As part of its overall strategy to ensure that all significant financial market players are subject to appropriate regulation and oversight, the European Commission (“Commission”) adopted a Communication on a new European financial supervisory framework on 27 May 2009.1 The package will cover both macro and micro-prudential supervision, and follows on from the Commission’s recent proposals on ratings agencies and hedge funds.

The plan will seek backing from EU leaders at next month’s European summit and in a public consultation open until July 15,2 and will become formal legislative proposals after the summer.

Main provisions
The Communication proposes a more stringent supervisory framework, to be composed of two pillars:

  • a European Systemic Risk Council (“ESRC”) which will have no formal legal status but will act as an early warning system for national authorities of any potential threats to financial stability arising from macro-economic developments and financial system-wide risks before they become insurmountable. In monitoring and assessing these systemic risks, the ESRC will issue non-binding recommendations for action where it deems it necessary to do so.3 As recommended by the de Larosière report,4 this new body is to be composed of central bankers, supervisory authorities, the Chairmen of the new European Supervisory Authorities (see below) and the Commission, and to be headed by the president of the European Central Bank. National supervisory authorities other than central bankers will have only non-voting, observer status. Decisions will be taken by majority vote, whereby votes will not be weighted.

  • a European System of Financial Supervisors (“ESFS”) which will oversee and coordinate the work of national regulators in order to ensure both financial stability at the firm-level and consumer protection in financial markets. Although day-to-day supervision of financial institutions is to remain within the competence of the Member States, this new arrangement is to be based on the collaboration between a network of the national authorities and three new European Supervisory Authorities (one each for the banking, insurance and occupational pensions, and securities sectors) that are to replace the existing consultative committees (known as Lamfalussy Level 3 Committees).5 Furthermore, the ESFS is to be responsible for the mediation of, and have the final say on, disagreements between national supervisors on the oversight of multinational financial institutions engaged in cross-border transactions, as well as the investigation of flagrant breaches of EC law. The system is also intended to produce a new single set of harmonised rules to govern the behaviour of financial institutions across the EU. In parallel, the intention is that all differences in the national transposition of community law stemming from exceptions, derogations, additions or ambiguities in current directives should be identified and removed. In addition, the Communication foresees an enhanced role for these new bodies in overseeing the prudential aspects of European mergers and acquisitions in the financial sector.

The idea behind this new structure of shared responsibilities, whereby certain specific supervisory functions6 are to be centralised at the European level, is to foster harmonised rules as well as uniform supervisory and enforcement practices via binding technical standards in specific areas and interpretative guidelines to be applied by the national regulators.

What is at stake
The package the Communication proposes will mark a new era of tighter regulation and more stringent supervision in which pan-EU authorities are on course to be given more power over assessing the prudential aspects of the provision of financial services within the EU. This is a direct response to the current developments in the banking sector.  In addition, the Commission wishes to create an opportunity for a far more centralised structure for the day-to-day regulation of all aspects of financial services provision in the Community. With the balance between national and European regulators likely to be recalibrated, market players will have to get to grips with the proposed new supervisory architecture within a very short period of time if the new structure is to come into force during the course of 2010 as the Commission intends. Given the opposition that a number of the provisions of the package proposed by the Commission’s Communication are likely to face, however, a significant number of changes can be expected before the formal legislative proposals are adopted in the autumn.

For more information, please contact:

Kiran Desai
Tel: +32 2 551 5959

Angela Hayes
Tel: +44 20 3130 3311
Nick Kynoch
Tel: +44 20 3130 3197

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Such recommendations shall force the authorities in question to “act or explain”, and shall be made public if the ESRC so chooses (see p.6 of the Communication).
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Committee of European Banking Supervisors (CEBS), Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and Committee of European Securities Regulators (CESR). Finance ministries are also represented on so called 'Level 2' committees – the European Banking Committee (EBC), the European Insurance and Occupational Pensions Committee (EIOPC) and the European Securities Committee (ESC).
Such tasks “could include such powers as those of investigation, on-site inspections and supervisory decisions” (see p.12 of Communication).