On 22 September, 2010 the European Parliament voted in a new supervisory framework for financial regulation in Europe that will come into force on 1 January 2011.  The package of reforms was endorsed by all EU Heads of State and government and is consistent with the EU’s G20 commitments.

The framework consists of a new European Systemic Risk Board (“ESRB”) and three new European Supervisory Authorities (“ESAs”) for the financial services sector.  The three ESAs are a European Banking Authority (“EBA”) based in London, which replaces the existing committee of European Banking Supervisors (“CEBS”), a European Insurance and Occupational Pensions Authority (“EIOPA”) in Frankfurt, which replaces the existing committee of European Insurance and Occupational Pension Committee (“CEIOPS”) and, of particular relevance to the funds industry, a European Securities and Markets Authority (“ESMA”) in Paris, which replaces the existing Committee of European Securities Regulators (“CESR”).  The framework is designed to “give Europe the control tower and the radar screens it needs to detect the risk” which can accumulate across the financial system as witnessed in the run up to and at the height of the financial crisis.  The three ESA’s will work in a network and in tandem with the existing national supervisory authorities to safeguard financial soundness at the level of individual financial firms and protect consumers of financial services.  The proposed system is a “hub and spoke” network of EU and national supervisors.  The new European network will combine nationally based supervision of firms with strong co-ordination at European level so as to foster harmonised rules as well as coherent supervisory practice and enforcement.  The ESAs will have the power to:

• draw up specific rules for national authorities and financial institutions;
• develop technical standards, guidelines and recommendations towards a “single rule book”;
• monitor how rules are being enforced by national supervisory authorities, take actions in emergencies, including the banning of certain products;
• mediate and settle disputes between national supervisors;
• ensure the consistent application of EU laws; and
• where necessary, have the possibility of settling disagreement between national authorities, in particular in areas that require co-operation, co-ordination or joint decision making by supervisory authorities from more than one member state.

Mechanisms such as joint committees will be introduced to ensure agreement and co-ordination between national supervisors of the same cross-border institution or in colleges of supervisors.

ESMA will have direct supervisory powers over credit rating agencies registered in the EU and have the power to request information, to launch investigations and to perform on-site inspections. 

The ESA’s will be able address decisions directly to national authorities in three areas namely:

• in cases where they are arbitrating between national authorities both involved in the supervision of a cross-border group and where they need to agree or co-ordinate their position;
• in cases were a national authority is incorrectly applying EU Regulations (EU Regulations are directly application and are not transposed into national law); and
• emergency situations is as declared by the European Council.

An ESA will be able to take decisions directly application to financial institutions as a last resort in the above cases where the ESA has addressed a decision to national supervisor but the national supervisor has not complied with it.  This can be done only in cases where there is directly applicable EU legislation.