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IOSCO (refer to: International securities regulation - IOSCO overhauls international standards)
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In­ter­na­tion­al se­cu­ri­ties reg­u­la­tion - IOSCO over­hauls in­ter­na­tion­al stan­dards

The International Organization of Securities Commissions (IOSCO) has revised its Principles of Securities Regulation and its Methodology for Assessing Implementation of these. In a lengthy process, IOSCO examined whether the standards adequately took into consideration changes on …

The International Organization of Securities Commissions (IOSCO) has revised its Principles of Securities Regulation and its Methodology for Assessing Implementation of these. In a lengthy process, IOSCO examined whether the standards adequately took into consideration changes on the securities markets and in their regulation.

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Microprudential supervision

Since 1 January 2011, solvency and market supervision has been carried out by three independent European Supervisory Authorities (ESAs) together with national authorities. The ESAs are the European Banking Authority (EBA), London, the European Insurance and Occupational Pensions Authority (EIOPA), Frankfurt am Main, and the European Securities and Markets Authority (ESMA), Paris.

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In the countries of the euro area, the day-to-day supervision of companies and institutions basically remained the responsibility of the national supervisory authorities until the introduction of the Single Supervisory Mechanism (SSM). However, as a lesson learned from the financial crisis, the Heads of States and Government of the euro member countries decided in the summer of 2013 to confer extensive banking supervisory powers on the ECB.

The Council of the European Union adopted the SSM Regulation and the amended EBA Regulation on 15 October 2013. Both Regulations were published in the Official Journal of the European Union on 29 October 2013 and entered into force at the end of October 2013 (EBA Regulation) and at the beginning of November 2013 (SSM Regulation). During the ensuing transitional period of one year, the SSM was implemented in full. The ECB has been integrated into the ESFS as a competent authority acting partly side by side with and partly instead of the national supervisory authorities within the banking sector.

The European Supervisory Authorities (ESAs) are meant to be responsible for greater harmonisation and for more consistent application of rules to financial institutions and markets in the EU. As a result of this, the functions of the new authorities have increased considerably compared to those of their predecessor committees (Level 3 committees), which is also reflected in their budgets and staffing levels.

Structure and organisation

Each supervisory authority has an independent, full-time Chair who represents the authority. As a matter of principle, though, operational and administrative decisions are taken by the Board of Supervisors. The only voting members of this body are the representatives of the national competent authorities. Consequently, in the case of Germany, it is BaFin that delegates a representative.
In addition to the Board of Supervisors, each ESA has a Management Board which is responsible for certain organisational decisions. An Executive Director acts as head of the authority and prepares the work of the Management Board. The Executive Director is also independent and is employed directly by the authority.

In order to ensure the necessary exchange of views with the financial industry, interest groups are set up at each authority. They are to be consulted on the adoption of regulatory and implementing technical standards, guidelines and recommendations. EIOPA is a special case in that it is the only authority to have two interest groups, one for the insurance and reinsurance industry and a second for occupational pensions. The members of an interest group are appointed by the Board of Supervisors upon the proposal of the respective interest representatives.

Competences and powers

The European Supervisory Authorities have been allocated many competences and powers. These are primarily coordinating functions but in certain circumstances the authorities may also take decisions that are binding on national authorities and/or financial institutions.

The core function of the new supervisory regime is the harmonisation of financial supervision in the EU. To that end, for cases provided for in the financial supervision directives the three authorities may develop regulatory and implementing technical standards and issue guidelines and recommendations.

Technical standards govern technical issues regarding the application of EU law; they involve no strategic or political decisions. They do not come into effect until they have been adopted by the European Commission by way of a Regulation or Decision. The European Commission also has the right to amend their content. Although guidelines and recommendations are in principle non-binding, like warnings and recommendations from the ESRB, compliance with them shall be ensured only by means of political pressure.

The EBA, EIOPA and ESMA are to assume a leading role in the promotion of transparency, simplicity and fairness in the market for retail financial products and services. In essence, they are tasked with analysing, coordinating and overseeing this area. However, the European Supervisory Authorities can also issue warnings in respect of financial activities in the event of a considerable threat to the stability of the financial system emerging. They may ultimately also restrict financial activities or even ban them altogether if the proper functioning and integrity of the financial markets or the stability of the financial system are threatened. This applies to the co-called “crisis situations” and the cases provided for in the directives.

The authorities may exercise direct supervisory powers if EU law is breached, crisis situations occur and in the case of differences of opinion between national supervisory authorities in cross-border cases.

Graduated powers

If a national competent authority fails to apply EU law or technical standards, the EBA, EIOPA or ESMA can initiate a four-stage procedure. The first stage is to launch an investigation into the matter which may result in a recommendation to comply with EU law (stage 2). There follows a “formal opinion” from the European Commission (stage 3) and then, subject to certain conditions, a direct decision binding on the financial institution in question (stage 4) if the national authority cannot be persuaded to comply with the European rules at an earlier stage.

The three new authorities also have graduated powers in crisis situations. First of all, they can demand that national supervisory authorities take appropriate measures. But if the latter fail to act, subject to tight conditions a direct decision may be addressed to a financial institution. The basic condition for this is that the Council in consultation with the European Commission and ESRB has determined that a crisis does exist. The third and final case in which the European Supervisory Authorities can take their own supervisory decisions is to settle disagreements between two or more national supervisory authorities.

In the cases laid down by sector guidelines, a three-stage procedure is available. It begins with mediation between the parties involved in the dispute aimed at reaching a solution. At the same time, the three authorities may set a deadline for reaching agreement. If this step fails to produce the required result, the authorities may, in the second stage, address a decision to the national supervisory authorities involved. If this decision is not implemented, as a last step a direct decision can be addressed to a financial institution (stage 3).

updated on 01.04.2016

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