European Commission publishes legislative proposals for reforms to EU-level financial supervision

The European Commission has published its proposal for (i) Regulations to amend the Regulations dealing with the functions of the various European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB), and (ii) a Directive making various consequential changes to MiFID II and the Solvency Directive.  These proposals contain some potentially important changes for the industry, in particular as regards the Benchmark Regulation (see Article 8 of the draft Regulation relating to the ESAs) and the Prospectus Regulation (Article 9 of the draft Regulation relating to the ESAs).

Some of the changes are clearly influenced by Brexit. Consistent with the Commission’s proposed EMIR 2.0 review (on future regulation of CCPs in the EU) the broad approach is (i) to give the ESAs, in particular ESMA, much greater supervisory powers within the remaining EU financial markets, at the expense of national competent authorities, to ensure harmonisation and a true “single market” – which will be much easier to achieve without the dominant UK market being part of the EU; and (ii) to toughen up  (or at least to avoid regulatory arbitrage) as regards third country entities wishing to conduct business in the EU e.g. third country issuers wishing to issue a prospectus, and third country benchmark administrators wishing to have their benchmarks used in the EU, will have to do so via ESMA. 

The aim is to have the legislation adopted before the end of the current legislative term of the European Parliament (March 2019 – also the timing for the UK to exit the EU). There are transitional provisions so that the changes to the Benchmark Regulation and the Prospectus Regulation will take effect from 24 months thereafter.

Assuming the UK leaves the EU in March 2019, and having regard to the fact that the EU Withdrawal Bill only “onshores” EU legislation insofar as it already applies on exit day, the changes to the Benchmark Regulation and Prospectus Regulation will not become part of UK law. They will however be very relevant to UK benchmark administrators and issuers who want to have their benchmarks used and to issue securities in the EU.  There are also provisions for ESMA to crack down on excessive “outsourcing” by EU entities, clearly intended to prevent a UK firm from establishing an EU presence and outsourcing most business back to the UK.  (This is consistent with guidance to national competent authorities already issued by ESMA.)

The changes will directly impact on EU issuers of securities, as in many cases ESMA, rather than the national competent authority, will assume responsibility for approving prospectuses.

There are some material changes to MiFID II and MiFIR as well (Article 6 of the draft Regulation relating to the ESAs), with ESMA  taking over responsibility for regulation of data reporting service providers, and firms making transaction reports directly to ESMA.

For further information please contact Pauline Ashall