UK: A New Financial Supervisory Framework for Europe

Last Updated: 14 September 2010
Article by Daren Allen, Elisabeth Bremner and Michael McKee

On 2 September 2010 a provisional agreement was reached between the EU Council, the European Parliament and the European Commission on the new financial supervisory framework for Europe. The framework, the first cross border framework of this kind, will be essential to financial stability and the management of future crises.  This is a significant step towards a pan-European regulation of financial markets.

The framework stems from proposals made last year by a group created by the Commission and led by Jacques de Larosière, the former governor of France's Central Bank, to reform financial supervision in order to help prevent another recession.

The reform package, described by Commissioner Michel Barnier as "a crucial milestone", will consist of four legal instruments by way of example: regulation setting up a macro prudential framework for financial stability oversight, a regulation setting up three regulatory separate European regulatory institutions, and two "omnibus" regulations covering a range of matters. The first omnibus regulation includes developing proposals for technical standards, resolving disagreement between national supervisors, contributing to ensuring consistent application of technical Community rules and a coordination role in emergency situations.  The second omnibus regulation will cover technical decisions.

The macro prudential oversight of the financial system will involve the creation of a new European Systemic Risk Board (ESRB). The micro prudential supervision will include three European supervisory authorities (ESAs) covering Securities and Markets, Banking and Insurance and Pensions.

Key Aspects

Macro prudential supervision will be centred upon the ESRB which will monitor and assess risk to financial stability as a whole. During the first five years, the Board will be chaired by the President of the European Central Bank (ECB) and thereafter a review will take place. More generally, the Board will be composed of senior representatives from central banks of Member States, and technical experts.

The micro prudential legislation sets up a new architecture for Europe's financial supervision system. The framework will be comprised of three supervisory authorities in different cities: the European Securities and Markets Authority (ESMA) in Paris which will grow out of the CESR secretariat,  the European Banking Authority (EBA) in London which will grow out of the CEBS secretariat and the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt which will grow out of the CEIOPS secretariat. Under the reform, ESMA will be responsible for the supervision of credit rating agencies Europe-wide. Early reports suggest concern over budgets for the new authorities, indicating that they are "very limited". In addition a strong safeguard clause will curtail governments' ability to challenge decisions taken by the ESAs.

The agreement, once approved, will establish a joint committee who will oversee collaboration between the three authorities. Despite the three authorities being separate, collaboration is vital given that the financial sectors the ESAs supervise are inextricably linked. Additionally the committee will provide a settlement system for disputes between national supervisors. Concern has arisen over the amount of power some of the authorities may have, but this remains to be seen. 

The first of the two omnibus regulations, will focus on the scope of the powers given to the ESAs and other technical issues. The second omnibus has yet to be agreed and remains under discussion. The omnibuses will take into account the 1959 Meroni judgement, which balances "clearly defined executive powers" against unlawful "discretionary power".

Legislative Provisions

The ESAs and the ESRB will be integrated through the regulations which, for the large part, will be legally binding and have direct effect on national law (i.e. there will be no need for separate legal acts in Member States to give effect to them). The 2009 Lisbon Treaty is clear as to the objective of the bodies but does not specify their power. Case law recognises the possibility of Community institutions delegating binding powers to the bodies provided the delegation only relates to clearly defined executive competencies. Delegated powers cannot consist of discretionary power, which is interpreted as meaning powers containing a wide margin of discretion. This judgement is a constraint on the extent to which the executive powers of the EU under the EU Treaties can be delegated to other bodies.

At present no budget has been agreed with regard to the new framework. The budgetary cost related to the ESRB will be borne by the ECB and have no direct impact on the Community budget. In relation to the ESAs, it is recognised that both personnel and budgetary resources are needed, but these will be decided at a later date.


On 20 September, the European Parliament is expected to adopt the texts in the first reading during a plenary session. According to sources, the  proposed reform is well under way to be formally ratified, implemented and operational by 1 January 2011.


The proposed changes should improve the EU's ability to assess, regulate, and monitor risk in the financial markets. The three authorities, however, will have to follow EU case law in relation to the implementation of the framework. The forecast for initial implementation is that it is likely to be slow and over-conservative.

However, having been hailed by some as "a massive step forward", political agendas are likely to feature heavily in deciding the final aspects of the agreement.

Readers of this alert are likely to see little immediate change to their own supervision in the next year or so. Over the medium to long term, however, a much more common approach to regulation and supervision is likely to emerge in Europe and this could impose constraints. Larger firms are likely to find it easier to adapt to this.

National supervisors will see a change more quickly. Already national regulators such as the FSA in the UK are stating that they are no longer have an independent regulatory agenda in wholesale financial markets and will take their lead from EU law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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