The European Securities and Markets Authority on Monday said it sees a need to create a common supervisory culture in the EU and believes that national financial supervisors need to intensify their horizontal, cross-border cooperation. It also acknowledged that it needs to improve its own cooperation with national supervisory bodies.
Presenting its five-year strategy for 2023-2028, Paris-based Esma referred to the need for “intensification of cooperation” between the “National Competent Authorities”, or NCAs, as national supervisors like Luxembourg’s CSSF or Belgium’s FSMA are known, as well as between Esma and NCAs.
But Europe’s top financial supervisory body, whose powers are minute when compared to those of the equivalent body in the United States, the almighty Securities and Exchange Commission, stopped short of calling for full harmonisation of all supervisory activities in the EU.
Common supervisory culture
“Creation of a common supervisory culture does not mean full harmonisation of all supervisory activities, but rather using an approach best suited to achieving the common supervisory objective,” Esma said in its strategy paper.
A common EU supervisory culture is “even more relevant for mandates where supervisory responsibility is shared between ESMA and NCAs across the same type of entities”, the ESMA strategy said. Examples include third-country mandates, supervision of data reporting service providers, or where the responsibilities of ESMA and NCAs are complementary, for example when it comes to reporting entities and trade repositories.
Regulatory arbitrage
Although national supervisors meet regularly in an EU context and often are in contact with each other, cooperation among national financial supervisors still can be problematic for market participants. Some supervisors also apply different interpretations of EU law, enable financial market players to play regulatory arbitrage.
This is currently, for example, the case in the application of the EU’s Sustainable Finance Disclosure Regulation, which requires that dark-green Article 9 investment funds hold investments in companies that aspire to achieve a positive change in terms of ESG and sustainability. While most regulators allow Article 9 funds to hold 80 or 90 percent of impact investors, some supervisors, like the Dutch AFM, require 100 percent. This has forced a number of Dutch asset managers to reclassify their Article 9 funds to a lesser category.
The problems at Belgian brokerage firm Merit Capital also show that the EU can improve the efficiency of its financial supervision. Merit is subject to supervision by Belgium’s FSMA and its central bank and an investigation by Antwerp’s business court, but its problems also touch market participants and investors in Germany, Luxembourg, France and the UK.
Three priorities, two themes
The 2023-2028 Esma strategy is centred around three priorities and two thematic drivers. The authority said it plans to continue to focus on strengthening financial supervision, enhancing investor protection and fostering financial stability as its top three priorities.
In addition, sustainable finance, as well as technological innovation and the effective use of data will feature prominently in its work as two “thematic drivers”, it said.
Speaking to journalists, Esma chair Verena Ross (photo) described the strategy as “ambitious.”
“I am happy to present an ambitious strategy, which will steer Esma’s direction for the next five years,” she said. “The Esma Strategy takes into account the rapidly changing market and geopolitical developments. The established strategic goals are important to enable Esma, the EU’s financial markets regulator and supervisor, to continue to achieve its mission to enhance investor protection, promote orderly and stable financial markets.”
“Fostering effectiveness and stability of the EU markets and enhancing the protection of retail investors, and doing both through strengthened supervision, are at the core of what Esma is all about,” said Ross. “The key twin drivers of sustainability and technological and data innovation are also now embedded across all areas of the organisation.”
Effective markets
Esma said it supports deeper capital markets, market integrity and effective markets. The next five years it plans to increase transparency as well as enhancing financial stability. “We will continue developing, maintaining and streamlining the Single Rulebook and supporting the common EU’s voice in the international regulatory and supervisory discussions.”
Esma cooperates closely with national supervisors, known as national competent authorities, or NCAs. These “are complementary and work to strengthen supervision across the EU single market”. A common EU supervisory culture, harmonised risk prioritisation, and the convergence of supervision approaches and outcomes are clearly identified.
Investor protection
Esma and the NCAs “will do all they can to ensure that investors are effectively protected, with a particular focus on retail investors”, it said. “We put forward actions related to investor engagement and effective information and disclosure,” it said.
Sustainable finance
By embedding sustainability in all its activities, Esma said it will support the transition to a more sustainable economic and financial system. The priorities from the EU’s Sustainable Finance Roadmap go hand in hand with the paths mentioned in the Strategy, namely: effectiveness and integrity of ESG information, an improved ESG regulatory framework and supervision, and a recognition of the role of retail investors in financing the transition to a greener economy.
Innovation and data
Esma said it will endeavour to ensure that financial regulation does not hinder innovation, while maintaining a level playing field between emerging players and products and more traditional ones. “Esma will further strengthen its role as data and information hub in the EU and contribute to extending the effective use of data in financial market supervision,” it said.