The European Association of Co-operative Banks (EACB) welcomes the opportunity to participate in the EC Public consultation on the operations of the European Supervisory Authorities (ESAs) as we consider this exercise as an appropriate step in thinking and deciding on the best way forward. We consider that the ESAs' role in developing the Single Rulebook and promoting supervisory convergence is crucial, and will continue to be so. In this context a reflection is needed on the overall supervisory framework, including the role of the ECB and SRB and the way the authorities interact with each other.
The ESFS and in particular the three ESAs have undoubtedly contributed to a more coherent supervision of the EU financial system and better coordination between national supervisory authorities. We appreciate and thank the ESAs for their hard work and efforts both individually in their respective field of operation but also when working together as the Joint Committee.
The EACB has closely followed the ESAs different work streams and has pursued to contribute to the fulfilment of their task sharing ideas and concerns. It is true that the ESAs work is highly challenging and complex and the ESAs have delivered significant achievements. Having said that, we welcome the EC’s wish to perform a stock taking exercise of the operations of the ESAs with an aim to reframe them and adjust them where necessary, as there are some areas that need improvement and clarification. For example, we believe that in many cases the ESAs tend to go beyond their mandate, that their complex task is translated in delays in the drafting of level 2 or level 3 measures while some times the drafting process of certain convergence tools is not transparent. In a few instances already the EACB has taken the opportunity to set forth examples of such cases.
KEY MESSAGES - ESAs REVIEW
• ESAs should abide to Level 1 text and not go beyond their mandate: All of ESAs proposals but also supervisory convergence tools must be in line with the Level 1 text and should not add requirements on top of the Level 1 text. That is of utmost importance.
ESAs have the task of "technically" determining the rules set by the Commission at the level 1 in order to contribute to a uniform supervisory culture. However, we have observed a tendency of the ESAs to overstep the Level 1 mandate given to them in some cases or not pay enough attention on the intention/decision of the Level 1 legislator when drafting Level 2 - i.e. by way of providing technical advice to the EC or when drafting Technical Standads- and/or Level 3 measures e.g. Guidelines and Recommendations, or Q&As. Any overstepping of the powers conferred at Level 1 leads to the Level 2 measure not being properly mandated.
For this reason, it needs to be ensured that delegated acts, implementing acts, technical standards and guidelines strictly comply with the provisions of the Level 1 text on which they are based. It is crucial to have legal certainty and it is of utmost importance that the hierarchy between level 1, level 2 and level 3 is respected by all EU authorities involved.
Supervisory authorities should not assume the role of the three EU institutions that are first and foremost in charge of initiating and negotiating legislative initiatives. In other words, supervisory authorities should limit themselves to develop the technical details of the regulatory framework based on Level 1 text. It would indeed be an undesirable outcome if the three principal EU institutions were limited to merely defining the broad regulatory framework whilst level 2 authorities designed strategic decisions or policy choices.
In this context it is critical to assess ESAs mandate, and how it is interpreted by the ESAs themselves and to clarify their competences and tools to achieve this, bearing in mind the original objectives of their establishment. We consider effective governance results from clarity of purpose and clarity in the nature and purpose of the mandating / legislative process involving these three EU institutions. Consistency between the work of the legislator, the regulator and the supervisor is key to good governance. We recognise that there are often fine lines involved; however when the ESAs initiate any activity without sufficient clarity from the legislator as to the limits of their mandate this may become problematic.
Level 3 instruments should be used less frequently by the ESAs and only within clearly defined boundaries. It should be avoided that Guidelines are used as a tool for example for implementing Basel’s recommendations without involving a legislative process, in a pre-emptive manner (e.g. EBA guidelines on disclosure requirements.
• Adequate, realistic and legally effective implementation periods and timeframes should ensure in future that the legislative acts of the different stages are coordinated with each other and that there is still sufficient time to implement the new regulations in time. Two recent examples show that this is not always the case. Both MiFID II and the PRIIPs Regulation are supplemented by comprehensive Level II measures, without which implementation cannot take place. Both legislative projects failed to adhere to the timetable envisaged, which led to considerable legal uncertainty and significant additional costs for market participants and in particular banks and investment firms. This is further illustrated by a look at the technical standards issued by the EBA under CRD IV/CRR: In the case of 26 legal acts based on an RTS published in the Official Journal of the European Union the EBA and the Commission failed to adhere to the time limits five times and seventeen times respectively. In the case of 21 published legal acts based on an ITS the EBA and the Commission failed to adhere to the time limits twice and twenty-one times respectively.
In order to avoid this in future and to ensure that Level 2 can be adopted appropriately and without time pressure, the implementation deadlines for the market participants should be based on the enactment of Level 2 (e.g. 12 months after publication in the Official Journal of the EU). This would permit also the two legislative levels to be properly synchronised with one other and avoid situations where Level 1 legislation has to be postponed at short notice as a result of delays at Level 2 (as has happened with MiFID II and the PRIIPs Regulation). The problem is that Level 1 cannot be applied in the absence of the more detailed specification provided by Level 2 measures.
Moreover, communication between banks and the Commission or supervisors is essential, which is why we recommend improving notification of the state of play in the legislative process. It would be helpful if the Commission or an ESA announced at an early stage whether it would be able to meet a deadline or, as the case may be, what the new timetable was.
In general, the process in the drafting of level 2 measures and in particular the timeframes need to be clarified (e.g. which is the timeframe for the EC to approve a revised proposal of the ESAs, how many times can this process of a revised proposal, is there a maximum number of attempts etc.). Indeed, having specific timeframes and observing such timeframes is very crucial for implementation by market participants even more so as many requirements have a direct impact on client relationship, service offering by financial institutions but also entail business decisions.
In addition to that we do consider that an extension of the consultation periods would be beneficial both for the ESAs and market participants in order to allow them to elaborate on possible issues, solutions and even allow data gathering. In the same vein, the consultations should be used by ESAs to gather feedback and genuinely assess comments/ suggestions made by stakeholders.
• “Non action” letters or similar tools need to be introduced:
We would recommend that the European Supervisory Authorities are granted the power to issue so called “no-action letters” or a similar instrument - which are available to most other financial markets regulators- in order to improve the speed with which it can respond to pressing market issues/ implementation situations and ensure supervisory convergence. Experience has shown that this is necessary under specific circumstances (e.g. the case of quickly evaporating liquidity) in order to avoid market disruptions. The kick- in of the EMIR margin requirements on 1st March 2017 clearly shows this necessity.
• Need to ensure consistency between different pieces of legislation:
In the context of the efforts to achieve convergence, due care should be taken to avoid inconsistent rules concerning the same or similar requirements (for example cost transparency according to MiFID II and PRIIPs). Such inconsistency is causing significant problems in implementation.
• Consumer protection should essentially remain a national prerogative, taking into account the structure and specificities of the local market- ESMA should not become a consumer protection supervisor
Critical efforts are being made to expand ESA's general mandate in the area of consumer and investor protection but we do not consider this necessary or useful. This is the primary task of European and national consumer protection authorities. Consumer protection often can be better dealt with on national level and should be in line with national law, jurisprudence developed by national courts and consumer complaints tribunals. For this reason, the subsidiarity principle must also be observed. Indeed, consumer protection is so deeply rooted in the national legal system, especially in civil law. Wider therefore constitutional problems could arise. Accordingly, the role of the ESAs should be a focus on coordination and cooperation.
• In our view, the current system of securities supervision which is based not only on ESMA but also on the national competent authorities (NCAs) should generally remain in place because it is suited best to deal with the different market structures of the Member States.
• At the same time, it is important to reject the idea of transferring to ESMA responsibilities of the national supervisory authorities, which could lead to direct supervision of small and medium-sized institutes. The national markets are very different for good reasons. Effective (pan-European) supervision is therefore not possible. Moreover, any such transfer of direct supervisory powers to ESMA would be contrary to the principle of subsidiarity. A single European banking supervisory system makes sense only for system-relevant institutions, which can pose a threat to stability across Europe and to taxpayers in other European countries. In addition, there is no need to include under the supervision small and medium-sized institutions, which are currently under the supervision of the national supervisory authorities, for a joint supervision of the securities business. The national supervisory authorities know the respective national market conditions as well as the business models based thereon, but also the decisive interplay with civil law. In this respect, NCAs have the necessary supervisory competences which ESMA does not always have.
• The EACB does not support funding of the ESAs by the banking sector: While the financial crisis may have created political pressure to make financial entities contribute more heavily to their regulation and supervision, there are strong reasons in favour of an at best exclusive public contribution to ESA funding:
- The ESA’s responsibilities are overwhelmingly of regulatory nature. Without the ESAs, their respective tasks would largely have to be carried out by the European Commission itself and under the European Parliament’s and the European Council’s scrutiny. In working on regulatory technical standards or implementing technical standards the ESAs are, in fact, performing tasks that should normally be performed by the European Commission pursuant to Articles 290 and 291 of the TFEU;
- With regard to the work (to date) of the ESAs in converging and aligning microprudential oversight at EU level, the EACB believes that there is a necessary public good involved in oversight by public authorities and believes it is important that the European Union budget continues to support the agencies that fall under the responsibility of the EU institutions;
- Being partly financed by the European Union budget, it is an additional guarantee that national interests do not prevail over the commitment to European interests and furthering the single market;
- It is a known fact that banks – apart from the significant implementation costs- have been facing a substantial increase of their funding contributions to regulators, and therefore should not be burdened with additional layers of substantial financial contributions. This is also because in practice we do not expect that a new fee to be paid to the ESA’s will be compensated by lower fees to be paid to the NCA’s. This will mean another increase of supervisory fees to be paid.
- If the ESAs would be financed directly by market participants this would have unacceptable negative impacts on the budgetary control. The currently exercised control by the European Commission, the European Parliament and the European Council over the ESAs’ budgets has proven to be beneficial to maintaining budgetary discipline, while a transition to a fee-based financing would almost certainly induce significant expansions of the ESAs budgets. This is because the industry cannot defend itself against inappropriate budgetary expansions in the way that the European Commission or Member States are able to – the industry would likely be accused of not cooperating with financial supervision.
- The adaption of a funding model based on fees by market participants would constitute a discrimination against actors in other sectors as it would be in stark contrast to the general practice in regulation and supervision. Most EU agencies are fully or mostly funded by the EU budget, for instance the European Food Safety Authority (EFSA), the European Railway Agency (ERA) and the European Global Navigation Satellite Systems Agency (GNSS).
• Streamlining Reporting to Supervisory Authorities:
Another issue that could be addressed is the need to streamline reporting to supervisors so that the SRB can directly find the necessary info at the level of the competent ESAs rather than at the level of individual market participants. Indeed, in the current daily practice the interaction and the (insufficient cooperation between the ESAs, the SRB and the national competent authorities is a massive problem for the institutions. This is for example particularly evident with regarding to the reporting requirements for institutions where an exchange of information between the supervisory authorities does not or does not exist to a sufficient degree. In this context we strongly oppose the consideration of the EC to reflect on whether the ESAs should be empowered to obtain information directly from market participants in specific cases and without first having to exhaust every other means of getting information (see section 6 on page 12 - access to data).
• The current endorsement process of the international accounting standards into EU legislation works effectively and efficiently. It is important to preserve the efficiency of the endorsement process to ensure all standards are endorsed before their mandatory effective date.
• We also support EFRAG’s role in giving endorsement advice to the European Commission. The endorsement process has proved its worth and we see no reason to make any adjustments. There is no need for ESMA to have an advisory role in the endorsement process as well. Its current role as an observer in EFRAG is appropriate given the importance to keep the standard setting process and enforcement clearly separated to avoid conflict of interest.In our view, standard-setting and enforcement are two different tasks (see above) and should be clearly separated. Setting and interpreting IFRS is the job of the IASB and the IFRS Interpretations Committee, whilst enforcement aims at ensuring that the standards are applied uniformly. Combining the two would lead to a conflict of interest, in our view.
• The rules-based nature of IFRS should be maintained: While we support greater harmonisation of accounting practices, the rules-based nature of IFRS should be maintained; any additional jurisdictional guidance would impair the global and principles-based character of IFRS. Any additional guidance, in the form of guidelines or interpretations provided on a local or regional level, could can impair comparability and transparency. Any issues with standards, from ESMA or national enforcers, should be reported to the IASB and IFRS IC for consideration at a global level.
• Need to take into account the interaction between accounting and prudential reporting. Although the objectives of financial reporting and prudential regulation are different, there is significant interaction between the two, as the accounting figures usually form the basis for calculating regulatory capital and regulatory risk positions. As a key criterion for an IFRS standard to be endorsed in the EU is to be conducive to the European public good, the effect on capital and prudential ratios as a result of the adoption of a new IFRS should also be considered. At the current endorsement process, EFRAG is not considering the effect of IFRS on capital or prudential ratios of regulated entities given that it is not in the competence of EFRAG to respond to the capital consequences of the new accounting standards. It would be advisable that the impact of new accounting changes on prudential capital should be investigated to ensure that the envisaged changes to the prudential framework or transitional arrangements take effect simultaneously with the effective date of the revised accounting standard.