June 2016

ASSOCIATION COLUMN: More democracy, less power for the European financial supervisors

The coalition parties of Germany believe the power of the European Supervisory Authorities (ESAs) should be put under stronger democratic control. They claim there’s a need to ensure the ESAs don’t become too autonomous. But has this not already happened? Both have demanded stricter limits for the EU’s financial supervision system, and are now acting to deter over-regulation by the ESAs. We and the wider industry have criticised this for a while, considering the ESAs’ administrative provisions can sometimes even contradict political decisions taken by legislators.

How did we get to this point?
The financial crisis exposed weaknesses in the transnational supervision of financial institutions. The EU responded by founding three supervisory authorities in 2011: the European Securities and Markets Authority (Esma), the European Insurance and Occupational Pensions Authority (Eiopa) and the European Banking Authority (Eba). The trio act as supervisors and policymakers. Together with the European Commission, they have published 537 implementing measures, guidelines and recommendations for investment funds since 2011. In the same period, the European Parliament (EP) and Council (EC) released 39 directives; a ratio of 14 to 1. EU regulation can already be compared to an iceberg; rules established by elected representatives are the tip, the larger part below the surface consisting of secondary ESA legislation.

Overlapping legislations and guidelines often result in unintended consequences. In some cases, secondary ESA legislation contradicts legislators.

How can such developments be counteracted?
Firstly, elected representatives must curtail the ESAs’ powers. The ESAs act within the scope of their existing mandate, but the mandate has gone too far. The EP and EC increasingly leave the ESAs and the European Commission to examine the details of secondary legislation at level 2, as the 28 Member States are unable to reach agreement at level 1. Additionally, time pressure at level 1 results in more and more laws being passed in a shorter timeframe. Civil servants are therefore increasingly left to work out the details in important clauses in secondary legislation. This has to change.

Secondly, where the duty of the legislature passes to the ESAs, there should at least be constitutional control in place. The ESAs can currently issue guidelines without EC or EP involvement. Furthermore, there is no technical supervision of the guidelines that often act as de facto laws, which contradicts the principles of law. The resulting democratic gap could be mitigated by giving market participants the right to sue, or introducing an appeal procedure with regards to guidelines.

Also, elected legislators should be able to intervene more effectively in secondary legislation. Currently, if the EP and EC disagree with suggestions, they can only reject the set of rules as a whole, not individual provisions. Thus, they’re often discouraged from disagreeing with a single paragraph, as this would derail the legislation entirely, and cause the process to restart. This results in provisions becoming law unintentionally.

Thirdly, the ESAs’ financing should remain under budgetary control. Currently, they are financed by national authorities (60%) and the EU budget (40%). Some have suggested the financial services industry should pay instead. Politicians must take countermeasures to prevent this from happening; this would eliminate state control, the ESAs would become more powerful, the number of regulations would increase even further, and the democratic gap would become even larger. The German Bundestag is pointing the way forward with the acceptance of the resolution proposal.

Thomas Richer is CEO of the German Investment Funds Association BVI

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