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Insights and News /

21 April 2015

Strapped for cash: do EU regulators need a top-up?

The European Supervisory Authorities (ESAs) have warned that important milestones in key regulations, such as MiFID II and CRD IV, might be delayed in light of cuts and staff freezes.

In a strongly-word joint letter to EU legislators in November, the chairs of the ESAs warned that the proposed budgetary cuts would reduce its “capacity to continue to deliver on the objectives set out in the ESAs’ regulations and tasks”.

Despite these protestations, EU legislators decided to go ahead with the bulk of the cuts in March, cutting out about 15 per cent of their budget for the year ahead. 

In response, the ESAs re-publish their work programmes in March and April, taking into account its available resources, tasks and mandates, and priorities, with the following changes:

  • European Securities and Market Authority (ESMA): Technical standards and technical advice on some regulations, particularly for the Benchmark Regulation, CSDR and MiFID II, will be delayed and it will have limited capacity to translate guidelines.
  • European Insurance and Occupational Pensions Authority (EIOPA): The Solvency II training programme for supervisors will be reduced by 20 per cent and production of the IT supervisory toolkit related to XBRL reporting has been cancelled. Elsewhere 31 “products” have been reduced in scope, 12 have been downgraded and 27 have been cut entirely from the work programme. Products that EIOPA describes as being "severely hit" include those in the areas of financial stability and consumer protection.
  • European Banking Authority (EBA): Technical standards and advice under the CRD IV and the Bank Recovery and Resolution Directive and global standards on mitigation techniques on OTC derivatives will not be achieved on time. The revised work programme has also been modified to reflect new mandates EBA has on the proposed Regulation on interchange fees for card-based payment transactions (MIF Regulation) and updates on implementing technical standards on liquidity coverage ratio reporting and the disclosure template for leverage ratio under the CRD IV.

Established in 2011, the ESAs consists of the EIOPA, based in Frankfurt, the EBA in London, and the ESMA in Paris. They are tasked with the often thankless, but important task, of developing draft technical standards on EU financial regulations, and also issuing guidelines and recommendations, promoting cooperation or harmonisation between regulators and supervising various entities (such as Credit Rating Agencies and Trade Repositories).

The budget cuts fly in the face of some of the recommendations in the European Commission’s Review of the European System of Financial Supervision (ESFS), which completed its work in August 2014. The review highlighted the importance of bolstering the ESAs' resources as they were still in a “growing phase”. The review recognised the importance of the ESAs in driving home the post-crisis reforms agenda, which proved so difficult to agree.  

Currently, the ESAs' budgets are based on 60 per cent contribution from the national supervisors and 40 per cent contribution from the EU budget. While their budgets have been significantly increased since their inception most respondents to the ESFS review considered that the current funding arrangements are not commensurate to their increasing tasks and responsibilities. Long-term there is an urgent need to identify a more robust solution to the financing of the ESAs.

The European Commission president, Jean-Claude Junker, has given the financial services commissioner, Jonathan Hill, a mandate to overhaul how the ESAs are financed. Ultimately it may be down to the financial industry to fund the ESAs’ burgeoning mandate. While firms may initially balk at the idea of further levies, it might be worthwhile in the long-run if it reduces implementation delays and regulatory uncertainty.