EFC report on financial regulation, supervision and stability, revised to reflect the discussion at the 8 October meeting of the Ecofin Council

EFC report on financial regulation, supervision and stability, revised to reflect the discussion at the 8 October meeting of the Ecofin Council.

Executive summary

Under the new approach based on the Lamfalussy framework for all financial sectors, the EFC recommends arrangements in line with those already implemented for securities, based on existing inter-institutional agreements, whilst also recognising sectoral specificities.  The new arrangements must fully respect the legislative role of the European Parliament and incorporate all accountability measures to the European Parliament and the Council already adopted for securities.

Sectoral specificities would be best recognised by three separate sectoral committees each at levels 2 and 3: for banking; insurance, including pensions; and securities, including UCITS.  In addition, in line with the Ecofin Council’s common position on the relevant draft EU Directive, a fourth committee at level 2 would be established to deal with certain specific rules concerning financial conglomerates operating across sectors.  This committee could explore how best to organise the level 3 advice required from the EU’s supervisors, and the precise arrangements could then be defined by the Commission.   

Each level 2 committee should have one voting national representative per Member State and one technical expert nominated by the relevant Ministry.  The level 2 committees might on occasion meet in joint session at a high level to consider difficult technical and cross-sectoral issues, and improve synergies and coherence of level 2 rules.  The chairs and secretariats of the level 3 committees should also co-ordinate their activities.

To exploit synergies between banking supervision and central banking, both national banking supervisory authorities and non-supervisory central banks should attend meetings of the level 3 banking committee.  Supervisory authorities should hold the vote.  Mechanisms must exist to ensure confidential information exchange for all sectors.

A reconfigured FSPG with a Member State chair should provide political oversight on financial market issues for the benefit of the Ecofin Council.  It should fill the gap between the political and technical regulatory levels, and provide for cross-sectoral strategic reflection, without becoming part of the legislative process. It should fully respect existing institutional prerogatives. It should report to the EFC to prepare advice to the Ecofin Council, taking into account the established role of COREPER. To reflect its new role and status, it might be renamed.

The new committee should have a ‘policy-shaping’ role, defining the medium- and long-term strategy for financial services issues; considering ‘hot’ short-term issues; and assessing progress and implementation. It should consider both internal (e.g. single market) and external issues (e.g. WTO issues). Without becoming part of the regulatory process, it could be briefed by the level 2 chair on technical issues.

The EFC is the primary source of advice on issues related to economic and financial developments for the Ecofin Council.  Therefore, the EFC should report to the Ecofin (and informal meetings of Ministers of Economy and Finance and Central Bank Governors) on financial stability issues.  The reconfigured FSPG, meeting in a special format, should contribute to the work of the  EFC in this field to help it to prepare the discussions of the Ministers, and of the Ministers and Governors.  To this end, it should build networks and consider relevant cross-sectoral structural issues with supervisors, represented in particular by the level 3 committee chairs, the ECB, and the BSC chairman.

Next steps

The above proposals are consistent with the principles agreed by the Ecofin Council on 7 May.  At its meeting on 8 October, the Ecofin Council endorsed the proposals and invited the Presidency and Commission to consult the European Parliament, and invite comments from third parties, particularly the industry and consumer groups. 

A final decision might be taken under the Danish Presidency.  In such a case, proposals for the relevant legislation and decisions to establish or amend the relevant level 2 and 3 committees could be brought forward by the Commission as soon as possible.  In addition, the reconfigured FSPG could meet for the first time in early 2003.   

The new arrangements for all financial sectors based on the Lamfalussy approach should be evaluated in 2004 in the context of the review of the arrangements for securities.  The functioning of the reconfigured FSPG, including its financial stability formation, should be reviewed in mid-2005.

Detail

1. The EU needs arrangements capable of dealing with fast-changing, highly integrated financial markets.

• Financial regulation must be able to adapt quickly to new market developments and practices.  It must also facilitate the integration of the EU’s markets, to bring benefits to consumers and enterprises alike, and to enhance the competitiveness of the EU’s  providers of financial services.
   
• Whilst supervisory tasks are best performed as close as possible to supervised entities, an environment of increased cross-border and cross-sectoral activity requires arrangements to facilitate necessary information flows. Strengthened cross-border and cross-sector co-operation amongst competent authorities is thus essential for the preservation of financial stability.  Greater convergence of supervisory practices can contribute to the single market and also enhance the efficiency of national supervisory authorities involved in monitoring cross-border financial institutions.
  
  
• In a highly integrated market financial contagion can spread rapidly across borders and sectors with potential macroeconomic and fiscal consequences.  Thus, roles and responsibilities must be clearly allocated, all actors must be properly accountable, and Ministers need to be appropriately informed.

2. In this context, on the basis of an interim report by the EFC, at its meeting of 12th July the Ecofin Council:

• invited the EFC to elaborate the new approach for all financial sectors based on the ‘four-level Lamfalussy framework’ for securities;
  
  
• considered it appropriate for the Financial Sector Policy Group (FSPG) to be reconfigured under Member State chairmanship to give political advice and oversight on financial market issues to the Ecofin Council, and
   
• invited the EFC to pursue reflection on the proposal to bring together representatives of all EU parties with an interest in maintaining financial stability in a new forum.

The Council invited the EFC to produce its report on implementation modalities by the end of September.

Extending the Lamfalussy framework to all financial sectors

3. Under the new approach based on the Lamfalussy framework for all financial sectors, the EFC recommends that arrangements should adhere to those already implemented for securities based on existing inter-institutional agreements, whilst also recognising sectoral specificities.  Therefore, new arrangements for other sectors must incorporate all of the accountability measures to the European Parliament and the Council - based on transparency, consultation, including with the private sector, a clear allocation of rights and responsibilities, and a role for the inter-institutional monitoring committee – exactly as adopted for securities.  

4. The EFC notes that adoption of a consistent approach to all financial sectors requires also consistency at level 1, i.e. the level of co-decision by Council and European Parliament. It might be inappropriate to segment the issues tackled by the various level 2 committees (and the reconfigured FSPG) between two different Council formations.  Therefore, in this context, it recalls the view expressed by the 12th July meeting of the Council that insurance sector legislation in the Council should be dealt with by the Ecofin Council.  

5. Sectoral specificities in the new framework would be best recognised by three separate sectoral committees each at levels 2 and 3: for banking; insurance, including pensions; and securities, including UCITS.  In addition, in line with the Ecofin Council’s common position on the relevant draft EU Directive, a fourth committee at level 2 would be established to deal with certain specific issues concerning financial conglomerates, and this committee could explore how best to organise the level 3 advice it would require from the EU’s supervisors. The precise role of the latter should then be defined by the Commission.

6. The detailed modalities of the level 2 committees should follow closely the arrangements of the European Securities Committee (ESC):

• Level 2 committees should act as regulatory committees in line with the 1999 Council comitology decision; they would also provide advice to the Commission e.g. on draft legislative texts, based on the input provided to the Commission by the level 3 committees.
  
  
• For each level 2 committee, each Member State should have one voting representative,  nominated by the relevant Ministry, and supported by one technical expert behind the table also nominated by the relevant Ministry according to national models.  The Commission services should chair and provide the secretariat.  The chair of the relevant level 3 committee should have observer status in its associated level 2 committee; the ECB should have observer status in the new level 2 committees for banking and financial conglomerates.
  
  
• Level 2 committees could occasionally meet in joint format at a high level to consider difficult technical and cross-sectoral cases, and improve synergies and coherence of level 2 rules.
  
  
• The Commission should  be invited to bring forward proposals, for adoption by the Council and European Parliament, to reform the Banking Advisory Committee (BAC) and Insurance Committee (IC) into the required sectoral level 2 committees.  Functions of the current BAC which are not transferred to the level 2 committee should be allocated to the level 3 banking committee.

Further modalities of the level 2 committees are considered in appendix 1.

7. Similarly, the modalities of the level 3 committees should closely follow those of the existing Committee of European Securities Regulators (CESR), subject to sectoral specificities: 

• Level 3 committees should advise the Commission,  in particular on its preparation of draft level 2 measures; promote consistent implementation of EU directives, supervisory convergence and best practices in Member States; and provide an effective operational network to enhance day-to-day supervision, including exchange of supervisory information in normal times and at times of stress.  The level 2 committee could request advice from the level 3 committee via the Commission chair, in particular on draft implementing rules.  The level 3 committees may periodically present activity reports to the level 2 committees.
  
  
• Each level 3 committee should be operationally independent.  Following the securities model, each Member State should have a single vote allocated to members from national supervisory authorities.  The Commission should have observer status in all level 3 committees.  The chairs and secretariats of the level 3 committees – also from the national supervisory authorities - should work closely together and co-ordinate their activities.
  
  
• To benefit from synergies between banking supervision and central banking, and in accordance with Treaty Article 105(5) , both national competent banking supervisory authorities, and central banks without direct supervisory responsibilities including the ECB, should participate in the level 3 banking committee, with the competent supervisory authorities holding the vote.   Representatives from the BSC and Groupe de Contact should also have observer status in the level 3 committee for banking. The committee should establish appropriate procedures and meeting formats to ensure efficient exchange of confidential information.  The Groupe de Contact should continue its activities and also act as the main working group of the level 3 banking committee, including for confidential information exchange.  In addition, in exceptional circumstances and at the explicit request of an individual member, restricted sessions of the level 3 banking committee should also be permitted.
   
• The Conference of Insurance Supervisors should be reformed into the new level 3 committee for insurance and pensions.

Further modalities of the level 3 committees are considered in appendix 2.

The reconfigured Financial Services Policy Group (FSPG) and financial stability arrangements

8. The primary aim of the reconfigured FSPG with a Member State chair should be to give political advice and oversight on financial market issues for the benefit of the Ecofin Council. It should thus fill the currently existing gap between the political and technical regulatory levels, and provide for cross-sectoral strategic reflection, separate from the legislative process. To reflect its new role and status, it might be renamed.

9. The new committee should have a ‘policy-shaping’ role, defining the medium- and long-term strategy for financial services issues; considering ‘hot’ short-term issues; and assessing progress and implementation.  It should provide political advice and oversight on both internal issues (e.g. single market, including implementation of the FSAP) and external issues (e.g. WTO and enlargement issues). 

10. The reconfigured FSPG should fully respect existing institutional prerogatives, in particular the Treaty; the Commission’s right of initiative and Treaty guardian role; the legislative role of the European Parliament and the role of COREPER; all inter-institutional agreements; and the level 2 and 3 committees. It should report to the EFC to assist its preparation of advice to the Council.  The European Parliament should be appropriately informed of the committee’s activities.  When useful, it could host hearings with third parties.

11. The new committee should comprise one high-level representative of the relevant Ministry per Member State, and one alternate. The Commission services should have one full member, ensuring representation of the chair of the level 2 committees, and the ECB and level 3 chairs should be observers.  As for the EFC, the secretariat should act  on the instructions of the chair and members and provide necessary support in preparing relevant documents when carrying out its responsibilities to the committee. The modalities for this issue are to be worked out during the period of consultation.  The President should ideally be a member of the EFC.

12. It is expected that the chair of the level 2 committees will play a constructive role in the reconfigured FSPG, including by providing information, if requested, on technical matters under discussion at level 2.  Without becoming part of the regulatory process, the new committee could also assist its members to guide their national representatives at level 2.  To assist it in considering thoroughly the issues set out in paragraph 8, it may set up ad hoc working groups.

13. It is important to analyse at the EU level issues related to financial stability and their economic consequences.  In accordance with Treaty Article 114(2) , the EFC is the Ecofin Council’s primary source of advice on issues concerning economic and financial  developments.  It should therefore play a role in defining the European strategy for issues related to financial services and financial stability. The reconfigured FSPG in a special format should contribute to the EFC’s work on such issues to assist it to prepare discussions in the Ecofin and/or informal meetings of Ministers of Economy and Finance  and Central Bank Governors. To this end, the level 3 committee chairs, the ECB and DG Ecfin should be granted full member status in this special session, which could also build networks and consider relevant cross-sectoral structural issues with supervisors from relevant financial centres.  The BSC chairman should also participate as observer and regularly report on macro-prudential developments. 

14. Further issues related to the reconfigured FSPG and the arrangements for financial stability are considered in appendix 3.
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