EC outlines stronger financial supervision
New systemic risk council & European-wide supervision
The European Commission is adopting a Communication on Financial Supervision in Europe that proposes a set of reforms, including the creation of a new European Systemic Risk Council (ESRC) and European System of Financial Supervisors (ESFS), which will be made up of new European Supervisory Authorities. Legislation to embody these proposals will follow in the Autumn. The EC has invited interested parties to submit their reactions before 15 July. Alterations to the current regulatory architecture was inevitable after the de Larosière report, Turner Review in the UK, and the G20 meeting in London during April, which all promised change after the meltdown last year. The EC is also pushing ahead with measures to register credit ratings agencies and the draft Alternative Investment Fund Managers (AFIM) Directive (see subhead)
Commenting on the Communication move and associated establishment of the ESRC and ESFS, Commission President José Manuel Barroso, said: "Better supervision of cross-border financial markets is crucial for ethical and economic reasons. That is why I asked Jacques de Larosière and his group to produce their report. The Commission is making proposals today [27 May] to help restore confidence, guard against future crises and protect growth and jobs. The new system will help the EU and its Member States to tackle both problems with cross-border firms and the build up of overall systemic risk. I am very pleased with the general support Member States gave the de Larosière report at the Spring European Council. I now urge EU leaders at the June European Council to endorse the concrete, timetabled steps we are setting out [in the Communication]. I would like the new architecture up and running during 2010."
Internal Market and Services Commissioner Charlie McCreevy said "Financial supervision in Europe has not kept track with market integration. The crisis has shown that the current system is not sufficiently responsive and not appropriate for a single financial services market. This new system will combine the expertise of all those responsible for safeguarding financial stability, with strong European bodies to coordinate their work. With this initiative, the Commission is responding to the weaknesses identified during the crisis as well as to the G20 call to take action to build a stronger, more globally consistent, regulatory and supervisory system for financial services."
Economic and Monetary Affairs Commissioner Joaquín Almunia said: "The financial sector was one of the main drivers of growth since the creation of the single market in the early 90s, but it also nearly brought the economy to a halt at the turn of the year. The reforms proposed today would create a new European body, the European Systemic Risk Council, charged with assessing potential threats to financial stability that might arise from macro-economic developments and from developments within the financial system as a whole. By providing analysis, issuing early warnings of system-wide risks and, where necessary, recommendations to deal with these risks, the new body would for the first time equip the EU with a pan-European macro-prudential supervision system".
The financial supervision package proposed in the Communication involves two key elements:
• a European Systemic Risk Council which should monitor and assess risks to the stability of the financial system as a whole. The ESRC will provide early warning of systemic risks that may be building up and, where necessary, recommendations for action to deal with these risks. The creation of the ESRC would address one of the fundamental weaknesses highlighted by the credit crunch crisis, which is the exposure of the financial system to interconnected, complex, sectoral and cross-sectoral systemic risks.
• a European System of Financial Supervisors for the supervision of individual financial institutions consisting of a robust network of national financial supervisors working in tandem with new European Supervisory Authorities, created by the transformation of existing Committees for the banking securities and insurance and occupational pensions sectors. The ESFS is to be built on shared and mutually-reinforcing responsibilities, combining nationally-based supervision of firms with specific tasks at the European level. It aims to foster harmonised rules and coherent supervisory practice and enforcement. This network should be based on the principles of partnership, flexibility and subsidiarity and should aim to enhance trust between national supervisors by ensuring, inter alia, that host supervisors have an appropriate say in setting financial stability and investor protection policies so that cross-border risks can be addressed more effectively.
Other regulations
The EC is also introducing measures to register credit ratings agencies and put in place a common issuance regime; moves that have just been welcomed and approved by the European Parliament and Council. It says this will ensure there are no conflicts of interest (advisory services will be banned); the quality of rating methodologies is maintained (financial instruments cannot be rated if there isn’t sufficient quality data to base rating upon and the models and assumptions used must be published); while transparency will be enhanced (via reviews, an annual transparency report and the imposition of two qualified independent directors whose remuneration isn’t dependent upon the performance of the company and will serve for only one term of five years).
Allied to the draft Alternative Investment Fund Managers (AFIM) Directive from the EC, which has also recently been unveiled and is designed to regulate shadow banking and hedge funds, these EC moves will profoundly affect the regulatory, and consequently procedural and technology environment, for financial institutions for years to come. The AFIM draft is designed to register and standardise the regulation of shadow banking and hedge fund managers, which have traditionally been loosely covered by disparate regulations, if at all, and whose ‘Anglo-Saxon’ methods have been blamed by many French and German commentators for exacerbating the crunch. The draft Directive is presently out for consultation, awaiting approval from the European Parliament and Council, but the EC envisages it may come into force in 2011, with provisions for third-party countries applicable in 2014. It will, of course, face opposition from hedge funds who don’t want their flexibility curtailed. Their trade body, the Alternative Investment Management Association has already announced plans to mobilise the industry against it. “The directive presumes a structure for the industry which bears little relationship to reality,” said AIMA CEO, Andrew Baker. “Implementation in its current form could prove to be unworkable …we will seek to exclude those provisions that are most damaging and prevent those who wish to make the draft even more punitive.”
• Further bad news for hedge fund managers emanated from the Financial Services Authority recently when the UK regulator extended its disclosure regime on short-selling, a favourite technique of hedgies, which had been due to expire on 30 June. According to Sally Dewar, managing director of wholesale markets at the FSA: “Keeping the disclosure requirements will continue to enhance transparency and limit the potential for market abuse, while details of a long-term regime for short-selling are being drawn up. We remain committed to achieving an international consensus that is as wide as possible.” In order words, it’s likely to stay for some time yet. As is the case at the moment, disclosures will need to be made if a net short position exceeds 0.25% of a company’s issued share capital or increases by 0.1% bands above that (for example, net short positions reaches 0.35%, 0.45% and so on).
more breaking
news
|
