As a further step on the way to a Capital Markets Union, on 20 September 2017, the European Commission published its long-awaited proposals for reforming the powers, governance and funding framework of the three European Supervisory Authorities.
Background
The Capital Markets Union (CMU) is a flagship initiative of the European Commission which aims to strengthen the EU capital markets by:
- reducing the existing barriers to cross-border investment in the EU;
- increasing funding options available to companies;
- and deepening the Single Market in financial services.
The CMU, together with the Banking Union, forms part of the Financial Union which is to be completed by 2019.
It is to be achieved by a series of steps and objectives rather than one single measure and in September 2015 the Commission published its action plan for the CMU detailing the initiatives that it intends to launch to bring about the CMU.
One of these initiatives is the Commission’s proposed reform of the supervisory structure of the capital markets which it has been assessing throughout 2017. In its report ‘Reinforcing integrated supervision to strengthen Capital Markets Union and the financial integration in a changing environment‘ (the Report) which was published on 20 September 2017, the Commission sets out its proposals with regards to the regulatory framework.
Reasons for a more integrated EU supervisory framework
In response to the financial crisis, the European System of Financial Supervision (ESFS), which was set up in November 2010, has been substantially reinforced. The ESFS includes both micro-prudential supervision of banking, capital markets, insurance and pensions, coordinated by three European Supervisory Authorities (ESA), and monitoring of macro-economic risks, coordinated by the European System Risk Board (ESRB).
The Commission explains in the Report that the system requires further reinforcement and in relation to the CMU specifically, provides two main arguments for the need for a more integrated EU supervisory framework:
- First, it is easier to conduct financial activities across borders if activities are regulated and supervised consistently across all Member States. For financial products providers, this provides a level playing field across the Single Market and users of the financial products may also equally benefit from a wider choice of financial products.
- Secondly, whilst there are clear benefits to enhanced financial integration it also ‘expands the channels of contagion’ between Member States in the event of adverse shocks, such as the financial crisis. An enhanced, unified supervision regime would, in theory, help to reduce this risk.
Whilst EU capital markets are currently, for the most part, supervised at a national level, the need for a Single European Capital Markets Supervisor has previously been identified. The ‘Reflection Paper on the Deepening of the Economic and Monetary Union’ furthered this by stating that the first steps towards this objective should be taken in the context of the review of the ESFS.
Given that the CMU will foster further financial integration, the Report therefore emphasises the need for:
- the capacity of the ESAs to be strengthened to ensure consistent enforcement of the single rulebook in Member States;
- more direct supervision from the European Securities Markets Authority (ESMA); and
- the powers of the ESRB to be strengthened in relation to macro-prudential supervision.
These initiatives should be seen as the first tangible steps towards a Single European Capital Markets Supervisor.
On this basis, the Commission proposes legislative measures to strengthen the powers of the ESAs and the ESRB.
One of the key proposals of the Commission is to extend the direct supervision by ESMA to selected capital market sectors, including, in particular the approval of:
- certain categories of prospectuses by EU issuers; and
- all prospectuses drawn up under EU rules by third country issuers,
both of which currently fall within the supervision of national competent authorities. The following categories of prospectuses by EU issuers are proposed to require ESMA approval:
- Prospectuses for wholesale non-equity securities offered only to qualified investors;
- prospectuses which relate to specific types of complex securities;
- prospectuses relating to asset-backed securities. and
- prospectuses drawn up by specialist issuers such as property companies, mineral companies, scientific research-based companies or shipping companies.
The Commission identified these types of prospectuses as they “involve a cross-border dimension within the Union, a level of technical complexity and potential risks of regulatory arbitrage which are such that their centralised supervision by ESMA would achieve more effective and efficient results than their supervision at national level.”
In relation to those prospectuses, ESMA will also control related advertisements.
This proposal is intended to “enhance the quality, consistency and efficiency of supervision in the Union, create a level playing field for issuers and lead to a reduction of the timeline for approvals.” It will also eliminate the need to choose a ‘home Member State’ and prevent forum-shopping.
The Commission has invited the European Parliament and the Council to discuss and agree the above proposals as a matter of priority in order to ensure that they are passed before the end of the current legislative term in 2019.
For further information please contact Kate Fleming at kfleming@wedlakebell.com.