The European Commission published on 20 September draft legislation that, if adopted, would introduce far reaching changes to the powers, governance structure and funding mechanism of the European Supervisory Authorities (ESAs). Amongst others objectives, the proposed amendments seek to shift part of the ESAs financing burden to financial market participants. The proposed regulation would also expand significantly the European Securities and Markets Authority’s (ESMA) competence in respect of securities markets oversight by introducing substantive amendments to select EU legislative acts, including Regulation (EU) No 600/2014 on markets in financial instruments (MiFIR), Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (BMR) and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation).
The proposed regulation will now be transferred to the European Parliament and to the Council for review and adoption. We expect the legislative review process, during which both legislators can submit amendments to the draft regulation, to last 12 – 18 months. Given the scope of proposed amendments we expect the debate to be contentious.
Key elements of the proposal include:
- ESAs’ power and governance
The Commission proposes prospectively far reaching amendments to regulations establishing ESMA, EBA and EIOPA that will equip the ESAs with additional competence. The ESAs will be responsible for the preparation of three-year “Strategic Supervisory Plans”, setting out proprieties for supervisory oversight. The Commission is also proposing to introduce a corresponding obligation for all EU national competent authorities (NCAs) to submit to their competent ESA a draft annual work programme and then report on its implementation. In addition, the proposal introduces amendments to the ESAs’ powers to address technological innovation and environmental, social, and governance factors, and expands their powers in relation to the investigation of EU law breaches. Furthermore, the Commission proposes changes to the ESAs’ governance by introducing an “Executive Board”, composed only of a limited number of NCA representatives, the main function of which would be to prepare decisions to be taken by the Board of Supervisors.
- Overhaul of ESAs’ funding mechanism
If adopted, the proposal would replace the current funding mechanism of the ESAs which is based on a 40/60 split of contributions from the EU General Budget and from NCAs. The Commission proposes to limit the total annual contribution from the EU General Budget to 40% of the ESAs’ annual budget. The remaining 60% of funding would come from a mix of private sector contributions, any other fees payable to the ESAs, voluntary contributions from Member States or observers, and charges for publication, training and other services. Private sector contributions would consist of payments from financial institutions subject to direct and indirect ESA supervision. The level of contributions by financial market participants not subject to direct ESAs supervision would seek to reflect the institutions size and importance to the market. The methodology for calculating the total amount of annual contributions by different categories of financial institutions will be set out in a delegated act.
- MiFIR transactions reporting and supply of financial instruments reference data
The Commission proposes to amend the Article 26 MiFIR transaction reporting obligation and to require investment firms to report transactions to ESMA, as opposed to NCAs. ESMA will have to make transaction reports available to the NCAs. The proposed amendments do not address the scope of the transaction reporting obligation and/or the submission method of transaction reports. Similarly, amendments to the Article 27 MiFIR obligation to supply financial instruments reference data make ESMA the recipient authority, instead of the NCAs.
- Changes to authorisation and supervision of Data Reporting Service Providers
Proposed amendments transfer the authorisation and supervision of data reporting service providers (DRSP) from Directive 2014/65/EU on markets in financial instruments (MiFID II) to MiFIR and make ESMA a competent authority for the purpose of the authorisation and supervisions of Approved Publication Arrangements (APAs), Approved Reporting Mechanisms (ARMs) and Consolidated Tape Providers (CTPs). The Commission proposes a three year transitional period to transfer competences in relation to DRSPs from the NCAs to ESMA.
- Changes to critical and third country benchmarks regime
The Commission proposes substantive changes to Article 20 BMR on critical benchmarks, including changes to both the procedure for designation of critical benchmarks as well as abolishing the colleges of supervisors and instead nominating ESMA as a competent authority for critical benchmarks. The proposed legislation also substantially amends Articles 32 and 33 BMR on recognition and endorsement procedures respectively for third country benchmark administrators that seek a licence to operate in the EU. ESMA will become a competent authority for all recognised / endorsed benchmarks. The Commission proposes a three year transitional period to transfer responsibilities from the NCAs to ESMA in respect of supervisory and enforcement activities regarding critical and third country benchmark administrators.
- ESMA’s role in market abuse investigations
If adopted, the proposed legislation will expand ESMA’s powers in relation to initiating and coordinating investigations into prospective market abuse. ESMA will be able to recommend to the NCA of a relevant Member State to initiate an investigation on the basis of “reasonable grounds to suspect that orders, transactions or any other activity with significant cross-border effects threaten the orderly functioning and integrity of financial markets”.
- Amendments to EuVECA, EuSEF and ELTIF Regulations
The proposed legislation seeks to amend Regulation (EU) 2015/760 on European long-term investment funds (ELTIF), Regulation (EU) No 345/2013 on European venture capital funds (EuVECA) and Regulation (EU) 346/2013 on European social entrepreneurship funds (EuSEF). The authorisation / registration and supervision of EU-label ELTIF, EuVECA and EuSEF funds will be transferred from the NCAs to ESMA. The proposed legislation also equips ESMA with investigatory powers, including on-site inspections and the power to impose fines and penalty payments for infringements.
- Expansion of ESMA product intervention powers
The Commission proposes to expand ESMA’s temporary intervention powers under Article 40 MiFIR, which allow ESMA to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments. ESMA product intervention powers are currently applicable to investment firms and credit institutions involved in marketing, distribution or sale of financial instruments, including units in collective investment undertakings. The proposed amendments expand the scope of Article 40 MiFIR to management companies of UCITS, UCITS investment companies and AIFMs authorised in accordance with Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD).
- Approval of prospectuses by certain categories of issuers
The proposed amendments designate ESMA as the competent authority in respect of four types of prospectuses – (1) offering wholesale non-equity securities only to qualified investors, (2) relating to asset backed securities, (3) drawn up by specialist issuers (property, mining, scientific research and shipping companies) and (4) drawn up by third country issuers. As such, ESMA will be charged with the approval of new and altered prospectuses and related advertising and will be given the power to suspend or restrict an offer of securities to the public or admission to trading on a regulated market in line with ESMA’s temporary intervention powers under Article 41 MiFIR. Additional amendments are made to the existing third country equivalence regime to enable ESMA to directly approve prospectuses from entities established in an equivalent third country jurisdiction.
- Monitoring of regulatory, supervisory and market developments in equivalent third countries
The proposed legislation explicitly tasks ESMA with monitoring the regulatory and supervisory developments and enforcement practices, as well as relevant market developments, in third countries for which equivalence decisions have been adopted by the Commission. ESMA will have to submit on an annual basis a confidential report to the Commission on the regulatory, supervisory, enforcement and market developments in relevant third countries.