Comments of the Association of German banks on CESR's preliminary progress report "Which supervisory tools for the EU securities markets?

Transcription

1 B U N DESViRBAND DEUTSCHER BANKEN Mr Fabrice Demarigny Secretary General Committee of European ^tact Securities Regulators (CESR) Tel avenue de Friedland Fax Paris E ' ma11 georg.baur@bdb.de FRANCE 28 January 2005 Comments of the Association of German banks on CESR's preliminary progress report "Which supervisory tools for the EU securities markets?" Dear Mr Demarigny, Thank you for the opportunity to comment on CESR's preliminary progress report "Which supervisory tools for the ED securities markets?". The report is an important contribution to the debate on how to create an efficient EU single market for financial services. Its publication at this point in time, when the Financial Services Action Plan is nearing its conclusion, yet we have experience of the Lamfalussy process only at Levels l and 2, is a bold and, at the same time, welcome step. Bold because it has not yet been possible to gain sufficient experience with the co-operation between regulators at Level 3 of the process and the report could thus be accused of failing to await the outcome of events under the existing supervisory system. And welcome because we also believe that it can never be too soon for an analysis and in-depth discussion of the future organisation of Europe's regulatory structures. While the report cannot claim to spell out the possible way forward in every detail, it is certain to fuel the debate on what form Europe's supervisory system should take in the medium term. We also take the view that it is not possible, in this context, to isolate the future supervisory regime in the securities sector from corresponding issues in the area of banking supervision. State of integration in the EU securities markets We essentially share CESR's analysis of the state of integration in the securities markets. Nevertheless, it must be borne in mind that we have not yet been able to gain sufficient experience of legal integration to judge how Financial Services Action Plan measures will work in practice. We have already called for a legislative breathing space in the securities sector. In Bundesverband deutscher Banken e.v.- Postfach Berlin Burgstr Berlin -Tel. (030) Fax (030)

2 BUND ESVERSAtäD DEUTSCHEM BANKEN particular, we need to see how the markets respond to the new rules in the MiFID, since these will harmonise conduct of business rules in Europe, thus eliminating one of the main obstacles to an integrated securities market in the retail sector. It will therefore be possible to evaluate the effect of the new rules only some time after the MiFID has entered into force and been implemented in all member states. Future development of supervisory structures in the securities sector We believe a strict distinction must be made between changes to the existing supervisory regime that would be feasible within the existing legal framework and those that would first necessitate its modification. Under the current system of co-operating supervisory authorities outlined by the Group of Wise Men, CESR is assigned an advisory role at Level 2 and a co-ordinating role at Level 3. Decision-making powers and responsibilities continue to be held by the national supervisory authorities alone. As things stand, though CESR is certainly in a position to promote uniform interpretations and put practical pressure on individual authorities, it cannot itself take decisions which will have a binding effect on the national competent authorities and thus indirectly on market participants, let alone affect market participants directly. This may sometimes be unsatisfactory, but it is inherent in the existing supervisory regime and its legal foundations. We therefore believe a term like "supervisor of supervisors" is misleading against this background since it implies the existence of binding decision-making powers that CESR in its capacity as a committee of European securities regulators does not currently possess. Nevertheless, it is naturally possible for the supervisory authorities, if they see fit, to agree between themselves to take steps to exert "peer pressure" as described on page 15. We therefore support the report's proposals for moving forward the existing system by increasing peer pressure, enhancing the transparency of individual decisions for both supervisory authorities and market participants, establishing central databases and so on. However, it will be essential for the details of these measures to be worked out in consultation with market participants. Seeking to fully harmonise supervisory powers, on the other hand, would not be consistent with the current legal position. The powers at the disposal of a national supervisory authority are essentially determined by the country's administrative and constitutional law and by how it implements the principle of the separation of powers. It is up to member states to ensure that European rules and regulations are implemented at national level, but which body is empowered to do so is a matter for the national administrative and constitutional law in the country concerned. The idea of a convergence of supervisory powers, in contrast, is both feasible and welcome. -2-

3 BUNDESVERBAHD DEUTSCHES BÄNKE M The existing system also rules out the concept of a single ED decision such as pre-clearance for promoters of pan-european innovative products (page 14) or a securities note at EU level for EU-wide public offerings, standardised UClTSs or a single European permit for credit rating agencies on EU level. Though we agree with the report's analysis that there may be a need for such measures, assigning CESR responsibilities for selected areas would not, in our view, be an effective approach. This would not offer companies the desired "one-stop supervision". On the contrary, it would simply add a further body to the existing supervisory regime. Changing the system We share CESR's view that the present system of co-operation between supervisory authorities has certain shortcomings and would draw your attention, in this context, to our Association's current position paper on the future institutional development of European supervisory structures, a copy of which is enclosed. We believe there is no alternative in the long term to a uniform system of European financial services authorities, with a supranational European authority supervising at least cross-border companies. In the short term, CESR's proposed pragmatic approach of seeking to improve co-operation is the right way forward. Nevertheless, all measures must rest on a sound legal basis. Assigning central powers without first ensuring the necessary constitutional and administrative prerequisites are in place must be rejected. The foundations for longer term political objectives should already be laid. We therefore propose that we should not wait to discuss possible scenarios and their appropriate legal basis; a political roadmap should be drawn up without delay. Elements should include: analysing the constitutional and administrative prerequisites for establishing a system of European financial services authorities, «continuing to publish regular evaluation reports (IIMG reports, reports by Commission groups of experts), designating intervals at which to assess all alternative ways forward. For further details, please see the enclosed position paper. Yours sincerely, Thomas Weisgerber Georg Baur Enclosure -3-

4 "verband BU N DESVER3AND DEUTSCHER BANKEN Position paper on the future institutional development of European supervisory structures 1. Against the background of the planned conclusion of the Financial Services Action Plan in 2005, the inauguration of the new European Commission and the publication of numerous reports and papers on the integration of the securities markets and experience with the Lamfalussy process 1, institutional aspects of legislation and supervision in the securities sector are currently a key item on the European political agenda. 2. Supervisory structures can only be evaluated and developed in the light of current and future market conditions. There is an interrelationship between market developments and political developments. Policy can shape the market, but must take account of existing economic realities and possible future developments. 3. The introduction of the euro is driving economic integration in the European Union. This applies first and foremost to the financial markets. But if we examine financial market integration - understood as the process of extending the interaction between market forces from national to European level - a distinction must be made between» market integration in the narrow sense, that is to say the convergence of markets that can be measured with the price and volume indicators normally used for this purpose, and an institutional integration in the sense of adapting (corporate) structures to new circumstances as a result of the potential convergence of the markets. The following progress has been made in market integration: The money market has developed into a true single euro-wide market. Thanks to the active involvement of market participants and self-regulatory initiatives like the establishment of conventions and benchmark interest rates such as EURIBOR and EONIA, it has been possible in this segment to create an almost totally integrated market with perfect market transparency. The integration of the bond market is also well advanced. This is well on the way to becoming a single, internationally attractive market with high liquidity and market depth and a synchronisation of yields. 1 Banking Expert Group, Asset Management Expert Group, Securities Expert Group: Financial Services Action Plan: Progress and Prospects of May 2004; CESR: Which supervisory tools for the EU securities markets? ("Himalaya Report") of 25 October 2004; European Commission, DC Internal Market: The application of the Lamfalussy process to EU securities markets legislation - a preliminary assessment by the Commission services of 15 November 2004; Inter-Institutional Monitoring Group (IIMG): Third report monitoring the Lamfalussy process oi 17 November Bundesverband deutscher Banken e.v.- Postfach Berlin Burgstr Berlin-Tel. (030) Fax (030)

5 BU N D ESVERBÄH D DEUTSCHER 8 A N f! E N On the equity markets, a European perspective is beginning to evolve when it comes to establishing and implementing investment strategies. Though it is true that both institutional and private investors continue to exhibit a certain home bias, there is no doubt that this has become less pronounced in recent years. As for retail banking - lending and investment operations with the general public - all the signs show that markets are still divided along geographical lines. As far as institutional integration is concerned, progress must be measured in terms of whether or not developments can be identified that go beyond market integration and are based on adjusting corporate structures: It is evident that cross-border mergers in the financial services sector have been the exception to date. «An important reason for the relatively small number of financial services offered on the basis of cross-border corporate networks is that banks trying to capture a share of a foreign market by opening branch offices have to contend with national supervisory practices, tax regimes and other legal requirements. This is due to the fact that legislation in the banking sector has been based on the principle of minimum harmonisation up to now and that rules are not interpreted in a consistent manner across the ED. Other rules are explicitly associated with existing market structures and prevent new market players from entering the market or gaining a sufficient market share. «Many banks have centralised major functions such as treasury/liquidity management and risk management, at least for their EU-wide activities. 4. The integration of the securities markets is still in its early stages. «There are signs of integration among market participants in the form of cross-border mergers and acquisitions (stock exchanges, clearing and settlement organisations).» National markets display much clearer structural differences than to be expected in an integrated market (not only size, economic importance, wholesale or retail focus, but also range of products, stock exchanges). «Efforts to harmonise the legal framework have yet to yield results. It is true that several major pieces of legislation have already come into force. But in some cases technical implementing measures at Level 2 of the Lamfalussy process are still outstanding (MiFID; Transparency Directive), while in other cases implementation in national law is not yet complete (MAD, Prospectus Directive). The Committee of European Securities Regulators has clearly expressed its wish to see economic integration. Sometimes, however, CESR has tried to promote harmonisation by inappropriate means, such as intervention in companies' organisational autonomy.

6 BU N DESVERBAHD DEUTSCHES BANKEN An example of this is the discussions at Level 2 to make it mandatory for even direct banks to furnish customers with advice. At the same time, however, there continue to be differences at national level in the implementation of the rules by national legislators and even supervisory authorities. 5. Integration in the banking sector is also not yet complete, though in important areas it is further advanced among market participants than at regulatory level. The Intel-nationalisation of European banks is at an advanced stage. Furthermore, progress in information and communications technologies makes it somewhat easier for new players to enter the market and promotes cross-border financial transactions, Greater internationalisation has also made the banks' risk management considerably more complex. Sophisticated risk management systems can only be established centrally and at group level. To take account of this practice by banks operating on a cross-border basis, the supervision of risk management must also take place at consolidated group level. «Efforts to harmonise the legal framework comprise only two new directives. Implementation of the Financial Conglomerates Directive is largely complete; the Lamfalussy process will play only a minor role in this context, however. The Capital Requirements Directive (implementation of Basel II) was delayed by the length of the negotiations in the Basel Committee on Banking Supervision. The comitology procedure will have a greater role to play in this directive, though not at Level 2 at present, since the level of detail in the Basel Committee's rules means there is currently little need to draft technical implementing measures at EU level. This shift in emphasis towards qualitative supervisory standards will make work at Level 3 all the more important. In order to maintain a level playing field, CEBS must ensure by means of intensive co-operation and co-ordination that the qualitative supervisory standards are not interpreted and applied in an inconsistent manner across member states. It is not yet entirely clear what impact CEBS's recently published work programme will have in this respect, since it leaves several questions open. Despite this progress, cross-border retail banking is hampered by marked legal fragmentation. 6. The situation is different in the area of accounting. Primary responsibility for adopting and interpreting accounting rules lies with the relevant standard setters. The enforcement of accounting standards takes place at national level. CESR's task is confined to co-ordinating enforcement across Europe. It is required to take regulatory action only in areas falling outside the responsibility of the standard setters and enforcement agencies. In other words, it is not up to CESR to set additional accounting rules or interpret existing ones. The creation of additional accounting standards would not only exceed CESR's

7 mandate; additional rules would also risk giving rise to inconsistencies or even contradictions within the legal framework. The role of accounting issues in the ongoing debate on the future shape of financial supervisory structures will therefore be limited to the question of harmonising external and regulatory reporting requirements. Duplication of reporting requirements should be avoided as far as possible since it doubles the workload and makes financial communication more difficult. 7. Any consideration of future institutional developments must take account of differences in the nature of supervisory tasks. «Banking supervision focuses on monitoring the financial institutions involved. The tasks of securities regulators, on the other hand, are twofold: they monitor both the entities subject to their supervision (financial institutions, investment banks, asset managers, stock exchanges, issuers) and certain aspects of the market (insider trading, market abuse, compliance with transparency requirements). 8. The basic principles of supervision are: Efficiency o Focus on practicalities o Consistency o Flexibility/speed in adapting to new developments o Awareness of market realities o Transparency o Stability o Planning certainty o Cost-effectiveness «Creation of a level playing field at o national o European and o international level Regulatory policy o Democratic legitimacy o Existence of checks and balances in the political process o Existence of legal remedies o Regulatory proportionality o Consistency of the legal system Depending on the specific nature of each case and the precise area of banking or market supervision involved, some of these principles may assume greater importance, though by no means to the exclusion of the others. The need for consistency, for example, will take clear precedence over the principle of awareness of market realities where issues of the internal

8 EU N D ESVERBAMD DEUTSCHE!! BANKEN organisation of a bank operating across borders are concerned. When it comes to monitoring insider trading, on the other hand, awareness of market realities will become more important, as will integration in the corporate and legal environment - for example with regard to correlations with criminal and company law. 9. The possible forms of a European supervisory system may be classified on the basis of the degree of co-ordination and cross-border or supranational allocation of powers. The three basic alternatives are: co-operation between national supervisory authorities on an equal footing; transfer of supervisory powers to national supervisory authorities which are otherwise on an equal footing, e.g. by designating a "lead regulator"; centralisation of supervisory tasks at European level. 10. The securities sector is currently gaining experience with co-operation between national supervisory authorities on an equal footing. Since no legislation has yet worked through all the levels of the Lamfalussy process, it is not possible to make a definitive assessment at this stage. It is already apparent, however, that the present degree of co-operation between regulators must be deepened in order to enhance efficiency and establish a level playing field. In its Himalaya report, CESR mentions various specific measures in this context ranging from the purely organisational (such as the exchange of staff) and methods of enhancing transparency (such as central databases for supervisory purposes) to steps aimed at increasing the harmonising pressure on national authorities. These include "peer reviews" and mediation schemes. The delegation of individual powers to other supervisory authorities is also conceivable. However, already on a structural level, discrepancies in supervisory practices will be unavoidable if the decisions of supervisory authorities have legitimacy only at national level. Even if all national supervisory authorities had the same status within their member states, discrepancies in practices would remain both possible and probable. In the absence of a uniform legal framework, therefore, successful harmonisation, enhanced efficiency and a level playing field is thus based on the national competent authorities voluntarily adopting non-binding rules and consequently on the power of European soft law, with all its legal limitations. 11. Particularly in the area of banking supervision, there is currently some discussion of transferring supervisory powers to other supervisory authorities, which would otherwise all be on an equal footing. This is the concept of the lead supervisor or consolidated regulator, for example. Unlike under the co-operation model, national authorities cede responsibility for supervising a cross-border banking group to a designated consolidated

9 regulator. The lead regulator's role, vis-a-vis both the other supervisory authorities and the supervised entity, goes far beyond that of informing and co-ordinating. The consolidated supervisor has the authority to make definitive and binding decisions and impose regulatory requirements on the supervised cross-border banking group. The legal and planning certainty offered by this alternative would benefit the supervised entities. The lead model is currently envisaged in the European directive implementing Basel II; the authority responsible for supervising the parent company is to assume the role of consolidated regulator. However, it is envisaged that it will apply only to decisions on the regulatory recognition of internal ratings methods/internally calculated Basel II parameters (such as LED and EAD). Furthermore, the draft directive envisages a period within which all involved supervisors can endeavour to reach a consensual decision. Only if consensus is not reached can the consolidated regulator make a binding decision on his own. To give internationally active institutions a single regulatory interlocutor with effective decision-making powers, the concept should be gradually extended to other supervisory fields. The national authorities do not, however, appear to be prepared at this stage to cede powers and sovereignty to such an extent. This system can claim to better meet the need for one-stop supervision than can the simple co-operation model. Greater efficiency could therefore be achieved, the extent of which would depend on the system's concrete form. Nevertheless, a level playing field can only be established for cross-border institutions if the respectively competent lead regulators give competing supervised entities equal treatment in equal circumstances and the enforceability of the lead supervisor function is ensured in all member states by the existence of identical or at least comparable supervisory powers. At present, the number of national options envisaged in the directive makes creating a level playing field extremely difficult. 12. If national authorities were to continue to be allocated certain functions, the centralisation of supervisory tasks at European level could take two forms. First, the division of powers between national and supranational authorities could be geared towards specific functions (no. 13). Alternatively, it could be based on the supervised entity (no. 14). 13. CESR discusses the idea of centralising individual supervisory functions in its Himalaya report. It correctly points out that any supranational action requires European legal and constitutional foundations that do not as yet exist. While the idea of centralising the supervision of certain functions offers a basis for consistent, swift and competitively neutral decisions, it also raises demarcation issues which may prove difficult to resolve.

10 This once again puts the objective of one-stop supervision at risk. This model might result in cross-border companies having to contend not only with a number of national authorities, but also with an additional, supranational regulator. 14. An alternative approach is a system of European supervisory authorities with supranational elements (e.g. along the lines of the ESCB or European competition regulation). The aim here would not be to subject all European banks to a central European regulator. There are various conceivable options: Banks operating across borders and with an EU-wide dimension are directly supervised by the European supervisory authority; banks with a regional focus can, in principle, continue to be supervised entirely by their national authorities. It is essential under such a model to ensure that there is a level playing field not only at EU level, but also between banks operating across Europe and those whose activities are confined to a particular region. «The EU authority could be assigned a certain degree of authority vis-ä-vis national regulators to rule out the possibility of major discrepancies in national supervisory practices and establish a level playing field across the EU.» Should certain supervisory tasks necessitate an awareness of market conditions, these could be carried out by national authorities even for banks operating across Europe. There would then no longer be one-stop supervision for cross-border banks, however. In the interests of consistent supervisory practices, a degree of authority vis-ä-vis national regulators would then be particularly important. Irrespective of the details, establishing such an EU supervisory authority, which would offer a number of advantages in terms of efficiency, is likely to prove feasible in the medium term at the earliest. It would require, among other things: «putting in place the necessary legal and possibly constitutional prerequisites to transfer powers from member states to the EU; «a European legal basis for creating a supervisory authority including, in particular, administrative, enforcement and cost aspects; «the organisational integration of the authority in the EU's system of high-ranking institutions and clarification of its relationship with the Council, Commission and ESCB etc.; «the establishment of corresponding European administrative law. Due to the need for member states to cede a degree of national sovereignty under this system - particularly where the granting of authority to issue instructions is concerned - this model will require strong political will. 15. A prerequisite for a European single market in financial services is a single set of regulatory and supervisory practices. In the long term, therefore, there is no alternative to

11 an integrated system of European financial services authorities, with a supranational European supervisory authority regulating at least cross-border companies. However, any supervisory structure aiming to achieve more than mere co-operation between peers will require member states and their supervisory authorities to surrender varying degrees of sovereignty. This issue thus has key political implications. Existing political resistance must be overcome by a process of confidence building and incremental progress. We believe a roadmap should be set up containing the following elements: a pragmatic approach in the short term, exploiting all possibilities of co-operation resting on a sound legal basis; «if the appropriate prerequisites are in place, the designation of lead regulators in certain areas (e.g. rating); the identification of fields which would lend themselves to regulation by a lead regulator (e.g. research); in parallel, the identification of the constitutional, administrative and organisational prerequisites for policymakers and market participants to establish a system of European supervisory authorities along the lines of the ESCB; «in the interests of the greatest possible transparency, regular evaluations of the legislative process, progress on integration and possible future developments along the lines of the reports by the IIMG and the Commission's groups of experts; an obligation for national supervisory authorities to publish regular comparative reports on their supervisory practices; the designation of appropriate intervals at which to re-examine all alternative ways forward. l n 'the., secu rities s,fegt&i$.^^ ': : '

12 and transfer 'tile ^s^ Since a integrate^ authority ;fai t to s]öp^ ny AM\ %i-l> : Eu^t^ ^tileäls^c^ si(c^n Berlin, 28 January 2005