [59], 712.

  12. Ibid.

  13. Schoorman/Mayer/Davis [75], 345.

  14. Mayer/Davis/Schoorman [59], 717.

  15. Mayer/Davis/Schoorman [59], 718–719.

  16. Mayer/Davis/Schoorman [59], 719.

  17. Basel Committee of Banking Supervision [4]; International Association of Insurance Supervisors [48]; International Organisation of Securities Commissions [49].

  18. International Organisation of Securities Commissions [49].

  19. Buttigieg [16], 197–227.

  20. For a general understanding of regulatory capture see amongst others: Boyer/Ponce [12], 206–217; Buttigieg [16]; Young [89], 663–688; and CFA Institute [47].

  21. Stigler [80], 3–21; Peltzman [69], 211–240; and Peltzman [70], 1–44.

  22. Lodge [56], 539.

  23. Baker [3], 647–663.

  24. Rubin [73].

  25. Supra fn. 1.

  26. See amongst others Moloney [62, 63].

  27. High-Level Group on Financial Supervision in the EU [45].

  28. See amongst others: European Insurance and Occupational Pensions Authority [35]; See also the ban on the marketing of certain financial products sold by operators passporting from other Member States—by way of example ‘Belgium one-ups France, bans all leveraged Forex [39]; Stafford/Murphy/Cornish [78] and Golovtchenko [42].

  29. Supra fn. 1.

  30. See for example: UK House of Lords [85]. In addition, during the EUROFI held in Malta in April 2017, the author inter alia participated in a session which dealt with cross-border investment funds. During this session one of the participants specifically mentioned that the exercise of the financial product passport should be subject to a condition whereby at least 30% of the said product is distributed at national level.

  31. European Commission [33].

  32. Fidler [36].

  33. See amongst others: Funds Europe [40]; Booth/Scarpetta [74]; Paredes-Vanheule [66]; Buck [15]; Ladbury [52]; O’Donnell [64]; Binham [8]; Shotter [76]; Finch [38]; Boland/Ralph/Ford/Brunsden [10]; Open Europe [65].

  34. Maijoor [57].

  35. Andreas Dombret, from the Deutsche Bundesbank has expressed concerns about the possible risks relating to regulatory and supervisory competition. See Dombret [25]. See also Ignazio Visco, Governor of Banca D’Italia, who briefly examines the negative impact of regulatory and supervisory competition in Visco [86]; and Jones [50].

  36. Presidential Executive Order on Core Principles for Regulating the United States Financial System [72].

  37. See amongst others: McLannahan/Jopsen [60]; Jopson/McLannahan [51]; Badkar/Platt [2]; Gray/McLannahan [44]; Pramuk [71].

  38. Wolff [87].

  39. Commission of the European Communities [19].

  40. Committee of Wise Men [21].

  41. Decision 2001/527/EC of 6 June 2001 establishing the Committee of European Securities Regulators and Commission Decision of 23 January 2009 establishing the Committee of European Securities Regulators https://goo.gl/mdB126, accessed 16.03.2016.

  42. Committee of European Securities Regulators [20].

  43. High-Level Group on Financial Supervision in the EU [45].

  44. European Commission [31].

  45. ESMA [29]; ESMA [30].

  46. See amongst others: Deutsch [24]; Makris [58]; Becker/Muller [7]; Becker [6]; Dunkley [26]; Buck [14].

  47. Commission of the European Communities [19].

  48. Committee of Wise Men [21].

  49. Committee of Wise Men [21].

  50. Committee of European Securities Regulators [20].

  51. Regulation (EU) No 1092/2010, Recital 14.

  52. ESMA [29]; ESMA [30].

  53. ESMA [29]; ESMA [30]; ESMA 2017 Supervisory Convergence Work Programme: “Acknowledging that financial services are increasingly provided on a cross-border basis in the EU, ESMA is determined to ensure that retail investors receive the same level of protection independently of the location of the firm providing the services. This increased focus on investors who deal in a cross-border context is seen as an essential condition for safeguarding the free movement of services in the EU and a variety of initiatives are proposed to this effect. Finally, this priority area also supports the Capital Markets Union (CMU) initiative.”

  54. Regulation (EU) No. 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No. 716/2009/EC and repealing Commission Decision 2009/77/EC [2010] OJ L 331/84.

  55. Regulation EU No. 1095/2010, Recitals 40 and Articles 1.

  56. Regulation EU No. 1095/2010, Recital 41.

  57. See the section of ESMA’s web site on supervisory convergence and peer reviews https://goo.gl/xqOhx0 accessed 26.02.2017.

  58. ESMA [29]; ESMA [30]; ESMA has started a process whereby national supervisory priorities are looked into in preparation of the supervisory convergence work programme. However, it is fair to state that the methodology for this kind of assessment is still in its early stages of development. See in particular the 2017 Supervisory Convergence Work Programme.

  59. Buttigieg [16], p. 224.

  60. Buttigieg [16], p. 224.

  61. Buttigieg [16], pp. 214–219.

  62. Buttigieg [16].

  63. High-Level Group on Financial Supervision in the EU [45]. The 2009 de Larosiere Report proposed in paragraph 216: “There may be merit, over time, in evolving towards a system which would rely on only two Authorities: The first would be responsible for banking and insurance issues, as well as any other issue which is relevant for financial stability (e.g. systemically important hedge funds, systemically important financial infrastructures). The second Authority would be responsible for conduct of business and market issues, across the three main financial sectors. Combining banking and insurance supervisory issues in the same Authority could result in more effective supervision of financial conglomerates and contribute to a simplification of the current extremely complex institutional landscape.” In this connection it is noteworthy that authors such as Wymeersch have argued in favour of the establishment of a Single European Regulator for financial services to achieve more efficiency in European supervision—see Wymeersch [88].

  64. Brunsden [13].

  65. European Commission [32].

  66. The information on which central banks that are involved in banking and insurance supervision was obtained from the web sites of the European Banking Authority (EBA) http://www.eba.europa.eu/ and the European Insurance and Occupational Pensions Authority (EIOPA), https://eiopa.europa.eu/, accessed 18.08.2016.

  67. Czech National Bank: https://goo.gl/gTI83s, accessed 02.08.2016.

  68. National Bank of Hungary: https://goo.gl/ASClOJ, accessed 02.08.2016.

  69. Central Bank of Ireland: http://goo.gl/hOYHqF, accessed 02.08.2016.

  70. Bank of Lithuania: https://goo.gl/zZORRT, accessed 02.08.2016.

  71. National Bank of Slovakia: http://goo.gl/8fPBCw, accessed 02.08.2016.

  72. The twin peaks model in France is only relevant to the oversight of securities markets. The Autorite de Controle Prudentiel (‘ACP’) is responsible for the prudential supervision of investment services providers and market infrastructure providers. The Autorité des Marchés Financiers (‘AMF’) is responsible for market and conduct of business supervision of all market participants and the prudential supervision of portfolio managers and funds. The ACP is also responsible for the supervision of banks and insurance companies. See IMF [46].

  73. See amongst others: Taylor [83]; Taylor [84]; Taylor [82].

  74. See amongst others: Gambacorta/Signoretti [41]; Filardo/Rungcharoenkitkul [37]; Svensson [81].

  75. Buttigieg [16].

  76. See amongst others: Goodhart [43]; Coeure [18]; Bini Smaghi [9].

  77. See amongst others: Laeven [53]; Beck/Gros [5]; Stein [79]; Borio [11].

  78. See amongst others: Peek/Rosengren/Tootell [67]; Peek/Rosengren/Tootell [68].

  79. See amongst others: Lastra [55]; Lastra [54].

  80. Angeloni [1].

  81. Melecky/Podiera [61].

  82. Ibid.

  83. Beck/Gros [5], p. 3; Goodhart [43], p. 19. Regarding the independence and expertise argument, way back in 2001 the European Central Bank emphasized that central banks are contributing effectively to financial stability and that central bank independence might shelter supervision from undue external interference, as well from the risk of regulatory capture by the supervised entities. See ECB [27].

  84. Angeloni [1].

  85. Supra fn. 1.

  86. Chakrabarty [17].

  87. See amongst others the web-sites of the European Banking Authority http://goo.gl/O419Kg; European Insurance and Occupation Pensions Authority http://goo.gl/BP4XXl.

  88. ESMA [28].

  89. Supra fn. 1.

  90. DeSchutter/Lenoble [23]; Deakin [22].

  91. DeSchutter/Lenoble [23].

  92. For more information on the European Banking Institute, please visit https://ebi-europa.eu.

  93. Mayer/Davis/Schoorman [59]; Schoorman/Mayer/Davis [75].

  94. European Commission [34].

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    Christopher P. Buttigieg

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Correspondence to Christopher P. Buttigieg.

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Dr. Christopher P. Buttigieg is the Director of the Securities and Markets Supervision Unit of the Malta Financial Services Authority (‘MFSA’) and is a member of the Authority’s Supervisory Council. He is also the MFSA alternate member on the European Securities and Markets Authority (‘ESMA’) Board of Supervisors. Dr. Buttigieg has a D.Phil. in Law Studies from the University of Sussex (UK) and is a lecturer in the Banking and Finance Department of the University of Malta. The paper is based on a presentation delivered by the author during the Federation of European Stock Exchange’s annual conference and the general meeting of the European Fund and Asset Management Association both held in Malta respectively on the 16th and the 17th June 2016. The salient points made in this paper were also presented during the Academy of European Law Conference on Financial Supervision held on the 1–2nd December 2016 in Brussels and the Annual Banking and Finance Conference organized by the University of Malta on the 7th March 2017. The author would like to thank Dr. John Consiglio, Senior Lecturer, University of Malta and Governor on the board of the Malta Financial Services Authority, Dr. David Fabri, Head of Commercial Law Department, University of Malta, Dr. Miriam Goldby, Reader in Law, Queen Mary, University of London (UK), Mr Alfred Mifsud, Deputy Governor of the Central Bank of Malta and Professor Eddy Wymeersch, University of Ghent (Belgium) and former Chair of the Committee of European Securities Regulators, for their comments on the content of the paper. The views expressed in this paper are those of the author at the time of writing and do not necessarily reflect the MFSA’s or ESMA’s position.

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Buttigieg, C.P. Strengthening mutual trust between European financial supervisors. ERA Forum 18, 41–66 (2017). https://doi.org/10.1007/s12027-017-0456-5

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