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The European Securities and Markets Authority and Institutional Design for the EU Financial Market — A Tale of Two Competences: Part (2) Rules in Action

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Abstract

The purpose of this article, and of its earlier companion article, is to examine the implications of the new European Securities and Markets Authority which was established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any institutional design would have struggled given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body’s powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision, even if there is considerable symbiosis between these activities.

This article considers ESMA’s supervisory powers. It argues that, by contrast with its rule-making powers, the current and potential extent of ESMA’s supervisory powers has pushed ESMA too high up the spectrum towards EU intervention. Local supervision of the EU rule-book represents an important safety valve for the EU financial market but this safety valve may be obstructed by ESMA’s undue standardisation of supervisory practices. ESMA’s extensive direct supervisory powers are also troubling given concerns as to their effectiveness. It was always going to be a challenge to draw the dividing line between ESMA’s supervisory powers and those of national competent authorities. But the line may have been drawn too far on the side of operational centralisation.

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  62. Ferran has noted the FSA’s concern on this point: supra n. 1, at pp. 44–45.

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  79. Omnibus Directive, Arts. 6(2) and 5(7).

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  95. ‘This proactive approach to supervision requires significantly more people than the old reactive model and those individuals must be of a higher quality and supported by more sophisticated systems. If society wants a more proactive approach it must accept that it will have a larger and more expensive regulator’: FSA Chief Executive Sants, commenting on the 2010–2011 Business Plan.

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  102. Consumer protection and stability conflicts were of particular concern in the US during the negotiations on the Dodd-Frank Act 2010 over the (ultimate) location of the Bureau of Consumer Financial Protection within the Federal Reserve. E.g., J. Coffee and H. Sale, ‘Redesigning the SEC — Does the Treasury Have a Better Idea?’, 95 Virginia Law Review (2009) p. 707.

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  105. Reviews of the UCITS passporting regime (CESR/09-1034) and CESR’s Standards Numbers 1 and 2 on financial information (CESR/09-374, CESR/09-188 and CESR/09-212) were disheartening. The UCITS peer review, e.g., revealed low levels of compliance, with only 5 Member States fully applying the guidelines and 20 Member States not applying at least 1. Previous CESR Chairman Wymeersch (in a personal capacity) described the outcomes of the peer review as ‘often appalling’: supra n. 1, at p. 248.

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  107. Although this procedure is not tied to a Commission opinion: Ferran, supra n. 1, at p. 52.

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  109. E.g., under the Market Abuse Directive, Art. 19 will apply where requests for information, to open an inquiry, or for its officials to take part in on-site inspection by a competent authority are refused (Omnibus Directive, Art. 3(6)). Under the Prospectus Directive, it will apply where information requests are refused (Omnibus Directive, Art. 5(11)). Art. 19 applies to a range of situations under MiFID, including with respect to information and inspection requests and the application of precautionary powers (Omnibus Directive, Art. 6(24)).

  110. A discrete voting regime applies to this procedure under Art. 44; Arts. 17 and 18 are subject to a simple majority vote.

  111. ESMA’s Art. 17 powers, e.g., reflect the constitutional pre-eminence of the Commission with respect to enforcement. Any ESMA action after the initial recommendation to the non-compliant competent authority is dependent on a Commission ‘formal opinion’ being issued. The Art. 18 regime depends, e.g., on the declaration of an emergency by the Council.

  112. Ferran, supra n. 1, at p. 49.

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  115. Infra n. 146.

  116. Brummer, supra n. 13, at pp. 281–282.

  117. See also Financial Markets Law Committee, infra n. 191, at pp. 14–15, noting that political circumstances may lead to non-compliance by competent authorities with EU law and to competent authority action to incentivise the market participant to act in breach of the ESA decision.

  118. E.g., House of Commons, Commission Written Evidence, infra n. 158.

  119. Moloney, supra n. 51, ch. 4.

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  121. Infra section 3.2.

  122. E.g., BME Consulting, The EU Market for Consumer Long-Term Retail Savings Vehicles. Comparative Analysis of Products, Market Structure, Costs, Distribution Systems, and Consumer Savings Patterns (2007).

  123. N. Tait, ‘ESMA Watchdog Prepared to Clash with Brussels,’ 2 March 2011, available via: <http://FT.com>, and R. Froynovich, ‘ESMA To Be Strongly Independent,’ 2 March 2011 (quoting Chairman Maijoor as stating that ‘we need to have an eye, and it needs to improve, on serving the interest of the financial consumer and retail investor’), available via: <http://WSJ.com>. Similarly, Keynote Address of ESMA Chairman Steven Maijoor, ISDA AGM, 13 April 2011, noting that ESMA was ‘conducting work … to form our future policies and procedures in this important area’, available via: <http://www.esma.europa.eu>.

  124. European Commission, Impact Assessment for the 2010 Credit Rating Proposal (SEC(2010) 678), at p. 9 (noting that Moody’s was expected to have 14 supervisors in its supervisory college under the 2009 Regulation).

  125. A €2.5 million increase in ESMA’s budget for 2011 was envisaged: ibid., at p. 33.

  126. Delegation is envisaged where a supervisory task requires knowledge and experience concerning local conditions which are more easily available at national level (rec. 13).

  127. ECON Legislative Report, November 2010 (Gauzès Report) (PE 448.995 and A7/340-2010).

  128. Council Regulation (EC) No 1/2003, OJ 2003 L 1/1.

  129. Supra n. 126, rec. 19.

  130. The Commission’s 2008 report on agencies, e.g., argued that agencies could not be entrusted with powers which had been conferred on the Commission by the Treaty: The European Agencies — The Way Forward (2008) (COM(2008) 135).

  131. Conex Banninger Limited v. The European Commission [2010] EWHC 1878.

  132. E.g., DLG Report, supra n. 6, at p. 53. 141 Giegold Report, supra n. 126, Amendment 76.

  133. E.g., Short-Selling Proposal, supra n. 82, at p. 5, and European Securities Committee, Minutes 21 June 2010, noting the ‘political priority and urgency of the issue’.

  134. ESMA action must address a threat to the functioning, integrity or stability of the market, cross-border implications must arise, and the competent authority(ies) must have failed to take action (Art. 24(2)). ESMA must also take into account the extent to which the measure will significantly address the threat, improve the ability of competent authorities to monitor the threat, not create a risk of regulatory arbitrage, and not have detrimental effects on the market, including with respect to liquidity and uncertainty. Notification (to competent authorities), consultation (with the ESRB and relevant authorities) and review obligations are also imposed (Art. 24(3)–(9)).

  135. CESR, Annual Report 2009, at p. 40.

  136. The MiFID Review also foresees ESMA’s ability to decide whether a derivative should be approved for trading on different categories of organised market: MiFID Review, at p. 13.

  137. CESR Annual Report 2009, at p. 52, and CESR/09-324.

  138. MiFID Review, at p. 23. This represents a significant change from the current position. On occasion, CESR has not been able to reach the qualified majority necessary to adopt a common position on waivers: CESR/09-324.

  139. The Commission’s FAQ on the proposed 2011 AIFM Directive, e.g., asserted that it ‘makes full use of the opportunities afforded by the recent reform of Europe’s supervisory architecture’: MEMO/10/572, 11 November 2010.

  140. CESR/09-821 and CESR/10-1183.

  141. E.g., CESR/09-417 (reviewing compliance with the revised 2008 Code).

  142. See further, E. Ferran, ‘The Regulation of Hedge Funds and Private Equity: A Case Study in the Development of the EU’s Regulatory Response to the Financial Crisis’ (2011), available at: <http://ssm.com/abstract=1762119>.

  143. July 2010 Partial Reading, supra n. 126, Arts. 6(1)(fc) and 12a(5) and c.

  144. ECOFIN Meeting, 2 December 2009: 16571/1-09.

  145. Any abuse of Art. 38, in particular in relation to a decision which does not have a significant or material fiscal impact, is to be prohibited as incompatible with the internal market (Art. 38(5)). Similarly, rec. 50 states that Art. 38 should not be used where the contested decision leads to a reduction of income, following the temporary prohibition of products or activities for consumer protection purposes.

  146. There has been little sign of institutional or Member State dissent. E.g., COM(2009) 252 (setting out the Commission blueprint for supervisory reform) and European Council, 18/19 June 2009, Presidency Conclusions, No. 20.

  147. The UK government is concerned as to the potential for fiscal risks arising from ESMA intervention in the sovereign debt markets: e.g., European Scrutiny Committee, 4th Report, Session 2010–2011, at pp. 14–15.

  148. The Commission’s 2010 Communication on Crisis Resolution (supra n. 25) is largely concerned with establishing common standards and with national crisis resolution funds, although the Commission’s preferred option was for a ‘Single EU Fund’.

  149. E.g., House of Commons, Treasury Select Committee, 16th Report 2008–2009, The Committee’s Opinion on Proposals for European Financial Supervision, 2008–2009, Commission Written Evidence; ESMA Regulation, recs. 29 and 32.

  150. ESMA FAQ, at p. 9.

  151. Supra n. 6, at p. 47, describing the new structure as ‘largely decentralised’ and proposing that ‘national supervisors, who are closest to the markets and institutions they supervise, would continue to carry out day-to-day supervision and preserve the majority of their competences’, and that the ESAs would carry out ‘a defined number of tasks that are better performed at EU level’.

  152. E.g., FSA Chairman Turner, Speech at the City of London Corporation’s Annual Reception for the City Office, 6 October 2009, available at: <http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/1006_at.shtml>. Similarly, Turner Review, supra n. 31, at p. 101, noting ‘very strong arguments for keeping the primary responsibility for supervision at Member State level’.

  153. E.g., Coffee and Sale, supra n. 106; H. Jackson, ‘A Pragmatic Approach to the Phased Consolidation of Financial Regulation in the US’ (2009), available at: <http://ssm.com/abstract=1300431>, and E. Ferran, ‘The Break Up of the FSA’ (2010), available at: <http://ssm.com/abstract=1690523>.

  154. M. Thatcher and D. Coen, ‘Reshaping European Regulatory Space: An Evolutionary Analysis’, 31 Western European Politics (2009) p. 806.

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  155. FSA Chief Executive Sants recently highlighted that ‘the [proposed Prudential Regulatory Authority] will not be attempting to pursue a “zero failure” regime. Persuading society that this is an acceptable goal will be a challenge’: Sants, supra n. 31.

  156. These dynamics have been extensively discussed in the US context. E.g., M. Roe, ‘Delaware’s Competition’, 117 Harvard Law Review (2003) p. 588.

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  157. ESMA FAQ, at p. 13. By contrast, and even allowing for a very different range of operational activities, the FSA’s budget for 2010–2011 was £458 million.

  158. ESMA FAQ, at pp. 13 and 15. A March 2011 speech by FSA Director Sheila Nicoll underlines the importance of the four relevant ESMA task forces in designing the delegated measures to be adopted under the proposed 2011 AIFM Directive: Speech on ‘The Alternative Investment Fund Managers Directive — The Road Ahead’, Brussels, 17 March 2011, available at: <http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2011/0317_sn.shtml>.

  159. FSA, The European Supervisory Authorities, available at: <http://www.fsa.gov.uk/pages/About/What/Intemational/european/esas/index.shtml>.

  160. Nicoll, supra n. 55.

  161. FSA, Business Plan 2011/2012, at p. 9, and HM Treasury, supra n. 54, para. 7.9, warning that the new UK authorities should ‘put significant time and effort into ensuring that the UK’s voice is heard at the European level and that decisions taken by the new authorities are appropriate’.

  162. FSA, ibid. Similarly, the FSA has described the ESAs as ‘member-led’ and as complementing, not replacing, national authorities: FSA, The FSA’s International Agenda (2010), at pp. 5–6.

  163. FSA, Working towards Effective and Confident European Supervisory Authorities. The FSA’s Views on Policy Considerations (2010), highlighting the FSA’s preference for non-binding mediation and suggesting acute concern with respect to ESMA’s emergency decision-making powers: at pp. 8 and 11.

  164. Letters from ECON Chairperson Bowles to the President-in-Office of the ECOFIN Council and to Commissioner Barnier, both of 1 February 2011, The Hungarian President-in-Office responded that ‘the Council has put high ambitions in the ESAs it now belongs to both Institutions [the Council and Parliament] to ensure that these ambitions translate into appropriate means each year’: Letter to ECON Chairperson Bowles, 2 February 2011. Documents available via the ECON website: <http://www.europarl.europa.eu/activities/committees>.

  165. Froynovich, supra n. 129.

  166. E.g., D. Langevoort, ‘Re-reading Cady Roberts: The Ideology and Practice of Insider Trading Regulation’, 99 Columbia Law Review (1999) p. 1319.

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  167. Moloney, supra n. 51, ch. 8.

  168. Chairman Maijoor is reported to have stressed that ESMA will have a strong consumer focus: Tait, supra n. 129.

  169. Although a retail market focus has long been associated with continental supervisors, the UK, traditionally associated with a more market-facing style of regulation, has post-crisis focused closely on the retail markets and has raised the tolerance level for consumer market failures: HM Treasury, supra n. 54.

  170. The retail markets have typically been overlooked at international level. A significant change in tone came with the February 2011 Paris G20 Communiqué of Financial Ministers and Central Bank Governors, which called on the OECD, the FSB and other relevant international organisations to develop common principles on consumer protection: available via: <http://www.g20.org/pub_communiques.aspx>, para. 6.

  171. Supra n. 129.

  172. As initially outlined in E. Tafara and R. Peterson, ‘A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework’, 48 Harvard Journal of International Law (2007) p. 31. Similarly, C. Brummer, ‘Post-American Securities Regulation’, 98 Columbia Law Review (2010) p. 327.

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  173. The emerging UK model, while broadly based on a twin peaks model, looks set to confer prudential supervision over some 18,500 firms on the new Financial Conduct Authority: HM Treasury, supra n. 54, at pp. 68–69.

  174. Ibid., paras. 7.11–7.14 and 7.20–7.25. It appears that where a prudential matter is raised by ESMA, the (proposed) Prudential Regulatory Authority should be invited as a non-voting observer and its views taken into account by the (proposed) Financial Conduct Authority. Similarly, FSA Chief Executive Sants has noted that ‘it is vital … that we achieve effective domestic coordination and cooperation between the regulatory authorities to ensure the UK’s views are best represented’: Speech on ‘Creating the FCA’, BBA Conference, 2 March 2011, available at: <http://www.fsa.gov.uk/pages/Library/Communication/Speeces/2011/0302_hs.shtml>.

  175. Inter-authority coordination can demand complex coordination models. The emerging regime for the proposed Financial Conduct Authority and Prudential Regulatory Authority will have a variety of elements, including legal coordination duties, MOUs, governance strategies in terms of board representation, and specific coordination mechanisms for specific rule-making and supervisory situations: HM Treasury, supra n. 54, at pp. 81–97.

  176. The 2009 CESR Annual Report, e.g., detailed the extensive 3L3 workplan: at pp. 72–80. Recent initiatives include a joint 3L3 report on the lessons learned from the financial crisis in the context of the Commission’s Green Paper on Audit (CESR/10-1541).

  177. Including under the proposed 2011 CRA Regulation (Art. 21).

  178. The ESMA FAQ notes its role in fostering supervisory convergence by working closely with the other ESAs: at p. 3.

  179. E.g., E. Chiti, ‘An Important Part of the EU’s Institutional Machinery: Features, Problems and Perspectives of European Agencies’, 46 Common Market Law Review (2009) p. 1395.

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  180. The UK House of Commons report on the ESAs was of the view that ‘it is wrong for an ESA to be given power to override the decision of a national regulator and to direct individual institutions’: supra n. 156, para. 71. The UK’s Financial Law Committee was less trenchant, although concerned as to conformity with the Treaty and with the practical implications with respect to enforcement and whether the ESAs’ powers would undermine the ability of national authorities to discharge their regulatory functions: Financial Markets Law Committee, Issue 152, European Financial Supervision: Legal Risks (2010), at pp. 9–10 and 13–16.

  181. E.g. Case C-376 Germany v. European Parliament and Council [2000] ECR I-8419 and Case C-66/04 UK v. Parliament and Council [2005] ECR 1-10553.

  182. European Commission, European Financial Integration Report (2009) (SEC(2009) 1702).

  183. Case C-217/04 UK v. Council and Parliament (ENISA — European Network and Information Security Agency) [2006] ECR I-3771.

  184. Ibid, para. 44.

  185. E.g., Short-Selling Proposal, supra n. 82, at p. 5, and OTC Derivatives Proposal, supra n. 85, at pp. 5–6.

  186. Subsidiarity concerns have been a recurring feature of the Board’s assessment of crisis-era measures. E.g., the Board’s assessment of the Proposal to Amend the Deposit Guarantee Directive (Ref. Ares(2010)16390).

  187. AMF, Better Regulation: Initial Assessment and 2008/2009 Work Agenda (2008), at p. 16.

  188. CONSOB, Annual Report 2008, at pp. 15–16.

  189. AFM, Report on General Findings Regarding Audit Quality and Quality Control Monitoring (2010).

  190. Case 9/56 Meroni v. High Authority [1957–1958] ECR 133.

  191. E.g., D. Curtin, ‘Holding (Quasi-)Autonomous EU Administrative Actors to Public Account’, 13 European Law Journal (2007) p. 523, and Geradin and Petit, supra n. 118, at pp. 42–43.

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  193. D. Curtin, ‘Delegation to EU Non-Majoritarian Agencies and Emerging Practices of Public Accountability’, in D. Geradin, R. Muñoz and N. Petit, eds., Regulation through Agencies in the EU. A New Paradigm of European Governance? (Cheltenham, Elgar 2005) p. 87, at pp. 93–95.

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  194. The particular difficulties which ESMA raises aside, the chain of delegation to an agency is generally not easy to identify: Curtin, ibid., at p. 90.

  195. Ibid., at p. 94, in the context of the enforcement powers exercised by the (then) proposed Community Fisheries Control Agency and, similarly, Dehousse supra n. 204, at p. 13, suggesting that implementation powers move from Member States to agencies, and Geradin and Petit, supra n. 118, examining the transfer of powers to agencies in terms of the extraction of power from national authorities (at p. 15).

  196. European Commission, Improving EU Supervision of Credit Rating Agencies — Frequently Asked Questions (2009) (MEMO/10/230). The Commission’s Impact Assessment also argued against direct ESMA fining power given Meroni concerns: supra n. 130, at p. 30.

  197. Regulation (EC) No 216/2008, OJ 2008 L79/1, Art. 25.

  198. E.g., the Parliament and/or its ECON Committee: added Art. 9 to the ESMA Regulation and called for direct supervisory powers over systemically significant actors (supra n. 126); added the ESMA power to undertake random sample tests on the validity of ratings, later diluted to a power to oversee back-testing by rating agencies, to the proposed 2011 CRA Regulation (Gauzès Report, supra n. 134); and argued for ESMA (rather than the Commission) to exercise the power to impose fines under the Regulation (I. Wishart, ‘MEPS Want to Give More Power to Securities and Markets Authority’, European Voice, 25 November 2011, available via: <http://www.europeanvoice.com>); and called for additional ESMA information-gathering powers and a hardening of ESMA’s power to offer an ‘opinion’ on a national short-selling decision to the power to make a binding ‘decision’, ECON Legislative Report, November 2010 (Canfin Report) (PE.454.372).

  199. MiFID Review, at pp. 80–81.

  200. E.g., Chiti, supra n. 190, at pp. 1403–1404.

  201. Regulation (EC) No 2100/94, OJ 1994 L 227/1.

  202. Regulation (EC) No 40/94, OJ 1994 L 11/1.

  203. Regulation (EC) No 216/2008, OJ 2008 L 79/1.

  204. Regulation (EC) No 1907/2006, OJ 2006 L 396/1.

  205. Geradin and Petit note the ‘clear trans-European component’: supra n. 118, at p. 39.

  206. Regulation (EC) No 713/2009, OJ 2009 L 211/1.

  207. Black, et al., supra n. 50.

  208. FSA, supra n. 173, at p. 11, calling for a panel of expert lawyers to assess action which appears to test the bounds of ESMA’s powers.

  209. Notably the UK: European Scrutiny Committee, 7th Report, Session 2010–2011, at pp. 70–72, citing the Financial Services Secretary to HM Treasury as noting that ‘the legality of delegating discretionary powers to [ESMA] is of vital importance and has been a priority for the Government throughout the negotiations’.

  210. The Commission’s Impact Assessment Board reports on the proposed 2011 CRA Regulation raised Meroni concerns with respect to the justification for ESMA’s supervisory and enforcement powers: Ref. Ares(2010)205437, 21 April 2010 (second report on the revised Impact Assessment) and Ref. Ares(2010)108790, 2 March 2010 (first report on the initial Impact Assessment).

  211. Supra n. 223, asking why Meroni issues were only considered with respect to sanctioning and not in regard to other supervisory powers, including registration and inspection: at p. 2.

  212. Supra n. 223, p. 2.

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    Niamh Moloney (Professor)

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I am grateful to Professors Damian Chalmers, Eilís Ferran and Takis Tridimas for discussions on many of the issues considered in this article. All errors and omissions remain my responsibility.

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Moloney, N. The European Securities and Markets Authority and Institutional Design for the EU Financial Market — A Tale of Two Competences: Part (2) Rules in Action. Eur Bus Org Law Rev 12, 177–225 (2011). https://doi.org/10.1017/S1566752911200016

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