New EU financial services supervision from January

The European Parliament yesterday gave the green light to the introduction of a new EU financial supervisory structure in January.

As the first major step in the reform of financial regulations launched by the EU after the 2008 financial crash, the new structure includes the establishment of a European Systemic Risk Board to detect macro-economic risks to financial stability and make recommendations about how to deal with them.

Three European financial supervision authorities to replace the current European committees of national supervisors for the banking industry, insurance and securities are also planned.

Despite this top-heavy supervisory structure, the day-to-day supervision of financial institutions will still remain largely in the hands of national supervisory authorities, the Malta Financial Services Authority in Malta’s case.

The supervisory authorities will have the power to take binding decisions in the face of opposing advance from national supervisors or even financial institutions in the event of failure to respect EU law. They will also have a role where there is disagreement among various national authorities or crises on the markets, as long as their decisions do not trample on member states’ sovereignty over their own budgets.

This is just the first stage in the process of ensuring that the financial crisis does not repeat itself.

As recommended by European Internal Market Commissioner Michel Barnier, the EU will now provide the details of the new supervisory system.

Powers held by the European authorities will be incorporated in the relevant industry’s legislation. Draft legislation has shown that the ESA for the securities market would have the power to scrutinise financial ratings agencies and various parts of the post-market industry, and to ban short selling of specific derivatives in the event of a crisis.

Following objections by member states, the supervisory package does not provide for an EU body to monitor cross-border financial institutions. This issue will be re-examined in 2013 when a progress report will be made.