THE 2017 REVIEW OF THE EUROPEAN

SUPERVISORY AUTHORITIES

Josina Kamerling,Head of Regulatory Outreach for EMEA,CFA Institute

Lisbon, 1 June, 2017

TABLE OF CONTENTS

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01 Mission & Facts

02 Capital Markets Union

03 Challenges for the investment

management profession

04 Supervisory challenges re FinTech

05 Future of EU Supervision

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MISSION & FACTS

CFA INSTITUTE MISSION

To lead the investment profession globally by promoting the highest standards of

ethics, education, and professional excellence for the ultimate benefit of society.

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Educated, ethical

investment professionals

Financial markets that reflect CFA

Institute beliefs

Global financial markets that

serve the public interest

CFA INSTITUTE KEY FACTS

• Non-for-Profit status

• 141,541 Members

• 135,692 CFA Charterholders

• 147 Societies across the world

• European societies: Austria, Belgium, Bulgaria, Cyprus, Czech Republic,

Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Luxembourg,

Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovenia Spain,

Sweden, Switzerland, Ukraine, United Kingdom.

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EU CAPITAL MARKETS UNION (CMU)

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MOST UNDERESTIMATED RISK TO GLOBAL

MARKETS FROM THE CFA INSTITUTE GLOBAL

MARKET SENTIMENT SURVEY 2015

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WHY A CAPITAL MARKETS UNION?

• Capital markets have expanded in the EU over recent decades:

1. €8.4 trillion total stock capitalization (around 65% of GDP) by end 2013 versus €1.3 trillion in 1992 (22% of GDP).

2. Total value of outstanding debt securities exceeded €22.3 trillion (171% of GDP) in 2013, compared to €4.7 trillion (74% of GDP) in 1992.

Stock market capitalization (2013)*

*as % of GDP

Source: http://ec.europa.eu/finance/capital-markets-union/index_en.htm

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• Nonetheless, European

market remain

underdeveloped in

comparison with other

jurisdictions

HOUSEHOLDS FINANCIAL ASSETS IN THE EU & US

(%TOTAL ASSETS; AVERAGE 2007 – 14)

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Source: Fleishman Hilliard

EU Regulatory Landscape

REGULATORY AVALANCHE

CAPITAL MARKETS UNION’S THREE

PILLARS

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Capital Markets Union

1. Developing more efficient and liquid markets for issuance of

financial instruments

3. Promoting open, integrated capital markets infrastructure

2. Harnessing long-term savings to promote investments

BARRIERS TO THE DEVELOPMENT OF EU CAPITAL

MARKETS (CFA CMU SURVEY2015)

65%63%

49% 48%47%

27%

0%

10%

20%

30%

40%

50%

60%

70%

Differences intaxation treatmentacross jurisdictions

Differences in legalframeworks

surrounding theownership and

transfer of securities

Protectionist policiesinhibiting cross-

border mergers andacquisitions

Administrativeburdens associatedwith the issuance ofsecurities (includingprospectus and filing

requirements)

Insufficientsecondary market

liquidity in corporatedebt markets

Lack of investordemand for SMEs

% Barrier (Top Two Box 4 + 5)

Q: To what extent are each of the following a barrier to the development of EU capital markets?

Scale: Please rate each on a 1 to 5 scale, where 1 means it is not a barrier at all and 5 means it is a huge barrier.

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CHALLENGES FOR THE INVESTMENT

MANAGEMENT PROFESSION

TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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TRUST IN THE FINANCIAL INDUSTRY (EDELMAN

2016)

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SUPERVISORY CHALLENGES RE

FINTECH

CFA INSTITUTE FINTECH SURVEY (2016)

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CFA INSTITUTE FINTECH SURVEY (2016)

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CFA INSTITUTE FINTECH SURVEY (2016)

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CFA INSTITUTE FINTECH SURVEY (2016)

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FUTURE OF EU SUPERVISION

CAUSES OF THE FINANCIAL CRISIS (DE

LAROSIERE HIGH-LEVEL GROUP REPORT 2009)

• Failures in risk assessments by both financial firms and those who regulated/supervised them.

• Dramatic failures in the ratings of structured products & major conflicts of interests by the

CRAs.

• Regulators and supervisors focused on the micro-prudential supervision of individual

institutions rather than on macro-systemic risks (Lack of information exchange & collective

decision making).

• Weak shareholders and management of firms along with remuneration schemes providing the

wrong incentives.

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SUPERVISORY & SANCTIONING POWERS (DE

LAROSIERE HIGH-LEVEL GROUP REPORT 2009)

• Member States Competent Authorities must have sufficient supervisory powers, including

sanctions to ensure compliance with the applicable rules.

• Member States Competent Authorities should also be equipped with strong, equivalent and

deterrent sanction regimes to counter all types of financial crime.

• Member States sanctioning regimes are weak and heterogenous*. This can lead to the

inducement of regulatory arbitrate in a single markets.

• Where needed, more resources should be deployed for the detection of financial crimes.

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LESSON FROM THE CRISIS: WHAT WENT WRONG? (DE

LAROSIERE HIGH-LEVEL GROUP REPORT 2009)

• In terms of macro-prudential risks, there was no mechanism to ensure that risk assessmentwas translated into action.

• Failures in the supervision, by national regulators, of particular institutions (i.e. Northern Rock).

• Failure to challenges supervisory practices on a cross border basis.

• Lack of frankness and cooperation between national supervisors (Lack of information flowamong supervisors).

• Lack of consistent supervisory powers across Member States (Lack of reaction).

• Lack of resources in the level 3 committees.

• No means for supervisors to take common decision due to lack of legal powers.

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MICRO-SUPERVISION: MOVING TOWARD A ESFS (DE

LAROSIERE HIGH-LEVEL GROUP REPORT 2009)

• Existing national supervisors would continue to carry out day-to-day supervision.

• The new European Authorities would be set up, replacing the previous 3 committees, with the

role to coordinate the application of supervisory standards and guarantee strong cooperation

between the national supervisors.

• Colleges of supervisors would be set up for all major cross border institutions.

• The ESFS will need to be independent of the political authorities, but be accountable to them.

• It should rely on a common set of core harmonized rules and have access to high – quality

information.

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SUPERVISORY REPAIR (DE LAROSIERE HIGH-

LEVEL GROUP REPORT 2009)

• A decentralized European System of Financial Supervisors should be set up.

• National Supervisory Authorities should be strengthened with a view to upgrading the quality of

supervision in the EU.

• EU should develop a more harmonized set of financial regulation, supervisory powers and

sanctioning regimes.

• EU should establish an integrated European System of Financial Supervision.

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EUROPEAN PARLIAMENT’S PRIORITIES IN

FINANCIAL SERVICES (ECON-MAY 2017)

• Capital Markets Union:

o Support for European Commission proposal on insolvency.

o Acknowledges ongoing European Commission High-Level Expert Group (HLEQ) work onsustainable finance as a priority.

o Call for a broader approach to SME financing including peer to peer lending and privateplacements.

• Supervisory Convergence:

o Proposal to streamline EU approach to third-country regimes across the regulatoryframework.

o Proposal on strengthening the ESAs, with a particular focus on ESMA for the supervision ofthe CMU.

o Call for the European Commission to ‘assess and where necessary to adjust’ the EUregulatory framework in light of Brexit (Including EMIR, AIFMD & MiFID II as a minimum).

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COMMENTS BY JACQUES DE LAROSIÈRE —THE ‘FATHER

OF THE ESA’S AT AN EP HEARING (MAY 2017)

• Twin-peaks model is not a silver bullet. Banking & Insurance particularities require distinct

supervision.

• EU needs to beef up supervisory capacity in light of Brexit and CMU ambitions.

• ESAs Boards’ governance needs to be reformed. It needs to be independent from national

agendas

• Sanctioning powers for ESMA are important to ensuring consistent implementation.

• Brexit: Observer status for FCA in ESMA – and vice versa?

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ESMA RESPONSE TO THE COMMISSION

CONSULTATION ON CAPITAL MARKET UNION MID-

TERM REVIEW 2017

• One of ESMA’s core objectives is to bring more convergent approaches to supervision

exercised by NCAs.

• To ensure that ESMA’s powers can be better used to improve outcomes in practice, it would be

helpful to clarify and adapt certain aspects of the existing ESMA Regulation.

• Firstly, it would be useful to clarify NCAs’ obligations to respond to requests for information

made by ESMA pursuant to Article 35 of the ESMA Regulation*.

• ESMA may use its powers under Article 17 of the ESMA Regulation to determine whether an

NCA has breached Union law**.

ESMA RESPONSE TO THE COMMISSION

CONSULTATION ON CAPITAL MARKET UNION MID-

TERM REVIEW 2017

• The ESAs and NCAs could benefit from having the possibility to suspend temporarily theapplication of a particular rule if its application could lead to unintended consequences orrequires guidance or technical specifications that are not yet available.

• To ensure investor protection in the context of cross-border provision of services, ESMA isfacilitating supervisory cooperation of authorities in their home-host relationship.

• ESMA continues fostering exchanges of supervisory experiences amongst NCAs to develop acommon understanding around key issues concerning the supervision of speculative products

• In terms of asset management, ESMA is building common approaches for delegation functionsunder the UCITS Directive and AIFMD and, in the context of investment services, work on theapplication of outsourcing requirements under MiFID II will be undertaken.

• ESMA is also about to start work to increase knowledge-sharing in relation to enforcementmodels and approaches.

ESAS AREAS FOR IMPROVEMENT IDENTIFIED BY

THE EUROPEAN COMMISSION

• ESAs work in promoting a common supervisory culture and fostering supervisory

convergence.

• Tasks and powers relating to consumer and investor protection provided for in the ESA

Regulations & the role played by the ESAs and their Joint Committee.

• Tasks and powers of the ESAs in order to facilitate their actions as regards breach of Union

law by individual entities.

• ESAs powers to access information & to monitor regulatory, supervisory and market

developments in third countries.

• Improvements to the current organization and operation of the various bodies to enhance

enforcement and supervisory convergence in the financial reporting area.

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ESAS AREAS FOR IMPROVEMENT IDENTIFIED BY

THE EUROPEAN COMMISSION

• To give EIOPA powers to approve and monitor internal models of cross-border groups.Requirement to take the EBA’s concerns into account.

• Extension of ESMA’s direct supervisory powers to be considered in order to reap the fullbenefits of a CMU.

• Current governance set-up in terms of composition of the Board of Supervisors and theManagement Board, and the role of the Chairperson to allow the ESAs to effectively fulfil theirmandates.

• Introduction of permanent members to the ESAs’ Boards further improve the work of theBoards

• Maximizing synergies between the EBA and EIOPA while possibly consolidating certainconsumer protection powers within ESMA

• Do the current ESAs funding arrangement needs to be fully/partly funded by the industry?

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CFA INSTITUTE RESPONSE TO THE EU

CONSULTATION ON THE OPERATIONS OF THE

ESASSupervisory Convergence:

• ESMA has functioned well in its regulatory work to achieve a common rule book through thedevelopment of technical standards and other implementing measures.

• More emphasis could be given to reporting of best practices by the ESAs, includingbenchmarking of national competent authorities against best practices.

• The Joint Committee of the European Supervisory Authorities plays an important role indelivering a joined-up approach to horizontal investor protection issues.

• Support to establish ESMA as the single supervisory authority for capital markets in the EU.

• It would be appropriate for the ESAs to conduct periodic monitoring of third countrydevelopments and consider whether there have been any material changes to third countrycircumstances that would warrant a reappraisal of the equivalence decision.

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CFA INSTITUTE RESPONSE TO THE PUBLIC

CONSULTATION ON THE OPERATIONS OF THE

ESASDirect Supervisory Powers:

• Consideration could be given to extending ESMA’s direct supervision powers in the area of cross-border investment funds.

• Improvements could be made to improve the efficiency and accountability of decision-making amongthe ESAs.

• Current model of having three separate ESAs for banking, insurance and securities markets has beeneffective and efficient.

Funding:

• Not in favor of changing the funding model of the ESAs to one which is fully funded by industry.

• Higher levels of resources for the ESAs to better equip them to deliver on their mandates, includingwhere they make take on enhanced powers and accountabilities. This implies higher contributionsfrom the EU budget may be needed.

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