Let’s build a European Financial Consumer Authority in Paris

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Two weeks left to respond to the European Commission’s consultation on the revision of the European Supervisory Authorities (ESAs) for the financial sector.

Here is an overview of where the debate stands so far on key issues, based on several debates, conferences and discussions with current and former ESA staffers. The European Parliament discussed its position on 3 May 2017 at 17:00 (recording).

The Authority shall have its seat in [Frankfurt am Main]

The major political debate hiding the real iceberg is the discussion about EBA’s future location. From the past few weeks, I would argue that there is an overwhelming support for the “German” version of what might become a “twin peaks” model: EBA moves to Frankfurt and ESMA effectively takes the lead on consumer protection, while continuing coordination in the Joint Committee.

Whether EBA and EIOPA become one legal structure, share an office building or nothing at all, is a secondary question. Given Commission Vice-President Valdis Dombrovskis’ remark in Bruges last week that this exercise would be a “targeted review”, I would in any case not expect a love affair between EIOPA and EBA beyond sharing a coffee machine – this is a discussion for later.

Politically, the matter has been decoupled from the ESA Review as Heads of State and Government have decided to further discuss the matter at the October 2017 Summit, which means the Commission has to move on with the ESA Review and propose legislation with a city name in the EBA Regulation in square brackets. And that city is not on the Oder river.

Strengthening ESMA’s consumer protection powers

Accepting that we won’t have one big integrated financial supervision authority in the EU (single supervisor) in the near future, the real iceberg is a more fundamental discussion about whether the authorities should continue to be split by sector, or move towards an activity-based split (conduct v. prudential), coined Twin Peaks (not the TV series) in 1995.

Following the lead of France, Belgium and The Netherlands over the past decade, the UK’s FSA split into the FCA (conduct) and moving the remainder to the Bank of England (prudential) is one of the latest examples in a series of national supervisors progressing towards twin peaks. I share Dirk Schoenmaker and Nicolas Véron’s excellent analysis that this is where the EU should move too, and certainly that no steps should be taken now to prevent such an outcome in the future.

Meanwhile, giving ESMA a clear conduct mandate seems to be the best way to ensure consumer protection is stepped up, and indeed current ESMA Chair Steven Maijoor does not hide his support (cf. his keynote speech at the CMU hearing on 11 April 2017) for this ambition:

“ESMA’s focus has shifted markedly from the single rule-book to supervisory convergence, but the experience indicates that stronger powers to ensure consistency across the EU are needed. Stronger tools would allow more effective and timely intervention to promote convergence of practices across the EU, while different combinations of tools might be needed to address specific convergence issues.”

The problems with CFDs, binary options, forex “trading” and boiler rooms, however annoying their daily phone calls are to me, are just the start. Given the appropriate resources, ESMA should step up  and start using its MiFID I (!) powers to ban products that are prone to lead to consumer detriment, beyond systemic risk (see Q7 of the Commission’s consultation). Especially as non-industry representatives, despite improvements, find it hard to weigh on the various expert and stakeholder groups created by the ESAs. Increasing ESMA’s powers and staff in Paris (not Strasbourg, please) might incidentally also help to create support by member states for the EBA move to Frankfurt.

Polluter pays principle

Despite strong industry statements about the unfairness of banks having to bear the cost of their own supervision, this should really be a non-issue. In fact, paying for costs incurred to the public is not a strange concept. As a citizen, I pay more than 100 euros to cover the cost of issuing my passport. When I move, I pay more than 100 euros to block a few parking spots in my street. Car manufacturers pay for their own (very effective) type approval process. All government services have become priced with some “polluter pays” principle over the past few decades. So why should I as a citizen pay for bank supervision? Yes, I benefit from safe banks, but I am not the one creating the systemic risk!

Both EBA and ESMA have an annual budget of roughly 40M euros, of which 1/4 is industry-financed in the case of ESMA. To completely remove contributions by national authorities and the EU public purse, a few tens of millions of euros need to be levied from the industry. In the case of EBA, that means that the largest (SIFI) banks would pay a million euros each – doesn’t sound like an issue you want to spend a lot of political capital on.

Some in the industry claim the ESAs cannot calculate proportionate fees because they do not have the required data. But is proportionality really needed? If so, why not use a simple proxy like staff numbers, total balance sheet, or apply a (two) bracket-based approach to not overly burden challenger banks with the same fee as SIFIs?

Balancing the co-legislators at Level 2

On several occasions, the Parliament insisted that it should retain the right to “challenge implementing measures at level 2” (paragraph 4, Van den Burg report, 2005).

And indeed, with PRIIPs in 2016, it formally used these powers for the first time in financial services. However, if we take another pertinent example, MiFID, it’s clear that Parliament’s influence has not been on par with that of the Member States. For more than a year, the Parliament sent letters to the Commission and ESMA to influence its internal decision-making under the threat of a rejection. Marginal improvements were made, e.g. on position limits (see Oxfam press release) but the margin for manoeuvre was limited as the Commission was operating between a potential Parliament and a potential Member State rejection. While formally the proposed RTS represented a middle ground, at the same time Member States were also using the influence of their supervisors as members of the ESMA Board of Supervisors, giving them an additional channel to influence the outcome.

In addition, on the side of both co-legislators, a continued effort should be made to sharpen the definition of what is political and what is technical. Particularly in the run up to the 2014 elections, the desire to complete legislative processes (in particular PRIIPs and MiFID II) has led to political decisions being pushed down to Level 2. It’s like agreeing to have a speed limit on highways, and then leaving the “technical” definition of the actual limit (a political trade-off between pollution, road safety and economic development) to a technical body.

Next Steps: revisiting Meroni

Thanks to our British friends, the ESA’s targeted post-Lisbon powers to intervene in financial markets have been tested by the the EU Court of Justice and deemed largely compatible with EU law, moving away from the 1957 Meroni decision which the UK claimed had been overstepped.

Post-Brexit and in light of a forthcoming convention (whenever it happens), the Meroni doctrine should perhaps be pushed aside to transform the ESAs into agencies with direct and binding decision-making powers, much like the ECB. This would end the political positioning on the Boards of Supervisors. In the meanwhile, moving as much powers as possible to the ESA Executive Boards would be an intermediate step forward.


In short, the targeted changes to the ESA Regulations should:

  • deal with EBA’s location in a way that is neutral to the future split of supervision tasks, pending the long-term move to a “federal” single supervisor;
  • show consumers of financial services that the EU is committed to making the internal market work for consumers by strengthening ESMA’s powers, and not going down the same path as the U.S. administration; and
  • continue strengthening the independence of the ESAs, by creating Management Boards as an intermediate step.

The debate will continue in the European Parliament, where MEPs on 3 May will discuss their view. I would hope that MEPs will leave EBA’s location for what it is, and discuss their core interest – the governance of the ESAs.

Disclaimer: this blog reflects a personal opinion only, based on my past experience. I currently do not represent clients with an interest in the ESA review.