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European Commission - Fact Sheet

Capital Markets Union: Creating a stronger and more integrated European financial supervision

Brussels, 20 September 2017

Capital Markets Union: Creating a stronger and more integrated European financial supervision

1. The European System of Financial Supervision (ESFS)

What is the European System of Financial Supervision (ESFS)?

The European System of Financial Supervision was set up in November 2010 in the wake of the financial crisis following the recommendations of a group of high-level experts led by Jacques de Larosière. This system was created to strengthen financial supervision, better protect European citizens and ultimately rebuild trust in the EU financial system.

The ESFS consists of:

  • The three European Supervisory Agencies (ESAs) which supervise individual sectors and institutions (“micro-prudential” pillar);

  • The European Systemic Risk Board (ESRB), which oversees the financial system as a whole and coordinates EU policies for financial stability ("macro-prudential" pillar).

What are the ESAs and what do they do?

The ESAs are the European Banking Authority ("EBA"), the European Insurance and Occupational Pensions Authority ("EIOPA") and the European Securities and Markets Authority ("ESMA"). They contribute to developing a unified set of rules for EU financial markets (the "Single Rulebook"). They also help to foster supervisory convergence among competent authorities and to enhance consumer and investor protection. The ESAs play a key role in ensuring that the financial markets across the entire EU are well regulated, strong and stable.

In particular the ESAs contribute to:

  • improving the functioning of the single market for financial services, underpinned by sound, effective and consistent regulation and supervision;

  • ensuring the integrity, transparency, efficiency and orderly functioning of financial markets;

  • strengthening supervisory coordination;

  • preventing regulatory arbitrage and promoting equal conditions of competition;

  • ensuring that risks in their respective sectors are appropriately regulated and supervised; and

  • enhancing customer and investor protection.

2. Rationale for the proposals

Why are you proposing changes to the supervisory framework?

The EU's supervisory framework underwent a complete overhaul in the financial crisis, thanks to the establishment of the three European Supervisory Authorities for banking, capital markets and insurance and pensions, as well as the European Systemic Risk Board for the monitoring of macro-economic risks. Despite these important steps, the process of financial integration is a work in progress and needs to keep pace with developments both within the EU and at global level.

Having recovered from the financial crisis, the EU is now moving ahead to complete the Banking Union (BU) and the Capital Markets Union (CMU). More integrated financial markets are beneficial for the EU as a whole, but are particularly important for the Economic and Monetary Union, as set out in the Reflection Paper on Deepening the Economic and Monetary Union of May 2017 and in the Five Presidents' Report of June 2015.

Moreover, the Five Presidents' Report highlighted that a single European capital markets supervisor will ultimately be necessary. Strengthening the powers of the ESAs is also included in the first set of priorities of the June 2017 Mid-term review of the Capital Markets Union Action Plan.

To this end, the Commission is proposing to further strengthen and integrate EU financial market supervision. This requires a reinforced coordination role for all ESAs and new direct supervisory powers for ESMA. To make this work, the Commission is proposing to make the ESAs' governance and funding fit for their new tasks.

This reform is also a response to new opportunities and challenges in supervision: it will promote sustainable finance and make sure the EU is up to speed with new financial technologies (FinTech).

How did you come up with the proposal?

Today's proposals build on six years of operational experience with the ESAs, on almost 300 responses to the Commission's public consultations of autumn 2016 (on the ESRB) and of spring 2017 (on the ESAs) and an intense dialogue with all relevant stakeholders. They also take into account the March 2014 recommendations of the European Parliament and the review report prepared by the Commission in August 2014.

How will these reforms foster more supervisory convergence?

This proposal gives the ESAs coordination powers over day-to-day supervision by competent authorities. The ESAs will set EU-wide priorities for supervision in 'Strategic Supervisory Plans' against which competent authorities would be assessed. Competent authorities will be required to draw up annual work programmes in line with the Strategic Supervisory Plan.

In addition, the ESAs will have a stronger role in coordinating some critical areas of supervision where sufficient convergence has not been achieved to date:

  • The ESAs will be notified and asked for an opinion in specific cases when a financial institutional or market participant intends to significantly outsource, delegate or transfer risks to non-EU countries in a way that would allow it to benefit from the EU passport while essentially carrying out its activities outside the EU. This strengthened coordination role will avoid any risk of supervisory arbitrage and 'forum shopping';

  • EIOPA will be able to better coordinate the authorisation of internal models that insurance companies use to calculate requirements on solvency capital;

  • ESMA will collect data on transactions in financial instruments directly from market participants. This will allow ESMA to build market expertise, better use its supervisory powers and ensure a level playing field in the EU. Moreover, this will also allow ESMA to play a stronger coordination role in investigations of market abuse cases with a cross-border dimension. ESMA may also recommend that competent authorities investigate market abuse cases in specific circumstances.

Will the balance between euro area and non-euro area countries be affected?

The proposals apply to all EU Member States. Following the establishment of the Banking Union, specific safeguards currently apply at the EBA for those Member States that are not yet part of the Banking Union. Those safeguards will continue to apply. Votes will need to be backed by a majority of national authorities from non-Banking Union countries. This should ensure that non-Banking Union countries are fairly represented in the decision making process at the EBA.

In addition, the new Executive Board of the European Banking Authority is required to be composed in a way that is balanced and in the interest of the EU as a whole.

3. Key features of the proposal

Why are you proposing more competences for ESMA?

Well-integrated capital markets are essential for the financing of the EU's real economy, essential for a well-functioning Capital Markets Union and act as important shock-absorbers in the Economic and Monetary Union. Integrated capital markets facilitate private risk-sharing across borders, while conversely also reducing the potential need for public risk-sharing. More integrated supervision at EU level also means fewer costs and obstacles for financial firms that wish to expand within the EU and more choice for consumers. In addition, integrated supervision reduces the risk of regulatory arbitrage, ensuring the same standard of supervision for non-EU players who can also benefit from a single point of entry in the EU.

On this basis, the Commission is proposing to extend ESMA's direct supervision to some specific areas of capital markets. In particular, ESMA will directly supervise specific sectors which are highly integrated, have important cross-border activities and which are, in most cases, regulated by directly-applicable EU law.

At the same time, the Commission is not proposing to change the responsibilities of national authorities to supervise other areas such as central depositories, money market funds, trading venues, UCITS or alternative investment funds. The Commission is proposing to entrust ESMA with the following direct supervisory powers:

  • Critical benchmarks

These are indices or indicators used to price financial instruments and financial contracts or to measure the performance of an investment fund. ESMA will supervise benchmarks that are deemed to be critical (such as EURIBOR and EIONIA) and will also endorse all non-EU benchmarks used in the EU.

  • Data reporting services

Data reporting service providers enable the reporting of transactions in financial instruments to regulators and the market. Centralising the authorisation and supervision of these operators, required by MiFID II, in ESMA will reduce fragmentation and costs and should ensure the same quality and reliability of data across the EU.

  • Market Abuse


ESMA will have a greater coordinating role in market abuse cases. It will have the right to act in specific cases, where certain orders, transactions or behaviour give rise to well-founded suspicion and have cross-border implications for the integrity of financial markets or financial stability in the EU. ESMA will be able to recommend that authorities in the Member States concerned initiate an investigation and exchange relevant information among each other and with ESMA. These new powers are in line with ESMA's mandate to ensure the orderly functioning of markets and financial stability.

  • Prospectuses

These are documents that contain the information an investor needs to have before making a decision whether to invest in a company. While the majority of prospectuses will still be supervised nationally, supervision of certain prospectuses will be transferred from national regulators to ESMA. These prospectuses have an important cross-border dimension and potential risks of supervisory arbitrage:

  • Prospectuses for certain wholesale non-equity securities and asset-backed securities (such as securitisations);

  • Prospectuses by specialist issuers (such as property companies, mineral companies, scientific research-based companies, shipping companies);

  • Prospectuses by non-EU country issuers.

Moreover, ESMA will be able to control advertisements for offers of securities or requests for admission to trading for which ESMA has approved the corresponding prospectus.

The reform will streamline the process especially for approving prospectuses to be distributed across borders by establishing a single point of entry to tap EU capital markets, without further notification needs, reducing the administrative burden for market operators. In addition, ESMA will benefit from economies of scale in the approval of prospectuses.

  • EuVECA, EuSEF and ELTIF funds

    European Venture Capital Funds (EuVECA), European Social Entrepreneurship Funds (EuSEF) and European Long-Term Investment Funds (ELTIF) are collective investment funds with EU labels whose rules are harmonised at EU level and which are to be sold to investors across the EU.

    The proposal will confer on ESMA the direct supervision of these funds. A single supervisor ensuring a uniform application of the rules will allow managers to lower transaction and operational costs for the benefit of investors. Moreover, the centralised authorisation and supervision of these funds will achieve economies of scale.

  • Product intervention powers

    These powers are set out in the Markets in Financial Instruments Regulation (MiFIR). They allow ESMA and national supervisors in certain exceptional and well-defined cases to restrict or prohibit the marketing, sale or distribution of units or shares in UCITS (Undertakings for Collective Investment in Transferable Securities) or alternative investment funds. The proposal extends these supervisory powers to cover also fund managers, in addition to MiFID firms and credit institutions. The extension of these powers will ensure that intervention powers are applied and interpreted consistently by national supervisors and are enforceable against all financial entities on the market. 

How will ESMA be equipped with the expertise and staff to carry out its new tasks?

The proposal will add to the tasks that the three ESAs – and ESMA in particular – carry out today. The new funding system that the Commission is today proposing will give the ESAs the necessary resources to employ the highly-qualified staff needed for these purposes, subject to appropriate review by the Parliament and the Council. For all three ESAs, the Commission made a detailed estimation of what will be required to make stronger supervision work. This is set out in the legislative financial statement accompanying the proposal.

What are the main changes to the way ESAs are governed?

The ESAs must be equipped with a solid governance structure which allows decisions to be taken quickly in the European interest while integrating the knowledge and experience of national supervisors. Under the proposals, national supervisors will continue to set overall directions and decide on regulatory matters within the Boards of Supervisors in each ESA. However, newly-created, independent Executive Boards, similar to the boards of the European Central Bank (ECB) and the Single Resolution Board (SRB), will be in charge of case-by-case decisions and certain supervisory matters in each ESA.

The new Executive Boards will prepare the ESAs' work programmes and budget. It will have decision making powers vis-à-vis individuals and competent authorities for certain non-regulatory matters such as dispute settlements, breach of Union law, reviews of competent authorities, and convergence activity for competent authorities. In certain areas, the Executive Board will also prepare decisions for adoption by the Board of Supervisors. Each Executive Board will consist of a Chairperson and full-time members (3 for EBA and EIOPA and 5 for ESMA).

What new funding system is being proposed for the ESAs?

Currently there is a fixed distribution of funding between national authorities (60%) and the EU budget (40%). This rigid funding structure has been deemed insufficient and has often meant in practice that the ESAs have not been able to find the resources needed to cope with increased workloads and have had to abstain from doing certain other tasks. This proposal introduces a new funding system to ensure that the resources of the ESAs are commensurate with their tasks.

The new system will also give ESAs more independence and flexibility when it comes to funding, by reducing the impact of public budgetary constraints – i.e. the growth rates of national budgets may not increase as fast as the growth rates of ESAs' activities. While the EU budget will continue to contribute a share of the ESAs' funding, less of it will come from the public sector. Instead, industry and market participants that benefit most directly from the supervisory convergence fostered by the ESAs should play a stronger role in the financing of the ESAs for the benefit of doing business in a stable and competitive market.

How will the burden of industry contributions be spread across the sector?

Contributions should be fair and proportionate to the benefit they can draw from the work done by the ESAs. Concretely, each subsector will have to bear the costs of the work carried out by the ESAs in relation to that sector. Within the sector, contributions will be distributed according to the size, reflecting the importance of financial firms.

Will these proposals increase the burden on the financial sector?

Not necessarily. As industry contributions are being introduced, the contributions by national supervisors – in many cases also financed by the financial sector – will be reduced to zero. Moreover, contributions will be collected by national authorities, who may where applicable use existing collection systems.

Will the ESAs be able to increase their budgets without limits?

No. Since part of the funding will continue to come from the EU budget, the EU budget procedure and budgetary discipline will continue to apply.

How will EIOPA's supervisory role change?

EIOPA will have a stronger role in promoting convergence in the validation of internal models that insurance companies use to calculate requirements on solvency capital. This will help overcome fragmentation and ensure better and more integrated supervision of the large cross-border insurance groups.

Solvency II allows the use of internal models by insurers, subject to supervisory approval. Despite ongoing work by EIOPA on supervisory convergence in internal models, major inconsistencies remain in the requirements of national competent authorities for internal models across the EU. Divergence in the supervision and approval of internal models may lead to inconsistencies, and creates an unlevel playing field. Today's proposal will enhance supervisory convergence by setting out in further detail EIOPA's role with regard to internal models through: provisions on cooperation; information sharing; clear powers for EIOPA to adopt opinions and guidelines in this area, and to contribute to dispute settlement.

Furthermore, EIOPA will set EU-wide priorities for supervision in the form of a 'Strategic Supervisory Plan' against which all competent authorities will be assessed. Competent authorities will be required to draw up annual work programmes in line with the Strategic Plan. This means EIOPA will be able to ensure convergence with respect to the prudential supervision of insurers who are primarily active in Member States other than where they are established and supervised.

What are the benefits of the proposals for market participants and other interested parties?

  • Consumers, investors and businesses

Better-functioning supervision will help the EU financial sector fulfil its primary objective of channelling savings to productive investments, and thus support economic growth. It will enhance the confidence of consumers, investors and businesses. The reformed supervisory system will better protect users of financial services, including through greater convergence of conduct-of-business supervision. It will also facilitate access to finance by strengthening the resilience and preventing the failure of individual financial institutions. The role of the stakeholders groups in the decision making process of the ESAs will be enhanced, in particular on budgetary matters.

  • Market participants

Thanks to the reform, for financial firms active across borders improved cross-border and cross-sector supervision will reduce compliance costs thanks to harmonised standards and supervisory practices. For example, there will be a one stop shop for the reporting of capital markets data, filing of prospectuses, or authorisation of benchmark providers or EU label funds, without further notification requirements to different national authorities.

At the same time the reforms will further improve the level playing field among different domestic firms, firms operating across the Single Market and firms operating from third countries.

Finally, the need to strengthen stakeholder involvement when developing guidelines and recommendations, and the need to take into account new developments in relation to FinTech or sustainable finance will ensure that supervisors are fully up to speed with market developments, which will help supervised firms to anticipate and adjust to new trends and maintain a competitive edge.

  • National competent authorities

Today's proposal will maintain a strong role for national authorities in many areas of supervision, as well as their experience and know how in the ESAs governance, while ensuring efficient decision-making in the common European interest. At the same time, the proposals will help national authorities to maintain the necessary standards of financial supervision, by reassuring them that similar supervisory standards are applied in all other EU Member States. Finally, support by the ESAs will help national authorities promote sustainable finance and stay up to speed with FinTech and other new developments.

Will stakeholders have a stronger say in the guidelines and recommendations issued by the ESAs?

Yes. Many stakeholders have pointed to the need for improvements in the ESA stakeholder processes and the proposals address this matter. First, the ESAs will as a rule have to carry out cost-benefit analysis.

Second, each ESA has a stakeholder group composed of experts representing financial institutions, employees' representations, consumers and users of financial services, representatives of SMEs and academics. When two-thirds of the members of a stakeholder group deem that the relevant ESA has exceeded its competence by issuing certain guidelines or recommendations, they may send a reasoned opinion to the Commission.

Based on an explanation from the ESA concerned, the Commission will assess whether the guidelines or recommendations exceed the competence of the ESA. After having given the ESA the opportunity to state its views, the Commission may adopt an implementing decision requiring the ESA to withdraw the guidelines or recommendations concerned. The decision of the Commission will be made public.

The European Banking Authority (EBA) will need to be relocated as a consequence of Brexit. Is this what you are proposing today?

No. The decision to relocate the EBA is for the governments of the 27 Member States to take (IP/17/2202).

4. Sustainable finance and FinTech

How will the ESAs promote sustainable finance?

The financial sector has a vital role to play in reaching the climate change goals of the Paris Agreement and the EU's 2030 Agenda for sustainable development. It is also essential that more private capital is mobilised towards green and sustainable investment so as to enable the transition to a low-carbon economy. Some Member States are moving faster than others in harnessing the potential of sustainable finance. It is important to avoid that this leads to financial market fragmentation. In this context, the ESAs can contribute to more coordinated ESG supervision of environmental, social and governance (ESG) criteria across the EU financial sector.

The Commission is proposing to require the ESAs to integrate ESG risks into their work. This will enable the ESAs to monitor how financial institutions identify, report and address risks that ESG factors may pose to financial stability, thereby making financial markets activity more consistent with sustainable objectives.

The ESAs will also provide guidance on how EU financial legislation can integrate sustainability considerations and promote the implementation of these rules.

How will the ESAs promote FinTech?

Financial Technology (FinTech) is transforming financial services. It facilitates access to financial services and makes them more convenient. It increases operational efficiency and can lower costs for consumers. It may also lower barriers for new market players and increase competition. For these benefits to happen, it is important to ensure the integrity and resilience of IT systems, data protection, and fair and transparent markets.

As financial services become more technology and data dependent, regulators and supervisors must be familiar with these technologies and be able to accommodate them. As part of the Capital Markets Union, the Commission is working on a comprehensive strategy setting out what detailed actions must be taken to address these challenges and allow for an integrated market for digital financial services without constraints to economies of scale and scope.

As a first step in that direction, the ESAs will now have to take account of all issues related to technological innovation while carrying out their tasks. This will require them to enhance a common EU supervisory culture as regards technological innovation among competent authorities. In particular, the ESAs will be tasked with coordinating national technological innovation instruments and tools - such as innovation hubs or ‘sandboxes' - set up by national supervisors. Furthermore, the ESAs will promote technology literacy with all national supervisors alongside information sharing on cyber threats, incidents and attacks. Through more coordinated approaches towards cybersecurity and resilience measures, the ESAs will also contribute to enhancing the security and integrity of the European financial sector.

5. Review of the European Systemic Risk Board (ESRB)

Why are you proposing changes to the ESRB now?

The ESRB Regulation stipulates that the ESRB must be assessed to determine if its mission and organisation need to be reviewed. In this context, the Commission conducted a public consultation in autumn 2016 and organised a public hearing in November 2016.

The Commission concluded that the ESRB is contributing to safeguarding EU financial stability and developing the EU macro-prudential framework by:

  • issuing recommendations and warnings to a wide range of addressees, including Member States and national supervisory authorities;

  • acting as a coordination platform and information hub for national authorities as regards macro-prudential policy measures;

  • monitoring EU-wide systemic risks;

  • providing guidance on the use of macro-prudential instruments.

However, recent institutional developments – the establishment of a Banking Union and efforts to build a Capital Markets Union – have changed the context in which the ESRB operates and need to be reflected in the ESRB's governance. As a result, targeted adjustments are needed to the ESRB composition and organisation, and its coordination with EU bodies and institutions. In addition, other provisions of the ESRB regulation needed to be updated. The founding Regulation stipulates that the ESRB is chaired by the President of the ECB for a term of five years following its entry into force, i.e. until 15 December 2015. Thereafter, the Chair of the ESRB shall be designated or elected in accordance with modalities to be determined on the basis of the review provided for in the Regulation.

What are the main features of the ESRB Review?

The Commission proposes the following changes:

  • ESRB Chair:

The ESRB has been chaired by the President of the European Central Bank (ECB). This set-up was initially envisaged for a period of five years. The ECB President has conferred authority and credibility to the ESRB and ensured that it can effectively build and rely on the expertise of the ECB in the area of financial stability. Therefore the Commission proposes that the ECB President become the permanent chair of the ESRB.

  • ESRB Secretariat:

The Commission proposes to enhance the role of the Head of the ESRB Secretariat by changing her or his selection procedure and clarifying her or his role. This will raise the profile of the ESRB and the impact and effectiveness of its warnings and recommendations.

  • Composition of the ESRB:

The Commission proposes that representatives of the Single Supervisory Mechanism (SSM) and of the Single Resolution Board (SRB) become voting members of the ESRB General Board. Corresponding adjustments will also be made to the Advisory Technical Committee and the Steering Committee. In line with the proposal to align the membership of the General Board, the Commission is proposing to specifically include the ECB as a potential addressee of ESRB warnings and recommendations for its tasks conferred by the SSM Regulation, i.e. not pertaining to the conduct of monetary policy.

  • Better Regulation:

In line with Better Regulation principles and where appropriate, the ESRB's advisory committees are expected to consult interested parties such as market participants, consumer bodies and experts, to inform their opinions, recommendations and decisions.

What happens next?

The proposals will now be discussed by the European Parliament and the Council.

6. For More Information

Press Release (IP/17/3308)


Website on the European system of financial supervision


Press contacts:

General public inquiries: Europe Direct by phone 00 800 67 89 10 11 or by email

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