COMMENTS ON THE EUROPEAN COMMISSION'S GREEN PAPER ON FINANCIAL SERVICES POLICY ( )

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1 j**ä M RAHOITUSTARKASTUS $ HNANSINSPEKT1ONEN $ FINANCIAL SUPERVISION 1(7) COMMENTS ON THE EUROPEAN COMMISSION'S GREEN PAPER ON FINANCIAL SERVICES POLICY ( ) KEY POLITICAL ORIENTATION Rahoitustarkastus (the Finnish Financial Supervision Authority) welcomes the opportunity to comment on the Green Paper on Financial Services Policy ( ) issued by the European Commission. We support the overall policy objective of the Commission's Financial Services Policy and agree with the key priorities identified in the Green Paper. However, we wish to raise the following issues for consideration by the Commission in preparing its Final Policy Programme. These comments reflect our role as a supervisory authority legally mandated to aim at preserving financial stability and maintaining public confidence in financial markets. We agree with the main emphasis presented in the Green Paper that the focus of the financial services policy should now shift from introducing new regulatory initiatives to the transposition and enforcement of Community legislation, and to efforts aimed at enhancing the convergence of supervisory practices. However, in our view, the financial stability angle does not in general receive adequate weight in the Green Paper. There are certain elements in the EU prudential regulatory framework, which would need to be addressed in the medium term in order to safeguard financial stability and to support the continuing integration of the financial markets. The need to review the prudential framework has also been emphasised by the creation of the new supranational company forms: the European Company (SE) and the European Cooperative Society (SCE). First, the strengthening of the coordinating role of the home authority to support consolidated supervision and to reduce supervisory burden would need changes in EU legislation, as well as creating of an adequate role for the host authorities in particular vis-ä-vis foreign branches of systemic relevance in the host country market. The prevailing home-host regime was established for totally different markets. In addition to allowing supervisory authorities to contribute in full to further integration and financial stability, changes in the EU legal framework would be needed to clarify industry's expectations, and support further work at the level three in developing supervisory cooperation. If unaltered, the EU legal framework could even constrain supervisors' cooperation, which should not be the case.

2 *ff% f*9fil ^ RAHOITUSTARKASTUS I FINANS1NSPEKTIONKN 'r FINANCIAL SUPERVISION 2(7) The second necessary amendment in the prudential framework concerns, in our view, the directive on Deposit Guarantee Schemes (DGS). We strongly support keeping supervisory responsibilities and deposit guarantee responsibilities in line with each other. Further, relying on the ability of home schemes to protect the depositors of large cross-border banks could become questionable and home-host cooperation or, ultimately, pan- European solutions might be required. The third aspect is that, in our opinion, any changes made to the current regulatory and supervisory regime should leave the door open to adapt to changing environment and pave the way for potential further changes in the regimes. These issues are discussed in more detail below. EFFICIENT AND EFFECTIVE PRUDENTIAL SUPERVISION AND REGULATION SUPPORTING IT Integration and Financial Stability In our view, profound discussion is needed on how to develop financial supervision in Europe in response and in support to the emergence of cross-border financial institutions with significant market shares in foreign markets. In this deliberation it is important to duly recognise the need to maintain financial stability, as well as the needs for efficiency and reduced supervisory burden on cross-border institutions. Supervisory arrangements should support further integration of financial markets without (unduly) compromising the objectives of prudential supervision. Financial stability should be maintained in all three levels: in home and host countries and at the EU-level. While the Green Paper does not take a strong stance in this area, it does emphasise the need to reduce the burden on cross-border institutions. We agree to this, but the financial stability angle does not receive adequate weight in the paper. The crucial issue from the point of view of financial stability is ensuring effective supervision of cross-border institutions and allowing the pursuit of the financial stability tasks. Model for the supervision of cross border financial institutions European authority

3 ,^SS«f. Ä-% f 3$ l RAHOITUSTARKASTUS W *SS> i{! FINANSINSPEKT1ONF.N FINANCIAL SUPERVISION 3(7) In our view, the case for establishing possibly an ESCB-type European authority to supervise large cross-border financial institutions -while smaller institutions would continue to be supervised at the national levelcould become stronger in the future with the emergence of a larger number of pan-european institutions. However, we recognise that the establishment of a European supervisory authority will be feasible only in the long-run due to many unresolved legal and other issues. Hence, a practical and immediate supervisory solution continues to be based on national competence, A network of competent authorities A model of "a network of competent authorities", which we support, entails effective home-host cooperation and maintains an active role also for host authorities, especially if foreign entities are of systemic relevance in the host country. This model would allow observing financial stability concerns in all Member States and would ensure the host input to the overall supervisory process of cross-border institutions. It could also be actually favourable to further integration as it could prevent possible protective host country policies motivated by financial stability concerns. In addition, this kind of model would be in line with a possible, more centralized type supervisory solution in the future horizon. In our opinion, the coordinating role of the home authority should be strengthened to support consolidated supervision and to reduce supervisory burden of the cross-border institutions. At the same time, the host authorities should be granted an adequate role vis-a-vis foreign branches of systemic relevance in the host country market both in day-to-day supervision and crisis situations. The involvement of the host authorities in such cases is necessary to have adequate information and possibility to influence ex ante supervisory measures as there can be a need for host country crisis management intervention by supervisory authorities, the central bank or the government. The worst situation would emerge when a financial institution were systemically relevant in the host country but not in the home country. Having crisis management responsibility without any supervisory role would result in greater risks to financial stability (moral hazard). An important issue in our opinion is the recognition of the role of host supervisors in case of major cross-border branching operations (like now in the case of subsidiaries). In our view, the stark distinction in the original EU legal framework between subsidiaries (location country responsibility) and branches (home responsibility) should be diluted. First, the risks and

4 i^tss\ f *Wi> l RAHOITUSTARKASTUS %*% rw$ FINANSINSPEKTIONHN ^Ks&Jf FINANCIAL SUPERVISION ^gggss^ 4(7) significance of host market businesses can be very similar in both cases, and the group can in both cases have substantial centralisation in internal organisation and risk management. Second, a move to a European Company form by major cross-border banks can result in systemically relevant branches, entailing a legitimate host country financial stability concern and possible crisis management and financing responsibility, which should be combined with available, preventive supervisory tools. In order to support an efficient supervisory process geared to monitor the overall condition of cross-border institutions, the overall coordination responsibility should be clearly allocated to the home authority, also as regards subsidiaries. Recognizing the involvement of the host authorities in information gathering and also supervisory decisions and enforcement would amount to recognizing host country competence as regards systemically relevant branches, while retaining leading coordination responsibility with the home authority. The necessary legal changes could be adopted in the banking field, for example, by amending the section of the Codified Banking Directive (2000/12/EC) dealing with the division of labour between home and host authorities to include references to the role of host authorities with respect to systemically relevant branches. The definition and identification of such entities might be left to the discretion by home and host authorities. Supervisory cooperation needs to be further developed regarding specific cross-border groups through bilateral cooperation across supervisory authorities (and specified in bilateral MoUs) and through multilateral cooperation (principles of supervisory cooperation, convergence of practices and information exchanges) developed within the auspices of CEBS.The principles of home-host cooperation and the consistent reporting frameworks being developed by CEBS are very helpful in avoiding duplications and reinforcing cooperation and information exchange. Lead supervision model Under a pure "lead supervision model", the home country (lead) supervisor would be responsible for the prudential supervision of the whole group and all its entities irrespective of their legal status (subsidiary or branch). The advantage of the model is that it would reduce supervisory burden on crossborder institutions. However, the lead supervision model would be problematic as it would not be in line with host country crisis management role and responsibility. It would also entail problems concerning the effective supervision of cross-border groups. For example, the home authority might put less importance on supervising the foreign activities of

5 $5 Ä RAHOITUSTARKASTUS»$ F1NANS1NSPEKT1ONEN j' FINANCIAL SUPERVISION 5(7) a financial institution OT group (or even the whole group) than the host authority would wish - especially if the institution were more important for the host market than the home market. One further possible problem of the lead supervision model is that in some countries individual banks would be supervised by different lead supervisors. This kind of situation would require very progressed convergence of supervisory practices and powers in order to maintain level playing field for the banks within the country. Deposit guarantee schemes As said, we strongly support keeping supervisory responsibilities and DCS protection in line with each other. Otherwise, there will be moral hazard as possible deposit guarantee responsibility for the State would not be coupled with ex ante supervisory powers and possibility to intervene at an early stage in fragile banks. This means that, under the present EU regime, foreign branches should be covered by the home DGS. We need to recognise, however, that when cross-border banks heavily expand their operations in other countries, the situation could become too burdensome for certain home country DGS. For these reasons it could be useful to consider whether certain parts of the deposit guarantee responsibility could be transferred to host countries in case of extensive foreign operations of cross-border banks. If the responsibility of the deposit guarantee of branches would be transferred in full or partly to the host country, adequate supervisory powers (full access to information and ability to influence supervisory decisions) should be recognised for the host authority as well. Ultimately, the best solution for pan-european banks could be to consider the possibility of an EU-level DGS. This could best support adequate DGS resources and avoid regulatory arbitrage. Further, it is not in line with the Single Market idea that there are differences in the level of coverage and scope of deposits covered by national DGS and these should be harmonised. Moreover, such differences could cause regulatory arbitrage and even the transfer of corporate seat. DGS rules (like all prudential regulations) should be neutral such that they do not by themselves influence the choice of location or legal form of operations (e.g. subsidiary or branch). Specifically, the level of protection should be low (e.g. harmonised at the current minimum) in order to support market discipline by leaving outside major deposit-holders. Finally, the issues raised by the European Company Statute for DGS should be addressed in this context as well, such as the harmonisation of entry/exit rules.

6 RAHOITUSTARKASTUS 6 (7) FINANS1NSPEKTIONKN FINANCIAL SUPERVISION BETTER REGULATION, TRANSPOSITION, ENFORCEMENT AND CONTINUOUS EVALUATION Consultation mechanisms In developing EU legislation, we support the full exploitation of the Lamfalussv structures. This entails, inte alia, strong recourse in all relevant changes to the advice by the level three supervisory committees. Economic impact assessments The Green Paper refers to "economic impact assessment" on new pieces of regulation. While we support this idea, the precise meaning and modalities of how such studies would be conducted would need to be clarified in the future. It is also worth recognizing that conclusions drawn from the analysis would differ taking into account that financial market structures vary. Supervisory convergence We support the progressive development of the "level 3 tools" to support regulatory and supervisory convergence and integration, such as strengthening the role of the level three guidelines, and developing the mediation and peer review functions within the level three committees. We would also like to point out that supervisory convergence can take place effectively only if the relevant authorities have equivalent and adequately strong powers to supervise and sanction institutions. It might be worthwhile to investigate whether differing legal powers of supervisors is an obstacle to further convergence also in the prudential supervisory field as has been noted by CESR concerning the securities field. Cross-sectoral convergence We would like to highlight the need for cross-sectoral regulatory convergence. The goal should be that similar type of products (products which have the same economic purpose for the investor) are subject to same kind of requirements. Similarly it is vital to ensure that the rules on financial markets area are compatible with rules on other areas, for example civil law and consumer protection.

7 F*ija l RAHOITUSTARKASTUS $ F1NANS1NSPEKTIONEN FINANCIAL SUPERVISION 7(7) POSSIBLE, TARGETED NEW INITIATIVES We agree with the areas selected for further attempts to foster integration: asset management and clearing and settlement. The limits of fostering integration in the area of retail financial services through regulatory initiatives should be carefully considered, since other obstacles to integration than regulation are also relevant in the retail field and it will take time before consumer behaviour will change and people will exploit the opportunities of the Single Market. Care must be taken not to impose futile or burdensome regulatory initiatives. Jukka Vesala Deputy Director General Head of Prudential Supervision Liisa Halme Deputy Director General Head of Regulatory Governance