Financial supervision in the European Union has encountered a pressing challenge - a notable disparity in the approaches taken by national financial supervisors when it comes to sanctioning investment funds.
As the watchdog of the EU’s financial markets, the European Securities and Markets Authority (Esma) has identified this growing divide and is now pushing for measures to foster greater convergence among member states.
A clear pattern has emerged during recent years, Esma said. Sanctioning powers are not equally used among National Competent Authorities, or (NCAs), while, with a few clear exceptions, the number and amount of sanctions issued at national level remains relatively low, Esma said.
16 supervisors took no action
Esma highlighted the divide in its latest report on sanctions under Ucits and AIFMD for 2022. Under Ucits, nine NCAs imposed a total of 38 penalties, compared with 61 penalties issued by 12 NCAs in 2021. 98% of the total amount of penalties was imposed by a single NCA, the AMF in France. 16 NCAs did not impose any sanction during this period.
Under AIFMD in 2022, 10 NCAs issued a total amount of penalties of 2.5 million euro, compared to 42.9 million in 2021. 60% of the total amount of penalties was imposed by a single NCA, again, the AMF.
Some 16 NCAs did not impose any sanction either under the UCITS Directive or the AIFMD during 2022.
When it comes to financial penalties, France topped both the lists for Ucits and AIFMD sanctions in 2022. French supervisor AMF issued a total of 95.6 million euro in fines, including one major, 93 million euro fine against H2O Asset Management. With 167,668 euro in Ucits fines, Luxembourg took 5th place, trailing Sweden, Spain and the Czech Republic. Total Ucits sanctions stood at 95.7 million euro.
Luxembourg 3rd with AIFMD sanctions
In regards to AIFMD sanctions, Esma members issued a total of 2.54 million euro in fines last year. The bulk, again, stemmed from France, where 1.52 million was issued in fines. Luxembourg came third on the AIFMD list, with 337,295 euros in sanctions, and Poland second.
In terms of Ucits enforcement, Belgium’s FSMA issued one single non-financial enforcement measure and did nothing under AIFMD. In the Netherlands, AFM imposed no sanctions at all in regards to Ucits and AIFMD, Esma data showed.
Esma’s total financial sanctions data for 2022 so far does not include national penalties handed out under the Market Abuse Regulation (MAR) and Mifid. For 2021, national supervisors have doled out a total of 54.3 million euro in MAR sanctions and 12.2 million under Mifid, led again by France. Luxembourg did not issue any MAR penalties in 2021 but that will be different thanks to fines of 1.55 million euro against Fuchs & Associés that supervisor CSSF announced last September.
Contrast with SEC
The total level of fines that the European financial supervisors hand out still stands in stark contrast to the fines issued by its powerful and feared US counterpart, the Securities and Exchange Commission, the SEC. Standing up for the investing public, the SEC in 2022 filed a total of 760 enforcement actions and recovered a record 6.4 billion dollars in penalties. That number of course cannot be directly compared with Esma’s sanctions data, but the huge disparity - roughly by factor 30 - does make clear that there is still work to be done to protect investors in Europe.
Esma has demonstrated a clear lack of consistency in the use of sanctions across member states. Its data underscores the need for discussions with national authorities to promote greater convergence in sanctioning measures, especially in the context of the Ucits directive, where effective and proportionate sanctions are deemed essential to maintain financial stability and regulatory compliance.
The Ucits directive, which mandates member states to implement sanctions that are “effective, proportionate, and dissuasive,” adds another layer of importance to the issue. Failure to enforce robust penalties for regulatory violations could lead to an environment where the potential benefits of engaging in risky behaviour outweigh the risks of getting caught.
Risk of uneven playing field
When it comes to investment funds, uniformity in regulatory measures is paramount to ensure the stability and integrity of a financial system. Esma’s quest for a common EU outcome-focused supervisory and enforcement culture is not merely an idealistic aspiration; it is a pragmatic necessity. The lack of consistency in sanctioning measures across different countries risks creating an uneven playing field for financial entities and may lead to regulatory arbitrage.
Investors, fund managers, and other market participants operate in an increasingly interconnected and interdependent global landscape. With cross-border investments becoming the norm, a fragmented approach to sanctions could potentially undermine investor confidence and hinder the seamless functioning of the EU’s financial markets.
Esma approach not without challenges
Esma’s commitment to engaging in discussions with NCAs on the use of sanctioning measures is a logical step in the EU supervisory framework. Rather than imposing top-down mandates, fostering collaboration and sharing best practices among member states could lead to more effective and well-tailored sanctioning strategies.
The path towards greater convergence will not be without challenges. National idiosyncrasies, varying risk appetites, and divergent supervisory cultures may pose hurdles in this endeavour. However, the ultimate goal of creating a level playing field and a harmonised regulatory approach should guide these efforts.
Out of balance
