We will track here amendments to this resource that reflect changes in law and practice.
This is a quick guide to the EU financial services supervisory framework that formally came into effect on 1 January 2011. The framework is known as the European System of Financial Supervision (ESFS). It consists of:
For a more detailed overview of the ESFS, see Practice note, An overview of the EU Financial Services supervisory framework.
The reform of the EU financial services supervisory framework, which resulted in the ESFS, was tracked in Reform of European financial services supervisory framework: key developments tracker. This tracker includes key source materials, together with related PLC Financial Services coverage.
This is a quick guide to the EU financial services supervisory framework that formally came fully into effect on 1 January 2011. The framework is known as the European System of Financial Supervision (ESFS). It consists of:
The European Systemic Risk Board (ESRB).
The European Supervisory Authorities (ESAs). The ESAs replaced the previous level 3 "Lamfalussy" committees (that is, the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (ESMA) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)).) The ESAs are:
the European Banking Authority (EBA);
the European Securities and Markets Authority (ESMA); and
the European Insurance and Occupational Pensions Authority (EIOPA).
The Joint Committee of the ESAs.
The 27 EU member state national supervisors.
For a more detailed overview of the ESFS, see Practice note, An overview of the EU financial services supervisory framework (www.practicallaw.com/4-504-3281).
The reform of the EU financial services supervisory framework, which resulted in the ESFS, was tracked in Reform of European financial supervisory framework: key developments tracker (www.practicallaw.com/6-501-1731). The tracker includes key source materials together with related PLC Financial Services coverage.
The financial crisis highlighted a number of weaknesses in the EU financial services supervisory framework. As a result, in November 2008, José Manuel Durão Barroso, European Commission President, asked a high-level group of experts (chaired by Jacques de Larosière, former International Monetary Fund (IMF) Managing Director), to advise the Commission on the future of EU financial regulation and supervision.
The group presented its report (known as the "de Larosière report") to the Commission in February 2009. In general terms, it concluded that the financial services sector in the EU needed to have a stronger system to reduce the risk and severity of future crises, increased convergence among member states on technical rules and co-ordinated decision-making in emergency situations.
The Commission welcomed and broadly supported the group's recommendations. It brought forward legislative proposals based on the group's recommendations in September 2009. A year later, in September 2010, the European Parliament, following agreement by the Council of the European Union, published a press release announcing the adoption of the new supervisory framework.
The new regime formally came into force on 1 January 2011.
All financial services firms, markets, products and market infrastructures in the EU are affected by the new regime.
The reform of the EU financial supervisory framework has resulted in the creation of the ESFS. The ESFS is an integrated network of national and EU supervisors. It consists of:
The European Systemic Risk Board (ESRB), an independent body based in Frankfurt, which is responsible for the macro-prudential oversight of the EU financial system (see European Systemic Risk Board: macro-prudential supervision below).
The following independent sectoral micro-prudential supervisors, known as the European Supervisory Authorities (ESAs):
the EBA, which is based in London;
the ESMA, which is based in Paris; and
the EIOPA, which is based in Frankfurt.
(See European Supervisory Authorities: micro-prudential supervision below).
The Joint Committee of the ESAs, which deals with cross-sectoral issues (see Joint Committee of the ESAs below).
The national member state supervisors, who (still) carry out the day-to-day supervision of firms, except in relation to credit rating agencies (CRAs) registered in the EU which are supervised by the ESMA.
The key aspects of the ESFS are outlined in the sections below.
The ESRB has:
A General Board. The Board takes the decisions necessary to ensure the performance of the tasks entrusted to the ESRB.
A Steering Committee. This Committee assists in the ESRB's decision-making process by preparing the Board's meetings, reviewing the documents to be discussed and monitoring the progress of the ESRB's ongoing work.
A Secretariat. The Secretariat is responsible for the ESRB's day-to-day business. The Secretariat is entrusted to the European Central Bank (ECB) due to its experience on macro-prudential issues.
An Advisory Scientific Committee. This Committee provides advice and assistance on issues relevant to the ESRB's work.
An Advisory Technical Committee. This Committee also provides advice and assistance on issues relevant to the ESRB's work.
Jean-Claude Trichet, ECB President, has been appointed the first ESRB Chair for a term of five years. The first Vice-Chair is Mervyn King, Bank of England (BoE) Governor, who has also been appointed for a term of five years. These appointments have been made given the ESRB's key role and its international and internal credibility.
For more information on the organisation and structure of the ERSB, see Practice note, An overview of the EU financial services supervisory framework: European Systemic Risk Board: macro-prudential supervision: Organisation and structure (www.practicallaw.com/4-504-3281).
The ESRB is accountable to the European Parliament and the Council.
For more information on the accountability and reporting obligations of the ESRB, see Practice note, An overview of the EU financial services supervisory framework: European Systemic Risk Board: macro-prudential supervision: Accountability and reporting obligations (www.practicallaw.com/4-504-3281).
As indicated above, the ESRB has been established to address the vulnerability of the EU financial system to interconnected, complex, sectoral and cross-sectoral systemic risks, properly and quickly. It is:
"responsible for the macro-prudential oversight of the financial system within the Union in order to contribute to the prevention or mitigation of systemic risks to financial stability in the Union that arise from developments within the financial system and taking into account macroeconomic developments, so as to avoid periods of widespread financial distress."
(Article 3(1), Regulation 1092/2010 on EU macro-prudential oversight of the financial system and establishing a ESRB (ESRB Regulation)).
The "financial system" is defined widely in Article 2(b) of the ESRB Regulation as meaning all financial institutions, markets, products and market infrastructures.
"Systemic risk" is defined in Article 2(c) of the ESRB Regulation as meaning a risk of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy.
The ESRB assesses potential threats to all aspects and areas of financial stability that arise from macro-economic developments, and from developments within the financial system as a whole, with a view to preventing or mitigating these threats. This is known as "macro-prudential supervision".
The ESRB aims to achieves its function by carrying out the following tasks:
Identifying, analysing and monitoring systemic risks.
Issuing warnings and recommendations.
Monitoring the follow-up to recommendations.
Alerting the Council to emergency situations.
For more information on the ESRB's tasks, see Practice note, An overview of the EU financial services supervisory framework: European Systemic Risk Board: macro-prudential supervision: What does the ESRB do? (www.practicallaw.com/4-504-3281).
For macro-prudential supervision to be meaningful, it must impact on supervision at the micro-prudential level. Also, micro-prudential supervision cannot effectively safeguard financial stability without adequately taking account of macro-prudential developments. As a result, the ESRB is required to work closely with the ESAs and the ESAs' Joint Committee. Where appropriate, it provides them with the information on systemic risks that they need to perform their tasks.
For more information on the ESRB's relationship with the ESAs, see Practice note, An overview of the EU financial services supervisory framework: European Systemic Risk Board: macro-prudential supervision: Relationship with the ESAs (www.practicallaw.com/4-504-3281).
The ESRB co-ordinates its activities with those of international financial organisations to contribute to a stronger international framework for risk monitoring, and more stable global financial markets. In particular, it works closely with the International Monetary Fund (IMF) and the Financial Stability Board (FSB) (which are expected to provide early warnings of macro-prudential risks at the international level). It also co-operates with the relevant bodies in countries outside the EU on issues relating to macro-prudential oversight.
In addition, the ESRB contributes towards implementing the recommendations made by the IMF, the FSB and the Bank for International Settlements (BIS) to the G20.
As indicated above, the ESAs (that is, the EBA, the ESMA and the EIOPA) are the sector-specific EU micro-prudential supervisors.
Each ESA comprises:
A Board of Supervisors. This is the main decision-making body of the ESA, which takes all policy decisions. It is made up of representatives of the 27 EU member state national supervisors, among others.
A Management Board. The Management Board sets the regulatory agenda for the ESA. Its role is to ensure that the ESA carries out its functions and performs the tasks assigned to it.
A Chairperson. The Chairperson, who is a full-time independent professional, is responsible for preparing the work of the Board of Supervisors. They also chair the meetings of the Board of Supervisors and the Management Board.
An Executive Director. The Executive Director, who is a full-time independent professional, manages the ESA. They are also responsible for preparing the work of the Management Board, and implementing the ESA's annual work programme (under the guidance of the Board of Supervisors and the control of the Management Board).
A Review Panel. Each ESA has a Review Panel to help it monitor the implementation of EU law and convergence in supervisory practices. The Panel carries out the ESA's peer reviews of supervisors.
A Stakeholder Group. Each ESA has a Stakeholder Group composed of 30 members with various backgrounds, representing academics, firms, consumers and other users of financial services. The Group's role is to help facilitate consultation with stakeholders in areas relevant to the ESA's tasks.
A Board of Appeal. The Board of Appeal is responsible for deciding on appeals against decisions of the ESAs. It is a joint body of the ESAs, but is independent from their administrative and regulatory structures.
For more information on the organisation and structure of the ESAs, see Practice note, An overview of the EU financial services supervisory framework: European Supervisory Authorities: micro-prudential supervision: Organisation and structure (www.practicallaw.com/4-504-3281).
The ESAs are accountable to the European Parliament and the Council. (On cross-sectoral issues, they are accountable through the Joint Committee.)
For more information on the accountability of the ESAs and their reporting obligations, see Practice note, An overview of the EU financial services supervisory framework: European Supervisory Authorities: micro-prudential supervision: Accountability and reporting obligations (www.practicallaw.com/4-504-3281).
"protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses".
(Article 1(5), Regulation 1093/2010 on establishing an EBA (EBA Regulation), Article 1(5), Regulation 1094/2010 on establishing an EIOPA (EIOPA Regulation), Article 1(6), Regulation 1095/2010 on establishing an ESMA (ESMA Regulation).)
The ESAs safeguard financial soundness at the level of individual firms (known as "micro-prudential supervision"). In fulfilling this objective, they contribute to:
A stable and effective financial system.
Improving the functioning of the internal market including, in particular, a sound, effective and consistent level of regulation and supervision.
Ensuring the integrity, transparency, efficiency and orderly functioning of financial markets.
Strengthening international supervisory co-ordination.
Preventing regulatory arbitrage.
Promoting equal conditions of competition.
Ensuring the appropriate regulation and supervision of credit and other risks.
Enhancing consumer protection.
From 1 January 2011, the ESAs replaced CESR, CEBS and CIOPS, assuming all of the level 3 committees' tasks and competencies, and taking over their then-existing and ongoing work, where appropriate.
The areas where the ESAs can act are strictly defined in the relevant EU legislation and regulations (see Key source materials below). They have wider tasks and powers than their level 3 committee predecessors, including the power to make binding decisions in relation to specific firms (see Key tasks of the ESAs below).
The ESAs aim to meet their objective by carrying out the following tasks:
Developing binding technical standards: a single EU rulebook.
Issuing guidelines and recommendations.
Providing opinions to the European Parliament, the Council, the Commission and national supervisors on all issues relating to their areas of competence.
Facilitating the exchange of information among national supervisors.
Resolving disputes between national supervisors.
Monitoring and enforcing supervisory convergence.
Adopting decisions addressed to national supervisors and firms.
Exercising direct EU-level supervision of certain pan-EU firms.
Temporarily banning or restricting financial activities.
Taking action in emergencies.
Contributing to colleges of supervisors.
Carrying out stress tests on firms.
Carrying out peer reviews of supervisors.
Monitoring market developments.
For more information on the tasks of the ESAs, see Practice note, An overview of the EU financial services supervisory framework: What do the ESAs do? (www.practicallaw.com/4-504-3281).
The ESAs are required to work closely with the ESRB. They are required to provide the ESRB with "regular and timely" information that it needs to achieve its tasks.
The ESAs are also required to ensure a proper follow-up to the ESRB's warnings and recommendations (see Key tasks of the ESRB above).
For more information on the ESAs' relationship with the ESRB, see Practice note, An overview of the EU financial services supervisory framework: Relationship with the ESRB (www.practicallaw.com/4-504-3281).
The Joint Committee of the ESAs has been set up to co-ordinate the functions of the ESAs in relation to cross-sectoral matters and ensure cross-sectoral consistency among them.
For more information on the Joint Committee, see Practice note, An overview of the EU financial services supervisory framework: Joint Committee of the ESAs (www.practicallaw.com/4-504-3281).
The Joint Committee's role is to ensure cross-sectoral consistency of the ESAs' work and joint positions regarding:
The supervision of financial conglomerates.
Accounting and auditing.
Micro-prudential analysis of cross-sectoral developments, risks and vulnerabilities for financial stability.
Retail investment products.
Measures combating money laundering.
Information exchange with the ESRB.
The Joint Committee is also required to develop the ESAs' relationship with the ESRB and settle cross-sectoral disputes that may arise among supervisors.
For information on future developments relating to the ESFS, see Practice note, An overview of the EU financial services supervisory framework: Future developments (www.practicallaw.com/4-504-3281).
For the key source materials relating to the reform of the EU financial services supervisory framework, which resulted in the ESFS, see Reform of European financial supervisory framework: key developments tracker (www.practicallaw.com/6-501-1731).
The key EU legislation relating to the ESFS consists of:
Regulation 1092/2010 establishing the ESRB (ESRB Regulation).
Regulation 1096/2010 conferring specific tasks on the ECB concerning the functioning of the ERSB.
Regulation 1093/2010 establishing the EBA (EBA Regulation).
Regulation 1094/2010 establishing the EIOPA (EIOPA Regulation).
Regulation 1095/2010 establishing the ESMA (ESMA Regulation).
Directive 2010/78/EU amending the:
Settlement Finality Directive (1998/26/EC);
Financial Conglomerates Directive (2002/87/EC);
Market Abuse Directive (2003/6/EC) (MAD);
Occupational Pension Funds Directive (2003/41/EC) (IORP);
Prospectus Directive (2003/71/EC);
Markets in Financial Instruments Directive (2004/39/EC) (MiFID);
Transparency Directive (2004/109/EC);
Third Money Laundering Directive (2005/60/EC) (3MLD);
Capital Requirements Directive (2006/48/EC and 2006/49/EC) (CRD); and
UCITS IV Directive (2009/65/EC),
in respect of the powers of the EBA, the EIOPA and the ESMA (known as the "Omnibus I" Directive).
The proposed Directive which will amend the Solvency II Directive and the Prospectus Directive (2003/71/EC) (2009/138/EC) (known as the "Omnibus II" Directive). This Directive is expected to be adopted at the EU level in January 2012.
Regulation 513/2011 on CRAs (CRA II), which amended Regulation 1060/2009 on CRAs (CRA Regulation).
The terms set out below are the key technical terms relating to the EU financial services supervisory framework.
European Banking Authority (EBA). The European micro-prudential supervisor for the banking sector.
European Central Bank (ECB). The EU institution that manages the Euro and safeguards price and financial stability in the EU. It is also responsible for framing and implementing the EU's economic and monetary policy.
European Insurance and Occupational Pensions Authority (EIOPA). The European micro-prudential supervisor for the insurance and occupational pensions sectors.
European Securities and Markets Authority (ESMA). The European micro-prudential supervisor for the securities sector.
European Supervisory Authorities (ESAs). The three European micro-prudential supervisors (that is, the EBA, the ESMA and the EIOPA).
European Systemic Risk Board (ESRB). The European macro-prudential supervisor.
European System of Financial Supervision (ESFS). An integrated network of European and national supervisors.
Joint Committee. A joint committee of the ESAs which deals with cross-sectoral matters.
Level 3 committees. The committees (the Committee of Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of Insurance and Occupational Pensions Supervisors (CEIOPS)) that were replaced by the ESAs in January 2011.