Partly born out of the free movement of capital, the European single market has allowed for the emergence of cross-border financial activities and common regulatory standards between member states. The complexity of the standards, the types of legislation and their interpretation by each national supervisory authority make a common approach to regulation difficult. From this concern for homogeneity came the principle of convergence in the supervision of financial activities.
However, supervisory convergence does not mean a single posture for all national regulators, but rather a consistent implementation of the rules. The key objective is that supervisory authorities should achieve comparable results in relation to each other. “This is to avoid a situation where a European text remains unaddressed by some authorities”, explained Andrea Gentilini, head of market infrastructures division at the Luxembourg Financial Sector Supervisory Commission (CSSF). Indeed, no authority should enjoy the single market without effectively applying its rules.
The single market allows entities to provide their services in other EU countries and investors can then benefit from the same protection, expecting entities to be supervised in the same way throughout Europe.
“The single market allows entities to provide their services in other EU countries and investors can then benefit from the same protection, expecting entities to be supervised in the same way throughout Europe,” stated Isabelle Jaspart, head of division in the legal department at the CSSF.
The European Securities and Markets Authority, one of the three European financial supervisory authorities, issued its conclusions on the supervision of cross-border activities of investment firms in March. The CSSF was one of six regulators evaluated during this peer review exercise, one of the three tools used in the framework of supervisory convergence. The other two tools are the publication of Q&As and guidelines by the European supervisory authorities.
The challenges of homogeneous supervision
“Peer reviews are one of the most powerful tools to assess supervisory practices of authorities,” said Gentilini. “Peer reviews should not only examine what has been done, but also identify best practices to improve supervisory systems. In this way, we can draw inspiration from other regulators.”
Jaspart illustrated this objective: “Mifid, for example, is several thousand pages long. In those thousands of pages, there is not a single article that says how to supervise cross-border activities. That’s why there is a real need for supervisory convergence and to understand that Esma’s job is to come up with good practices that will apply to all competent authorities and entities that have cross-border activities.”
Peer reviews are one of the most powerful tools to assess supervisory practices implemented by authorities. Peer reviews should not only examine what has been done, but also identify best practices to improve supervisory systems. In this way, we can draw inspiration from other regulators.
The supervision of standards is full of subtleties. One of them stems from the specific competences of each supervisory authority, as Gentilini, the head of market infrastructures at the CSSF, pointed out: “Some authorities in Europe have seen the merger of central banks and supervisory authorities. On the other hand, in other states, there is a clearer division of competences, with a central bank and a market authority.” This element of heterogeneity in the structure of the authorities and their competences is therefore reflected in the way each authority undertakes its supervisory task.
A further difficulty in the enforcement of European standards arises from the European legislative framework itself. Indeed, some supervisory regimes are based on directives, i.e., rules that are only applicable once they have been transposed by a national law. In other areas, European regulations become immediately applicable. “This nuance in the European regulatory framework explains a potential difference in the elements to be monitored,” said Gentilini.
Triggering a peer review
A peer review is not, however, triggered when a European authority suspects that a national regulator is not functioning properly. Initially, peer reviews are planned on a voluntary basis by the European authorities. Things have become slightly more complicated over time, Gentilini pointed out: “With the European market infrastructure regulation, the first European regulation that dealt with a cross-sectoral activity and not a sector, already provided for a peer review in the text. This is what is known as a ‘mandatory peer review’. We have the same thing with the Central Securities Depositories Regulation, which specifies that the authorities must undergo a periodic peer review.”
In parallel, the European and national authorities regularly analyse the risks that may fall under the scope of supervisory convergence, which are more related to exogenous causes. This was the case, for example, for the business continuity of the supervised entities when teleworking became compulsory at the beginning of the covid-19 pandemic.
“The perspective of topics is vast, especially since within each topic a multitude of strands can be observed,” said Gentilini. Thus, for each peer review, the European supervisory body in charge calls for candidates to form the “peer review committee”, composed of both employees of the European authority and national regulators.
We are talking about an exercise that mobilised at least twenty people over almost six months.
Every peer review starts with a detailed questionnaire sent to the national authorities concerned by the evaluation. Subsequently, the analysis of the answers provided enables the peer review committee to prepare onsite visits to each regulator, based on an agenda of the points to be discussed, the documents to be submitted and a sample of files to be tested.
Such a process requires a lot of resources from the national supervisory authorities. For the recent peer review on the cross-border activities of investment companies, “we are talking about an exercise that mobilised at least twenty people over almost six months,” reported Jaspart.
Recommendations for all regulators
During an onsite visit, the evaluators usually tackle the practical and concrete functioning of a regulator. They observe, for example, the procedures put in place, the approaches made to supervised entities or the volumes of notifications received. It is also an opportunity for the assessed authority to initiate a dialogue with the assessors to obtain clarifications on their expectations and objectives. Unfortunately, answers are sometimes considered irrelevant by the evaluators because of simple problems of understanding.
During an onsite visit, the assessors sometimes interview entities supervised by the national regulator. “We had one entity interviewed,” explains Isabelle Jaspart. “They asked us for a list of entities, so that we could not point to the star pupil. They talked to this entity for several hours.”
Two years after the publication of its report, the peer review committee then reviewed the situation again with the entities evaluated to ensure that its recommendations had been properly implemented, although this remained at the discretion of each authority. However, “it is clearly stated in the reports that all competent authorities in the European Union should be inspired by the remarks and best practices”, said Jaspart. Indeed, although the strength of the single capital market is greater than the sum of the 27 jurisdictions that make it up, its unifying element cannot work without credible supervision in each of them.
Originally published in French by Paperjam and translated for Delano