What are the new powers and functions that the Commission proposes to assign to ESMA?

The main amendments proposed by the EC, to ensure effective supervision, in the EU are as follows⁶:

1. Duty of cooperation. The EC considers that, in order for ESMA to exercise its direct supervisory powers effectively, it should be supported by the competent and/or relevant authorities. In fact, its objective is to share the knowledge and resources of all EU authorities in the financial sector in order to address new challenges. To this end, it proposes to empower ESMA to enter into cooperation agreements with them when, among other situations, supervisory powers are transferred from the competent authorities to the European authority, in order to ensure continuity and an orderly transfer of responsibilities. These agreements may range from the exchange of information to the establishment of joint supervisory teams or the conduct of joint inspections, but must also allow for gradual adaptation over time. (Article 8a, hereinafter Art.)
2. Review of “No action Letters”. The EC proposes to include two new scenarios that will allow ESMA to address the EC and propose a regulatory amendment to resolve problems arising from the application of a rule to market participants⁷. The first one is when a temporary exemption, transitional rule or provision in a legislative act is due to expire before the entry into force of a new regulatory framework. The second one is when significant market developments mean that complying with certain requirements of a legislative act would be a disproportionate burden. (Art. 9a)
3. Two new supervisory convergence tools to improve investor protection in the cross-border provision of financial services:
• Failures in supervision on the approval of financial products, services or entities. The EC proposes to empower ESMA to use a mechanism to correct serious failures in the supervisory activity carried out by NCAs, when these have been detected during a peer review or investigation, provided that they pose a risk to market integrity, financial stability or investor protection. In such cases, the European authority may require the NCA to seek its opinion prior to the approval of products, services, activities or entities in the sector concerned. However, it shall endeavour to reach an agreement with the NCA to resolve the situation beforehand, which may include the adoption of specific measures. (Art. 17aa)
• Suspension of rights to provide services on a cross-border basis. The EC proposes to give ESMA the power to issue decisions to NCAs requiring them to order their entities to suspend the right to provide cross-border services whenever the European authority has reasonable grounds to believe that they have committed a serious infringement that could compromise market integrity, financial stability or investor protection. Furthermore, if NCAs fail to comply with ESMA’s decision within the specified time limit, ESMA may adopt a binding decision to impose the suspension of the entity throughout the EU. The resumption of service will only be possible once the effectiveness of the corrective measures has been verified. (Art. 17aaa)
4. Collaboration platforms between NCAs, with the aim of improving cooperation and supervision of cross-border activities. Furthermore, the EC proposes to empower ESMA to resolve any disputes where two or more authorities, which are part of these platforms, disagree on the content of a measure to be taken. (Art. 19a)
5. Mechanism for the mutual recognition of administrative fines and assistance in their recovery in a cross-border context. The aim of this proposal is to resolve the difficulties encountered by NCAs when an administrative fine must be recovered in the jurisdiction of a Member State other than the Member State in which the fine was imposed. (Arts. 28a and 28b)
6. Data platform. The EC proposes that ESMA create a data platform to facilitate the collection, storage, access and processing of information required under the ESMA Regulation or other EU rules providing for the use of this platform⁸. (Art. 35c)

⁶ The article focuses on the most notable amendments, but the package also includes improvements to other existing supervisory convergence tools, such as the breach of UE Law procedure, the settlement of disagreements between competent authorities and the delegation of tasks and powers.

⁷ This is without prejudice to the fact that the problem has been identified in guidelines, and ESMA modifies them directly.

⁸ ESMA shall ensure that the platform is designed and managed efficiently, avoiding duplication of data collection and ensuring the accuracy and interoperability of data.

What is the main change proposed by the Commission with regard to ESMA’s supervisory and enforcement powers?

In order to ensure effective and consistent supervision across all sectors, the EC proposes to introduce a new Chapter, IIa, into the ESMA Regulation, consolidating all the supervisory and enforcement powers conferred on ESMA, which were previously scattered across different sectoral rules. This framework will apply to all financial market participants subject to its supervision, except for third-country central counterparties (Tier II) or where otherwise specified in a regulation⁹.

⁹ Specifically, this chapter refers to rules relating to requests for information (Art. 39b), investigations (Art. 39c), on-site inspections (Art. 39d), and supervisory measures and the imposition of penalties (Arts. 39e, 39f, 39g, 39h, 39i, 39j, 39k and 39l).

What is the new funding model proposed by the Commission for ESMA?

In order to ensure that ESMA has the necessary resources to efficiently fulfil the new direct supervision and supervisory convergence mandates assigned to it by this new revision, the EC proposes the following measures in its financing model: (1) the new direct supervision mandates will be financed entirely by fees; (2) the new tasks assigned to ESMA, that do not involve direct supervision, will be financed 50% by the EU and 50% by the NCAs. However, tasks already being carried out in this last area will continue to be financed according to the current model (40% by the EU and 60% by the NCAs).

Furthermore, in order to ensure that ESMA’s supervisory activities are financed in a fair and transparent manner, the EC proposes to harmonise the principles governing the fees to be charged to financial market participants subject to its supervision (Article 39n). ESMA will, therefore, charge fees to financial market participants subject to its supervision for the costs incurred in the performance of its tasks, which must in any case be proportionate to their annual turnover. In addition, where this authority has requested assistance from a competent authority, the fees will also cover the reimbursement of any costs incurred by the latter.

¹⁰ In particular, registration, authorisation, certification, recognition, enforcement or supervision activities, as well as other activities related to supervision – specifically, supervisory convergence or the development and maintenance of tools –.

What is the new governance framework proposed by the Commission for ESMA?

In terms of governance, the main change introduced by this proposal is the replacement of the current Management Board with an Executive Board (Articles 44a and 46a). The aim is to provide this authority with a more effective and professional governance structure, so that it can take on the new challenges entrusted to it. To this end, the EC proposes that this body be composed of the ESMA Chair and five independent full-time members with diverse supervisory experience, but in such a way that, together, they have comprehensive and adequate knowledge of the sectors supervised by ESMA. Each member will have one vote, and the chair will have a casting vote in the event of a tie. The term of office of its members will be limited to five years, with the possibility of a two-year extension¹¹.

The executive board will be primarily responsible for decisions that ESMA has to take in relation to the direct supervision of those financial market participants subject to its remit. In addition, the proposal assigns to it the adoption of decisions relating to (1) product intervention powers, (2) breach of EU law, (3) failures in the supervision on the approval of financial products, services or entities, (4) suspension of rights to provide cross-border services, (5) action in emergency situations, (6) settlement of disagreements in cross-border situations, (7) collaboration platforms, (8) systemic risk and (9) independent evaluations. The EC considers that assigning these powers to the executive board will enable the European authority to take decisions that ensure a better balance between national specificities and the interests of the Union than is currently the case¹².

It will also take on the current responsibilities of the management board, such as those relating to the preparation of work programmes, ESMA’s budget, staffing and the establishment of coordination groups. However, the proposal also provides for the executive board to be able to delegate specific tasks entrusted to it to internal committees, the chair or the executive director.

The board of supervisors will continue to be ESMA’s main body, responsible for general guidance and decision-making on mainly regulatory or organisational issues (e.g. the work programme or budget). This body may object to the main supervisory decisions taken by the executive board within ten days or 48 hours in urgent cases¹³. On the other hand, the members of the executive board will be integrated into the board of supervisors and will have the right to vote on general issues related to supervisory convergence.

¹¹ This limit is also set for the terms of office of the ESMA Chair and Executive Director.

¹² Currently, these decisions are taken by the board of supervisors.

¹³ Specifically, decisions taken in accordance with Arts. 17(3) and (6), 17aa, 17aaa, 18(3) and (4), 22(4), 30(4) and (8), 39h(a), (b, (f), (g), (i), 39i and 65, as well as any decision indicated in the sectoral regulations.