Last September, the European Commission presented its detailed proposals on a new European supervisory system. To recall, following the recommendations of the de Larosière report, the European Commission adopted, last May, a Communication proposing an enhanced European financial supervisory framework which would be based on two new pillars: a European Systemic Risk Board (ESRB) and a European System of Financial Supervisors (ESFS). Last June, the EU leaders reached a general agreement on the reform of financial sector supervision endorsing the Commission plans. The European Council requested the Commission to present all necessary proposals by early autumn at the latest so that the new framework could be in place in 2010. Hence, the Commission adopted a package of five legislative proposals aiming at giving effect to the framework for EU financial supervision.

Lord Myners, the Financial Services Secretary to the Treasury, has recently said to the European Scrutiny Committee that “the Government supports the broad objective of the legislative proposals — that is, to raise the quality and consistency of national supervision, to improve rulemaking and enforcement in the Community and to better identify risks in the financial system.”

The Commission has adopted a draft regulation on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board. The European Systemic Risk Board will be responsible for safeguarding financial stability. The ESRB would be a body without legal personality and it would not have legally binding powers. The ESRB main role would be to identify risks to financial stability and prevent or mitigate their impact on the financial system within the EU.

The Systemic Risk Board would collate and analyse information received from banks. And, where necessary, it would issue risk warnings, for example, on the financial situation of individual banks and recommendations for action to address any identified risks. Such warnings and recommendations might be of a general nature or could concern individual Member States, European Supervisory Authorities, and national supervisory authorities.

The ESRB recommendations will not be legally binding. Nevertheless, their addressees are expected to react to them. Thus, where the Member States, European Supervisory Authorities, or national supervisory authorities agree with an ESRB’s recommendation, they must communicate all the actions undertaken in response to it. However, if the addressees do not agree with it and, consequently, have not act, they must explain their reasons. In order to increase the pressure on the addressee “to act or explain”, all warnings and recommendations must be transmitted to the Council, whilst those related to supervisory issues should also be transmitted to the relevant ESA. National supervisors would be required to justify themselves to the Council and/or the ESAs if they fail to observe the ESRB’s recommendations. Moreover, it may also decide by a qualified majority of two-thirds of the General Board on a case by case basis whether warnings and recommendations should be made public in order to increase pressure for prompt action.

The ESRB will be composed of a General Board, a Steering Committee, an Advisory Technical Committee and a Secretariat. The main decision-making body will be the General Board whose members with voting rights will be the Governors of national central banks, the President and the vice-President of the ECB, a member of the European Commission and the chairpersons of the three European Supervisory Authorities. However, the Member States’ representatives of the competent national supervisory authorities will have no voting rights. The General Board will act by a simple majority of members present with voting rights. The Steering Committee will assist the decision-making process of the General Board. Lord Myners has recently said to the ESC that “the Government has ensured a balanced representation of eurozone and non-eurozone representatives” on the Board’s Steering Committee. However, under the current proposal the UK has not a seat on this committee.

Under the draft proposal, the members of the Board would be required to act impartially. Hence, they must not follow instructions nor take into account the individual interests of any Member State.

The Commission followed the compromise reached by the European Council and proposed that the chairperson will be elected for 5 years by the Members of the General Board of the ESRB. The General Board is composed of the governors of the central banks of the EU’s 27 member states. The president of the ECB might not be automatically appointed however that does not mean that he would not become president of the ESRB.

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. However, under the draft proposal the European Central Bank will have a considerable level of influence on the ESRB.

The Commission also put forward a proposal for a Council Decision entrusting the European Central Bank with specific tasks concerning the functioning of the European Systemic Risk Board. Such decision would implement Article 105(6) of the Treaty, which foresees the possibility for the Council, acting by unanimity, to confer upon the ECB specific tasks related to prudential supervision. The draft proposal would confer on the European Central Bank the task of ensuring the Secretariat of the ESRB.

The European Council also endorsed the creation of a European System of Financial Supervisors, comprising three new European Supervisory Authorities. The Commission proposed, therefore, the establishment of a European System of Financial Supervisors (ESFS) which will comprise national financial supervisors, a Joint Committee of European Supervisory Authorities and the European Commission. Hence, unsurprisingly, the Commission would also be part of the network of supervisory activities. According to the Commission the day-to-day supervision of financial institutions will remain at the national level but the European System of Financial Supervisors would have a central role in the supervision of cross-border groups.

The new system entails, therefore, the replacement of the three existing Committees of Supervisors which only have advisory powers by three new European supervisory authorities (ESAs). The Commission proposed three separate regulations to establish a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA) and a European Securities and Markets Authority (ESMA). The European Commission proposals would transfer powers from national financial supervisors to the new European bodies. The ESAs will be Community bodies with a legal personality and they would have legal, administrative and financial autonomy. They will assume all of the tasks and competences of the current Committees of Supervisors but they also would have considerably increased responsibilities and greater authority than them. In fact, they will have binding powers to supervise cross-border firms in banking, securities and insurance sectors. Both Authorities would be empowered to challenge the decisions of national supervisors on a cross-border basis. National supervisors would be accountable to the three new EASs. The UK’s Financial Services Authority would see its powers substantially reduced if such proposals are adopted.

The ESAs would coordinate supervision of cross-border financial groups, solve disputes between national supervisors, monitor the application of Community law, supervise credit rating agencies and make decisions during crises. Moreover, they would contribute to the establishment of common regulatory and supervisory standards.

The European Council endorsed the Commission's proposal that a single EU rule book applicable to all EU financial institutions should be established. The aim is to remove the differences in the national transposition of Community law, in order to ensure uniform application of rules in the EU. 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 in their respective areas that would be applied in all financial institutions in the EU. Such draft technical standards will be adopted by the Authorities on the basis of qualified majority of the members of the Boards of Supervisors. The Commission may decide to amend these draft technical standards and then adopt them in the form of regulations or decisions so they can have direct binding legal effects.

Moreover, the ESAs would also have the power to issue non binding guidelines and recommendations on the application of Community legislation to national supervisory authorities and financial institutions, in those areas not covered by the technical standards. The national supervisors would have to apply such guidelines while taking individual decisions, such as, on licensing and supervision of financial institutions. If national supervisory authorities decide not to comply with such recommendations they are obliged, under the proposal, to explain their decision to the Authorities.

In order to ensure consistent application of Community’s rules, 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 Community legislation, including the technical standards, as well as to adopt a recommendation for action addressed to the relevant national supervisor. If the national supervisory authority does not comply with such recommendation, the European Commission would be empowered to address a decision to the national supervisory authority concerned, requiring it to either take specific action or to refrain from an action. Moreover, when the supervisory authority does not comply with the abovementioned decisions, the European Supervisory Authorities would also have the power to adopt decisions addressed to individual financial institutions in respect to Community law which is directly applicable to them, requiring the necessary action to comply with their obligations under Community law. The three ESAs would have therefore enforcement powers against individual financial institutions. Under the current draft proposals the ESAs would have powers to directly regulated Member States’ financial institutions. This is without prejudice to the Commission's powers under Article 226 of the Treaty – infringement procedures against member states.

Last June, the majority of the Member States accepted that the ESAs should have the power to adopt specific emergency decisions, in crisis situations whereas the UK was against such approach. According to the Council conclusions the Commission should “(…) ensure that such power should not impinge in any way on Member States' fiscal responsibilities.”

The European Supervisory Authorities would have an active coordination role between national supervisory authorities in crisis situations such as by facilitating cooperation and exchange of information between the competent authorities. However, the Commission pointed out that coordination may not be enough in some emergency situations as national supervisors may lack the tools to respond rapidly to an emerging cross-border crisis. The Commission has granted to itself the power to determine whether there is an emergency situation. The Commission may, therefore, adopt a decision addressed to an ESA, determining the existence of an emergency situation. In this case, the Authorities would be empowered to adopt individual decisions, under which national competent authorities would be required to take action in order to address any risks to the functioning and integrity of financial markets.

The ESAs would have the power to require national supervisors to jointly take specific action to remedy an emergency situation. If a competent national supervisory authority does not comply with such decision, ESAs may adopt decisions directly addressed to financial institutions in areas of Community law directly applicable to them, requiring the necessary action to comply with obligations under that legislation.

Under the proposals, the European Supervisory Authorities would have legally biding mediation powers to settle disputes between national supervisors for the banking, insurance and securities sectors. The Commission proposed therefore a dispute settlement mechanism. In case of disagreement between national supervisory authorities, a conciliation phase should be set up, during which ESAs would assist the supervisors in reaching a joint agreement. However, if national supervisors are unable to reach an agreement, the European Supervisory Authorities would “settle the matter.” The Authorities may therefore take a decision requiring national supervisors to take specific action or to refrain from action. They would therefore override, in this way, national supervisors’ decisions. If the national supervisory authorities concerned do not comply with such decision, the Authorities would have the power to adopt decisions addressed to financial institutions requiring the necessary action to comply with obligations under Community law which is directly applicable to them.

There was a general endorsement, at the European Council, to confer to the new ESAs powers of binding mediation over national supervisors. The UK and a small number of other Member States could not agree to such approach. Hence, the European Council agreed “that the European System of Financial Supervisors should have binding and proportionate decision-making powers (…) in the case of disagreement between the home and host state supervisors, including within colleges of supervisors” but on the condition that “decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States.”

The Commission’s legislative proposals have had to take the European Council Conclusions into account. The Commission proposed a safeguard clause in order to ensure that the ESAs’ decisions in settling disagreements and in emergency situations would not impinge on the fiscal responsibilities of the Member States. The so called safeguard clause just covers those provisions. Under the draft proposals, if a Member State considers that the measures taken by the Authorities in settlement situations impinge on its fiscal responsibility, it may notify the Authority concerned and the Commission that the decision will not be implemented by the national supervisory authority. The member state would be required to justify its action and to “clearly” demonstrate how the Authority’s decision impinges on its fiscal responsibilities. Then, the Authority would decide whether to maintain or revoke its decision. Where the Authority maintains its decision, the Member State may refer the matter to the Council and the decision of the Authority is suspended. The Council then would decide whether the decision should be maintained or revoked, acting by qualified majority. The suspension of that decision would be terminated, if the Council decides to maintain the Authority's decision, or if it does not take a decision within two months. There is also the possibility for a legal battle at the ECJ.

The Commission has proposed an expedited procedure for the Authority’s decisions in emergency situations. If a Member State believes that such decisions impinge on its fiscal responsibilities, within three working days, it may notify the Authority concerned and the Commission that the competent authority will not implement such decision. However, it must justify such action as well as “clearly demonstrate how the decision impinges on its fiscal responsibilities.” Then, within ten working days, the Council will decide whether the Authority's decision is maintained or revoked, acting by qualified majority. The Authority's decision would be kept if the Council does not take a decision within ten working days.

Gordon Brown and Alistair Darling have claimed victory as they managed to include in the European 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 members of states.” However, under the Commission’s proposals the ESAs are very likely to impinge on Member States’s fiscal responsibility. ESAs would have the power to take decisions relating to individual banks. It is not out of question that they may bypass member state’s governments in ordering bank bailouts. Under the Commission’s legislative proposals the UK might be allowed to challenge, and suspend the implementation of an ESA´s decision that impinges on its fiscal responsibility however in order to such decision to be rejected it still needs the backing of a qualified majority of other EU Member States. It is now crystal clear that the Government has not ensured that the UK interests would be reflected in the proposals. The Commission’s proposals imply a considerable surrender of national powers.

The European Commission’s proposals foresee that ESMA would be responsible to register credit rating agencies. ESMA would also be empowered to withdraw the registration or suspending the use for regulatory purposes of credit ratings. It would also have supervisory powers such as the power to request information and to conduct investigations or on-site inspections. The Commission is planning to amend the Regulation on Credit Rating Agencies, next year, in order to include the responsibilities and powers of ESMA.

The Commission also proposed the creation of a Board of Appeal to which any natural or legal person, including national supervisory authorities, may appeal against a decision by the ESAs as regards coherent application of Community rules, action in emergency situations, and the settlement of disagreements. The Board of Appeal’s decisions would be subject to appeal before the Court of First Instance and the Court of Justice of the European Communities. Moreover, according to the Commission’s proposals, if an Authority has an obligation to act and fails to take a decision, proceedings for failure to act may be brought before the Court of First Instance or the Court of Justice in accordance with Article 232 of the Treaty. However, this article just foresees these types of actions for acts of the European Parliament, the Council, the Commission and of the ECB.

According to the Commission’s proposals each European Supervisory Authority would comprise a Board of Supervisors, a Management Board, a Chairperson; and an Executive Director. The Board of Supervisors would be the principal decision-making organ of the Authorities. Members of the Board of Supervisors would be required to “act independently and only in the Community's interest” and to not take instructions from a Government of a Member State or from any other public or private body.

All decision-making in the Board of Supervisors would be done through a system of “one member, one vote.” All member states would be therefore on an equal foot, with the same voting power. This would entail a reduced influence to the UK as the member state with the biggest financial sector. As a rule, decisions by the Board will be taken by simple majority including decisions on disputes between national supervisors. The Commission has proposed that the Board of Supervisors would adopt some decisions by qualified majority voting, such as decisions related to the adoption of technical standards, guidelines and recommendations as well as budgetary matters.

There is no legal basis in the Treaty which allows the creation of the new EU-level authorities with binding powers. The Commission has proposed, as expected, that the European Systemic Risk Board and the European Supervisory Authorities will be established on the basis of Article 95 of the EC Treaty. The Commission has justified its choice stressing that the creation of the ESRB and of the ESFS will improve the functioning of the Internal Market. The Commission is once again going too far in its choice of using the internal market's legal basis. The Commission’s proposals would confer to the ESAs enforcement powers, powers to adopt emergency decisions and powers to settle disagreements between competent authorities, one could say that the draft regulations go far beyond what is necessary to achieve the objective pursued – “improving the functioning of the internal market.” The Commission has not respected the principle of proportionality.

The European Commission recalled the ECJ judgment in Case C-217/04, United Kingdom v European Parliament and Council, where the UK has argued that Article 95 allows the Community to harmonise national laws but not to establish agencies. The ECJ held that Article 95 provides an appropriate legal basis for setting up a "Community body responsible for contributing to the implementation of a process of harmonisation" but the objectives and of tasks of such a body must be closely related to the subject-matter of the acts approximating the national legislations. The Commission believes that the Authorities fulfil these requirements.

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.

The European Scrutiny Committee and the Treasury Committee have raised concerns over the legality of the proposals as regards the delegation of powers. Under the principle of conferral the Community can only act within the limits of the competences conferred on it by the member states to attain the objectives set out in the Treaties. As abovementioned, there are no specific legal bases for proposals to create community agencies. The ECJ has decided on the limits to the delegation of powers to agencies in the 1958 Meroni judgment (Meroni & Co., Industrie Metallurgiche, SpA v High Authority of the European Coal and Steel Community). The Court set up a general principle “A delegating authority cannot confer upon the authority receiving the delegation powers different from those which it has itself received under the Treaty.” The Court also stated that the delegating authority “must take an express decision transferring” the powers. Moreover, according to the Court the discretionary delegation of powers to bodies which are not foreseen in the treaty would imply a wide margin of appreciation, replacing “the choices of the delegator by the choices of the delegate”, entailing, in this way, “an actual transfer of responsibility.” The Court has stressed that the discretionary delegation of powers to such bodies would infringe the ‘principle of institutional balance.’ In 2005, the Court reiterated the Meroni doctrine in Carmine Salvatore Tralli v European Central Bank.

It seems therefore that the Commission’s proposals are not consistent with the Meroni doctrine. In fact, the Commission is delegating more powers to the ESAs than it has itself expanding, in this way, the Community competence. The ESC has doubts whether the Commission has respected “the rules delegation of power”, particularly as regards the ESAs powers to settle disagreements between competent authorities. According to the ESC “(…) these extensive powers risk: going further than the powers the Commission would have if it acting in place of the ESA (…); delegating broad discretionary powers that give the ESAs too wide a margin of appreciation in the interpretation and application of Community law, (…) applying a procedure for assessment which is not subject to precise objective criteria so as to permit arbitrary decision-making and to make judicial review impossible.” Consequently, the Regulations establishing the ESAs, once adopted, might be challenged by an annulment action before the ECJ.

Lord Myners has said “The main issues that still need to be resolved are whether the supervisory authorities may be exercising discretion which goes beyond that contemplated by Meroni and whether the Commission is seemingly playing the role of the courts where we must not transgress the authority of the courts.”

The Commission has estimated the total costs of creating the ESAs around €38 million in the first year of operations and around €60 million after two years. The Commission has proposed that the Community budget funds 40% of the costs and Member States fund 60%. According to the Commission “the need for Community funding is also particularly important to ensure that the Authorities are truly independent from Member States.” Moreover, the Commission has stated “A significant Community contribution is needed to compensate for the limited role which is being given to the Commission in the decision-making bodies of the Authorities.”

The Commission’s proposals are not in line with the June 2009 European Council Conclusions. Member states would have reduced control over the supervision of their financial institutions. On 20 October, at the Ecofin Council, the Swedish presidency was able to secure a “broad political agreement” on the structure and powers of the ESRB. The Government is seeking to amend the Commission’s proposals on the ESAs. It remains to be seen what will come out from the negotiations. It will be difficult for the UK to water down the proposals.

On 30 October, the European Council urged the Council “to reach agreement by December 2009 on a complete package setting up a new supervisory structure in the EU.” The European Parliament and the Council of Ministers will work towards reaching a first reading agreement on the different draft regulations on financial supervision therefore the proper consideration of the vital details of the legal texts would be sacrificed in a blind rush to adopt the legislative proposals so that the new system is in place in 2010. Obviously, the behind close doors meetings would be fully used at the expense of a proper debate and analysis of the legislative proposals.