In November 2017, it was announced that the European Banking Authority (EBA) would relocate to Paris in 2019 following the UK's decision to withdraw from the EU. With a team of approximately 700 staff and a supervisory role in a sector where the European Central Bank also has a mandate for banking supervision, the EBA's move is only a minor though symbolic success for Paris.

The announcement does however come at a time when attention is focused on significant changes to European Supervisory Authority (ESA) governance, recently put forward by the European Commission. These changes are likely to have far-reaching repercussions for the future of supervision of the financial services sector within the EU from 2019 onwards.

The Commission has put forward several proposals that would substantially amend the regulatory framework governing both the ESAs and the European Systemic Risk Board. It has also proposed changes to recent EU Directives such as Solvency II and MiFID II.

The upcoming reforms will involve significant changes to the scope of the authorities' powers, changes to internal governance and new sources of funding for each ESA. These changes will mean increasingly centralized supervision of financial institutions, increased involvement from each ESA and less of a role for each of the National Competent Authorities (NCA), or home regulators in each member state.

The first change of note is to funding sources for the ESAs. The Commission has proposed to complement the current system of funding of ESAs by way of contributions from the EU. Fees raised both from entities newly subjected to direct supervision by the ESA and from contributions from financial institutions who are currently indirectly regulated with direct supervision from an NCA.

Other changes of consequence, concern the internal governance framework at each ESA and will have a direct impact on how decisions are made. An Executive Board is to be appointed at each ESA, staffed by external appointments. The Chair of the Executive Board will appoint full-time Board members selected from a list of individuals nominated by the Commission who have the requisite skills, knowledge of financial regulation and experience in a supervisory role. The Commission's proposals will effectively concentrate decision-making at the Executive Board level, with the creation of a new governing body comprised of four individuals for both the EBA and the European Insurance and Occupational Pensions Authority, (EIOPA) and an Executive Board of seven individuals for the European Securities and Markets Authority, (ESMA). Even though the Commission has made a clear statement of its expectations that Board members will act independently and in the sole interest of the Union, leaving aside any national interest, there is still concern in some quarters about a concentration of power in the hands of such a small number of individuals.

The organization currently in place within each ESA centers around a Management Board composed of the Chairperson and of representatives from each of the member state NCAs, consequently decision making involves creating consensus amongst the different representatives of each of the EU countries. The move to a smaller and more concentrated Executive Board is intended to speed up decision-making and promote effective, impartial decisions taken to promote the interests of the EU.

Each ESA will retain the current Board of Supervisors as the ultimate decision-making body with responsibility for overall supervision. The Executive Board's mandate will be to prepare decisions for the Board of Supervisors, however the Executive Board will also have direct powers to conduct independent reviews of NCAs and to resolve disputes between NCAs arising out of EU law.

Perhaps the most topical of all the changes to the ESAs responsibilities is the proposal that the Executive Board will also be responsible for monitoring outsourcing, delegation and risk transfer arrangements to third countries. The Executive Board is to be competent to act, subject only to a requirement to keep the Board of Supervisors informed of their actions and decisions.

This move would seem to elevate the decisions made the Executive Board to the same level as those of the Board of Supervisors, potentially allowing a handful of individuals to determine which third countries will be deemed as fulfilling the criteria for equivalence.

As part of their monitoring activities the ESAs will receive semi-annual reports from NCAs informing them of delegation or outsourcing requests to third countries. This change is likely to result in increased focus on those delegation arrangements with financial institutions outside the EU. This is likely to impact not just the UK financial services sector looking for ways to access opportunities and capital within the EU post Brexit, but also every other third country and is of particular concern to the U.S., as evidenced by recent pronouncements by both the SEC and by U.S. fund trade bodies.

At a time when the UK is wholly focused on Brexit negotiations and the desire to preserve access to EU capital for its banks, asset managers and insurers, many in the UK at least perceive the Commission's proposed changes to strengthen rules around third country access as a direct attempt to ensure that the UK does not engage in a regulatory race to the bottom, once outside the EU.

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