Chairman of the European Foundation, Bill Cash MP, produced a comprehensive analysis on EU financial regulation immediately after the European Summit on 19th June. In particular, he draws attention to paragraphs 18 to 22. What this clearly demonstrates that, far from the victory claimed by Alistair Darling, the overarching legal jurisdiction of the Court of Justice, which has been clearly entrenched by the political decision of the European Council, which is binding upon the Member States for this reason, will be carried out through the use of Article 95 of the EC Treaty and therefore will be driven through by co-decision and qualified majority voting. Therefore, the United Kingdom under the European Communities Act 1972 will not be able to insist upon retaining its own control over financial services and banking in the City of London and in the United Kingdom. Mere national supervision does not mean national control, and therefore the Westminster Parliament will be obliged to accept under Section 2 of the European Communities Act 1972 the outcome of the decisions arrived at which will include the overarching legal architecture and final jurisdiction of the European Court of Justice. The French, the Germans and President Barroso have therefore won and Gordon Brown, Alistair Darling and the United Kingdom have lost.
1. On 27 May the European Commission adopted a Communication on European financial supervision. The Communication outlines the Commission’s plans for the reform of financial supervision. It sets out the “basic architecture” for a new European financial supervisory framework. The European Commission is hopping that the June European Council approves the plan and then it will present legislative proposals to give effect to the framework for EU supervision in the autumn. The aim is to have the new European Financial Supervision system, comprising both macro-prudential and microprudential components in place during 2010.
2. Following the recommendations of the de Larosière report, the Communication proposes an enhanced European financial supervisory framework which would be based on two new pillars: a European Systemic Risk Council (ESRC) and a European System of Financial Supervisors (ESFS).
3. On 9 June, the Ecofin Council adopted conclusions on the reform of the EU’s supervisory framework for financial services. In general, the Council endorsed the Commission’s proposals but the EU Finance Ministers failed to reach an agreement on the most controversial issues in the financial supervision reform.
4. The European Commission proposes the creation of the European Systemic Risk Council (ESRC) which would be a new independent body, responsible for safeguarding financial stability. It would monitor and assess the risks to the stability of the financial system as a whole (“macro-prudential supervision”). The Council endorsed the Commission’s proposal for the establishment of an independent macroprudential body but changed its name to ‘European Systemic Risk Board’ (ESRB).
5. The ESRB would identify risks to financial stability and would give EU Member States early warnings and, where necessary, will issue recommendations for action to deal with these risks. Such warnings and recommendations might be of a general nature or could concern individual Member States and would be channelled through the ECOFIN Council or the new European Supervisory Authorities. The Commission has stressed that “The ESRC would not have any legally binding powers”, nevertheless “The addressees of warnings and recommendations would therefore be expected to act on them unless inaction could be adequately justified.” National supervisors would be required to justify themselves to the Council and/or the ESAs if they failed to observe the ESRB’s recommendations. The Council noted that “On a case by case basis, the ESRB could decide to make the recommendations public after consultation of Council.”
6. As regards the composition and functioning of the ESRB, the Commission believes that it could include the central bank governors of all Member States and the President of the ECB. Following the recommendation made in the de Larosière report, the chairperson of the ESRB would be the ECB President. According to Lord Myners, the ESRB should be independent of the ECB in order to represent the whole of the EU and not solely the Eurozone. The Member States could not agree on the role of the European Central Bank (ECB) in macro-prudential supervision. However, the Commissioner responsible for Economic and Monetary Affairs, Joaquin Almunia, is confident that the European Council will support the commission position that the ECB president should chair the ESRB.
7. According to the Commission the European System of Financial Supervisors (ESFS) would consist of a network of national financial supervisors “working in tandem with new European Supervisory Authorities to safeguard financial soundness at the level of individual financial firms and protect consumers of financial services (“micro-prudential supervision”).” The new system will see the creation of three new European supervisory authorities (ESAs) which will replace the three existing Committees of Supervisors: a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA), and a European Securities Authority (ESA). Each one would have legal personality.
8. They would have increased responsibilities and greater authority than the current Committees of Supervisors. In fact, the European Supervisory Authorities will have binding powers to supervise the banking, securities and insurance sectors.
9. The Council agree that national supervisors would remain responsible for day-to-day supervision of individual entities. However, as regards cross-border institutions, the Commission said that colleges of supervisors “will be the lynchpin of the supervisory system” and that the European Supervisory Authorities would participate, as observers, in meetings of the colleges of supervisors, “so as to contribute to the emergence of a common supervisory culture and consistent supervisory practices.”
10. According to the Commission changes to the sectoral legislation will be necessary to ensure a more harmonised set of financial regulations so that the ESFS can work effectively. In fact, the Commission has stressed that “The goal will be to bring about more harmonisation in the rules that have to be applied by supervisors as well as greater consistency in the national powers and sanctions available to them.”
11. Hence, the new European Supervisory Authorities will contribute to the development of “a single set of harmonised rules.” The Authorities will develop binding technical standards and will draw up interpretative guidelines which the national supervisors would have to apply while taking individual decisions, such as, on licensing and supervision of financial institutions.
12. Presently, the existing current Level 3 committees use peer review to solve disputes but the decisions are taken by the home authorities. The Commission has followed the recommendation of the de Larosière report and proposed a system of binding mediation. The European Supervisory Authorities would have legally binding mediation powers to settle disputes between national regulators. According to the European Commission Communication, the European Supervisory Authorities, in case of disagreement between national supervisory authorities, would assist the supervisors in reaching a joint agreement. However, if national supervisors are unable to reach an agreement after a phase of conciliation, the European Supervisory Authorities would “through a decision, settle the matter.” They would therefore take over decisionmaking if mediation fails, overriding, in this way, national supervisors’ decisions. According to EUbusiness, a diplomatic source has said that the UK is asking “how far is it legal for an EU authority to countermand the decision of a national supervisor without the authority of the courts.” Whereas the UK and a small number of other Member States do not agree in giving to the ESAs powers of binding mediation over national supervisors the majority of the Member States support this proposal. The UK government believes that such approach could encroach on Member States’ fiscal responsibilities.
13. The UK is concerned that in case of disagreement between national bank supervisors a government may have to follow instructions from the ESAs. Alistair Darling said “The thing which concerned us, which we could not live with, was a proposal whereby there might be an agreement reached by regulators at the European level that would have had fiscal consequences for domestic governments.” Alistair Darling has said that he had convinced his EU colleagues at an Ecofin council meeting, to amend the proposals to make sure that the new ESAs may not impose such decisions on governments. According to the Council conclusions, “The Commission’s forthcoming legal text should define precisely the scope and modalities of this mechanism and ensure that such powers should not impinge in any way on Member States’ fiscal responsibilities.”
14. The European Supervisory Authorities would be able to investigate cases where the behaviour of a national supervisory authority has been deemed to be contrary to existing Community legislation as well as to adopt a recommendation for action addressed to the relevant national supervisor. Moreover, if the national authority does not comply with the recommendation within a fixed period of time, the European Supervisory Authorities would inform the Commission of the situation. They will have the power to refer Member States to the Commission for non-compliance. The Commission may require the national supervisory authority to either take specific action or to refrain from action in order to comply with the acquis communautaire in the area of financial services. Moreover, the European Supervisory Authorities would also have the power to “adopt decisions directly applicable to financial institutions in relation to requirements stemming from EU regulations relating to the prudential supervision of financial institutions and markets as well as the stability of the financial system” in case of urgent situations or national supervisors inaction in relation to the implementation of Community law.
15. The European Supervisory Authorities would also be responsible for the authorisation and supervision of certain entities such as credit rating agencies and EU central counterparty clearing houses. Whereas the majority of the Member States support the Commission to propose EU legislation giving the ESAs such responsibility, the UK and a small number of other Member States do not support such approach as they believe it could encroach on Member States’ fiscal responsibilities. The EU Finance Ministers agree that “(…) these full supervisory powers should not be extended to financial conglomerates, banks, insurance companies or investment firms and other financial institutions whose failure could result in fiscal burden for Member States.” According to the Council conclusions the Commission’s legislative proposal “should define precisely the scope and modalities of this mechanism and ensure that such powers would not impinge in any way on Member States’ fiscal responsibilities.”
16. Moreover, the European Supervisory Authorities would have a coordinating role amongst supervisors in crisis situations such as by facilitating cooperation and exchange of information between the competent authorities. The EU finance ministers asked the Commission to look at how ESAs could play a coordinating role amongst supervisors in crisis situations whilst respecting the national authorities’ responsibility in preserving financial stability as well as respecting the central banks’ responsibilitiesin relation to the provision of emergency liquidity assistance.
17. According to the Commission’s plans they would have the power to adopt some emergency decisions in crisis situations which would be define in Community legislation. Whilst the majority of the Member States are willing to accept that the ESAs should have the power to adopt specific emergency decisions, in crisis situations, the other Member States, including the UK, are against such approach as they believe that it could encroach on the fiscal responsibilities of the Member States. According to the Council conclusions the Commission should “address precisely the scope and modalities of this mechanism and ensure that such power should not impinge in any way on Member States’ fiscal responsibilities.”
18. Alistair Darling has claimed victory as he managed to include in the Council conclusions a statement that the Commission legislative proposals should ensure that the ESAs powers “should not impinge in any way on the fiscal responsibility of Member States.” Nevertheless, he was not able to water down the proposals since there was a general endorsement to establish the new ESAs which would have the power to override national regulators in areas of banking, insurance and securities.
19. The European Supervisory Authorities would also be responsible for the gathering all relevant micro-prudential information stemming from national supervisors. A central European database would therefore be created and managed by the European Supervisory Authorities.
20. The Commission has stressed that “(…) any decision by the European Supervisory Authorities or the Commission must be subject to review by the Community Courts.”
21. The Commission has suggested that the European Systemic Risk Council and the Europe an Supervisory Authorities will be established on the basis of Article 95 of the EC Treaty which is the general legal basis for internal market legislation. The Commission has been extensively using this legal base to expand EC competences to the detriment of the competences of the Member States. The Commission has justified its choice stressing that the creation of the ESRC and of the ESFS will improve the functioning of the Internal Market. The Commission recalls, as regards the ESFS, that the ECJ has held that Article 95 is an appropriate legal basis for setting up a “Community body responsible for contributing to the implementation of a process of harmonization (…).”
22. Measures proposed under Article 95 would have to be adopted by the Council and the European Parliament (codecision procedure) with QMV required at the Council. Therefore, the UK would not be able to veto the Commission proposals. If the EU leaders reach an agreement on several issues, that will form the basis for the Commission’s detailed legislative proposals to be put forward in the autumn.
European Council Conclusions
23. (…) 19. The communication presented by the Commission on 27 May 2009 and the Council conclusions of 9 June 2009 set the way forward to the establishment of a new framework for macro- and micro-prudential supervision. The European Council supports the creation of a European Systemic Risk Board which will monitor and assess potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action and monitor their implementation. The members of the General Council of the ECB will elect the chair of the European Systemic Risk Board.
24. The European Council also recommends that a European System of Financial Supervisors, comprising three new European Supervisory Authorities, be established aimed at upgrading the quality and consistency of national supervision, strengthening oversight of cross border groups through the setting up of supervisory colleges and establishing a European single rule book applicable to all financial institutions in the Single Market. Recognizing the potential or contingent liabilities that may be involved for Member States, the European Council stresses that decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States. Subject to this and supplemental to the Council conclusions of 9 June 2009, the European Council agrees that the European System of Financial Supervisors should have binding and proportionate decision-making powers in respect of whether supervisors are meeting their requirements under a single rule book and relevant Community law and in the case of disagreement between the home and host state supervisors, including within colleges of supervisors. ESAs should also have supervisory powers for credit rating agencies. The European Council further emphasizes the importance of ensuring that the new framework supports sound and competitive EU financial markets.
25. The European Council welcomes the Commission’s intention to bring forward, by early autumn 2009 at the latest, the legislative proposals to put in place the new framework for EU supervision, fully respecting the balance of competences and financial responsibility and taking full account of the Council conclusions of 9 June 2009. These proposals need to be adopted swiftly in order for the new framework to be fully in place in the course of 2010. The European Council will take stock of progress at its meeting in October 2009 and will if necessary provide further direction.
26. It is equally important to further advance work on building a comprehensive cross-border framework for the prevention and management of financial crises. The European Council invites the Commission to make concrete proposals for how the European System of Financial Supervisors could play a strong coordinating role among supervisors in crisis situations, while fully respecting the responsibilities of national authorities in preserving financial stability and in crisis management in relation to potential fiscal consequences and fully respecting central banks’ responsibilities, in particular with regard to the provision of emergency liquidity assistance.