The Role of CESR

Prof. dr. sc. Edita Čulinović Herc Mihaela Braut Filipović, Ph.D. candidate

The Role of CESR in EU Securities Market Law From technical advisor to sectoral supervisor

1. Introduction The Lamfalussy process deeply reformed law-making in financial sector, i.e. internal market of the EU. The main characteristic of the Lamfalussy model, as introduced in the 2001 Report of Wise Men Committee, is that it is a model based on comitology and extensive consultation with market participants, where committees advise and assist Commission in its regulatory policy. Since the comitology means that Parliament and Council delegated law-making powers to Commission, and subsequently to the level 2 and level 3 committees of the Lamfalussy model, it raised a justified concern to Parliament that the committees, namely the European Securities Committee (ESC) and the Committee of European Securities Regulators (CESR), will become too powerful law-making factors in financial market. It was reluctant as to whether Lamfallussy legislative technique would be able to grant expected level of transparency, legal certainty and to preserve principle of institutional balance. Indeed, CESR showed a great expansion of its sphere of influence and consequently, it exceeded the pure advisory role. Also, it occasionally acted independently and outside of the area of its competences. At the same time, it grew into a respectful institution, which opinions and interpretation of the existing legislative provisions significantly contributed to the uniform application of legislation under the EU internal market. The obstacle in achieving the complete harmonisation was the fact that recommendations and interpretations are a soft law instruments, which could not legally bind physical persons nor national supervisors. New legislative proposal made by Commission radically changes the role of CESR, by building the platform of independent national and EU supervisors, the so-called European System of Financial Supervisors (ESFS). In that new network, CESR became one of the sectoral supervisors of the EU internal market, with the power to make legally binding decisions towards market participants and national supervisors, although under strict

1 conditions. Authors shall further explore how CESR developed from the technical advisor on level 2 and coordinator on level 3 to the sectoral supervisor.

2. The role of the CESR in the securities sector under the Lamfalussy process The Lamfalussy process was created as a tool to help in realization of Council’s Financial Services Action Plan (FSAP)1, which goal was to introduce 42 EU laws which would remove the obstacles in forming the EU internal financial market. Its creation was aimed to overcome lengthy three to four years necessary procedure for adopting legislation in the inter-institutional co-decision procedure in the securities field. Also, lengthy procedures often resulted in adoption of overly detailed and prescriptive measures, which had a negative impact on the internal market. In order to address these concerns, Lamfalussy model was introduced in 2001 by the report of the Committee of Wise Men (CWM)2, under the chairmanship of Baron Alexandre Lamfalussy. The Lamfalussy process established the four-level system for adoption of framework legislation in the securities field. The task of the level 1 is to reach an agreement in co-decision procedure between the European Parliament and the Council of Ministers on framework principles and definition of implementing powers in the new legislative act3. Before the said co- decision procedure, proposals and initiatives come from the Commission after the full consultation process with market participants. Adopted principles by Parliament and Council represent the specific essential elements of each proposal. Technical measures for implementing the framework principles are left for the level 2. Under the Lamfalussy model, Commission in 2001 established ESC4 and CESR5 and provided that they have an important role in level 2 and level 3 for adopting framework legislation and in supervising its implementation. Both committees are established primarily as an advisory body of the Commission. ESC has the role to advice Commission primarily on policy issues, and it accordingly consists of high

1 Communication from the Commission - Implementing the framework for financial markets: action plan, COM/99/0232 final, Official Journal C 040 , 07/02/2001 P. 0453 – 0459. 2 Final Report of the Committee Of Wise Men on the Regulation Of European Securities Markets Brussels, 15 February 2001, http://ec.europa.eu/internal_market/securities/docs/lamfalussy/wisemen/final-report-wise-men_en.pdf, (Report of WMC). 3 P. 27 of the Report of WMC. 4 Commission Decision 2001/528/EC [2001] OJ L191/45, Proposal and Explanatory Memorandum at COM(2001)1493 (hereinafter: the ESC decision). 5 Commission Decision 2001/527/EC [2001] OJ L191/43, Proposal and Explanatory Memorandum at COM(2001)1501, (hereinafter: the CESR decision)

2 level representatives of Member States6. On the other hand, CESR’s role is to prepare technical advice, which is created on the basis of extensive consultations with market participants7. In the decision establishing CESR, it is defined as “independent body for reflection, debate and advice of the Commission in the securities field”8. One of the further differences between ESC and CESR, is that CESR, before presenting the Commission with its opinion on securities market, must consult extensively and at an early stage with the market participants9. Member States are represented in CESR by the high-level officials from their respective regulatory / supervisory authorities in the field of securities. The necessity for a close operational cooperation between CESR and Commission resulted in provision that members of Commission are present in the CESR’s meetings as well10. However, Commission clearly emphasized that CESR has no regulatory powers at Community level11. On the level 2, CESR consults with market participants, consumers and end-users in order to give formal advice to the Commission regarding the implementation of the framework principles12. CESR is authorised to give advice when requested by Commission or on its own initiative13. After that, Commission forwards the proposal to ESC to vote on the proposal. If the ESC does not vote for the adoption of the proposal, the measures are delivered to the Council. However, European Parliament is the final decision making body on whether implementing powers exceed the framework principles14. If they do not, the entire process goes to the level 3. It is interesting that Parliament’s biggest concerns and objections to the Lamfalussy process were regarding the work of committees on Level 2. In particular, Parliament was reluctant to allow that sensitive issues of implementation of the legislation are delegated to the committees. Parliament feared that committees, CESR and ESC, will become too powerful, and that they will ruin the inter-institutional balance. For that reason, additional control mechanisms were added in the Lamfalussy model. First of all, Parliament was given the power to decide whether implementing measures of the

6 Article 2 and Article 3 of the ESC decision. 7 Visscher,De Christian, Maiscocq, Olivier, Varne, Frederic: The Lamfalussy Reform in the EU Securities Markets: Fiduciary Relationships, Policy Effectiveness and Balance of Power, Journal of Public Policy (2008), 28: 19-47, p.22. 8 P. 2 of the CESR decision. 9 Article 5 of the CESR decision. 10 Article 7 of the CESR decision. 11 P.3. of the CESR decision. 12 Page 36 of the Report of WMC. 13 Article 2 of the CESR decision. 14 Visscher,De C., Maiscocq, O, Varne, F., op.cit., p.22.

3 committees exceeded the level 1 legislation15. In that way, a new type of comitology was introduced, the “regulatory procedure with scrutiny”16 where Parliament has stronger position than in classic comitology. Also, Parliament insisted on the insertion of the so-called “sunset clause”17. The role of the sunset clause is to place a time-limit, usually four years, on delegation of law-making powers to committees on level 2, which allows Parliament to periodically revise and controls the process. Commission also reaffirmed its obligation towards the Council, under which it shall “not to go against predominant views within the Council”18, i.e. the so-called “aerosol clause”. On that way, Council and Parliament are both given the power to ensure that implementing measures on level 2 are in the accordance with the EU policy and that they do not exceed level 1 legislation. However, the issue of inter-institutional balance remained the primary concern regarding the entire evolution of the Lamfalussy process. On the level 3, the so-called “coordination level”, based on the adopted proposal through the first two levels, CESR’s task is to ensure effective implementation of the measures by using administrative guidelines, joint interpretation recommendations, common nonbinding standards in areas not covered by the EU legislation, benchmarking and peer review19. It is in accordance with CESR’s duty to “contribute to the common and uniform day-to-day implementation of Community legislation”20. Also, CESR’s role is to help Commission in its supervisory role, by obtaining a nonbinding opinion when requested to do so or on its own initiative21. Also, CESR should facilitate the exchange of the information between supervisory authorities22, and perform other duties in order to enhance the entire Community supervision in implementing legislation in financial sector. Level 4 is an enforcement phase where the Commission has the main role in monitoring how the adopted measures are being implemented in the Member States23.

15 Moloney, Niamh:EC Securities Regulation, 2.ed. Oxford, 2008, p. 1022. 16 Schusterschitz, G. and Kotz, S. „The Comitology Reform of 2006. Increasing th Powers of the EU Parliament Without Changing the Treaties“ (2007), Cambridge LJ 68. 17 Moloney, N., op.cit, p. 1029. 18 Visscher,De C., Maiscocq, O, Varne, F., op.cit., p.25. 19 Page 39 of the Report of WMC. 20 P. 3 of the CESR decision. 21 Article 4.b of the CESR decision. 22 Article 4.c. of the CESR decision.. 23 Page 40 of the Report of WMC.

4 The main advantages which were expected that the Lamfalussy model shall introduce were the following. First, it was expected that the legislative process would speed up24. This should be done by achieving that the Council and the Parliament in the co- decision procedure focus solely on the essential issues, and leave the implementing details to CESR. Second, it was expected that the process shall maintain democratic and institutional balance, since implementing measures from the level 2, have to be approved by the Council and the Parliament in the co-decision procedure25. Third, it was expected that the EU institutions shall benefit “from the technical and regulatory expertise of European regulators”26. In 2002, the European Parliament, the Council of Ministers (ECOFIN Council) and the European Commission established the Inter-institutional Monitoring Group for securities markets (IIMG)27. IIMG was composed from six independent experts, where each of the constituting institutions nominated two of them. Their goal was to asses the progress of the implementation of the Lamfalussy process in the securities markets and to identify any possible obstacles in the process, as well as to enhance the regulatory framework in the securities market. Although they had certain remarks on the process, it can be said that their general conclusion was that the “Lamfalussy Process is working well overall and has led to swifter preparation of legislation”28. Also, market participants and stakeholders agreed that consultation periods were systematic and transparent. The role of CESR was evaluated to be very important, since it was found that CESR’s level 2 advice was generally accepted by both the Commission and the ESC. In fact, some assessments went so far as establishing that even 90% of the CESR’s advice was accepted29. However, in certain politically sensitive issues, as occurred in the example of Investment Recommendations Directive and in question of credit rating agencies, Commission and ESC did not follow CESR’s advice30. However, in order to preserve good relations between the

24 P. 24 of the Report of WMC. 25 Ibid., p. 24.. 26 Ibid., p. 245. 27 Financial Markets: Inter-institutional Monitoring Group for securities markets meets for the first time, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/02/1452&format=HTML&aged=0&language=EN&guiLanguage=en 28 Inter-Institutional Monitoring Group: Third Report monitoring the Lamfalussy Process, http://ec.europa.eu/internal_market/securities/docs/monitoring/third-report/2004-11-monitoring_en.pdf, p. 6. 29 Inter-Institutional Monitoring Group: Second Interim Report monitoring the Lamfalussy Process, http://www.europarl.europa.eu/comparl/econ/lamfalussy_process/iimg/200312monitoring_en.pdf , p.10. 30 Moloney, N., op.cit., p. 1022.

5 institutions, Commission thoroughly explained reasons for taking different opinions, thus abandoning CESR’s advice31. Positive evaluation of the Lamfalussy process encouraged the Commission in its idea of extending the process to other areas of financial market as well.

3. The role of CESR after the extension of the Lamfalussy process to insurance and investment funds area After the positive evaluation of the Lamfalussy process, Commission proposed extension of the Lamfalussy process to banking, insurance and occupational funds, as well as expansion of the work of the CESR and ESC to include the area of investment funds, i.e. the Undertakings for Collective Investment in Transferable Securities (the UCITS)32, although it was not initially contemplated. Accordingly, the Directive 2005/1/EC33 established a new organisational structure for financial services committees. Directive repeats that the main principle of the Lamfalussy process, which consists of the transparency and interinstitutional balance, must be achieved in extended areas as well34. The main goal of the Directive is to improve the quality of the legislation and to speed up its adoption in banking, insurance and investment funds areas, in order to improve the quality of the EU internal market35. Directive introduced four newly established committees in banking and insurance area which main task was to implement legislation under the Lamfalussy process. The new regulatory committees were the European Banking Committee (EBC)36 and the European Insurance and Occupational Pensions Committee (EIOPC)37, while the supervisory committees were the Committee of

31 Moloney, N., op.cit., p. 1068. 32 Financial services: Commission presents measures to improve regulation of banking, insurance and investment funds, IP/03/1507, 06/11/2003, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/03/1507&format=HTML&aged=0&language=EN&guiLanguage=en 33 Directive 2005/1/EC of the European Parliament and of the Council of 9 March 2005 amending Council Directives 73/239/EEC, 85/611/EEC, 91/675/EEC, 92/49/EEC and 93/6/EEC and Directives 94/19/EC, 98/78/EC, 2000/12/EC, 2001/34/EC, 2002/83/EC and 2002/87/EC in order to establish a new organisational structure for financial services committees, OJ L 79, 24.3.2005, p. 9–17, http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:079:0009:0017:EN:PDF. 34 Directive 2005/1/EC, op.cit., P. 9. 35 Ibid., p. 10. 36 2004/10/EC: Commission Decision of 5 November 2003 establishing the European Banking Committee, OJ L 3, 7.1.2004, p. 36–37, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=CELEX:32004D0010:EN:NOT 37 2004/9/EC: Commission Decision of 5 November 2003 establishing the European Insurance and Occupational Pensions Committee, OJ L 3, 7.1.2004, p. 34–35, http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004D0009:EN:NOT.

6 European Banking Supervisors (CEBS)38 and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)39. Two already existing and operating committees, ESC and CESR, were implemented as they were given the supervisory role on the implementation of the legislation on collective investment funds, which was prior under the authority of the UCITS Contact Committee40. Since the Lamfalussy process was extended, the IMMG for financial markets was re- established in 2005 in order to evaluate whether the extension created exptected progress in the EU internal market41. Although the IIMG found that significant progress was made under Lamfalussy process, it concluded that “The Lamfalussy process has not so far led to the expected improvement of transposition performance.”42 The IIMG found that the main obstacles are unclear line between the level 1 and level 2, which resulted in excessive detail legislation instead of the framework legislation on the Level 1, as well as the over tightly timeframes for the implementation on the level 2. Report analyzed the problem of excessive legislation details on the level 1 on the example of MiFID43 Directive. It suggested that a new conduct business regime, implemented in MiFID, could have included basic principles as are due diligence, adequate disclosure and the necessity to differentiate between professional and retail investors, but not and much more extensive approach which is taken in MiFID. In particular, current conduct business regime of MiFID reflects the political issues of

38 2004/5/EC: Commission Decision of 5 November 2003 establishing the Committee of European Banking Supervisors, OJ L 3, 7.1.2004, p. 28–29, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=CELEX:32004D0005:EN:NOT. 39 2004/6/EC: Commission Decision of 5 November 2003 establishing the Committee of European Insurance and Occupational Pensions Supervisors, OJ L 3, 7.1.2004, p. 30–31, http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004D0006:EN:NOT. 40 2004/7/EC: Commission Decision of 5 November 2003 amending Decision 2001/527/EC establishing the Committee of European Securities Regulators, OJ L 3, 7.1.2004, p. 32–32, http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004D0007:EN:NOT; 2004/8/EC: Commission Decision of 5 November 2003 amending Decision 2001/528/EC establishing the European Securities Committee, OJ L 3, 7.1.2004, p. 33–33, http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004D0008:EN:NOT. 41 Financial markets: Inter-institutional Monitoring Group for financial services re-established, IP/05/1002,25/07/2005, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/05/1002&format=HTML&aged=0&language=EN&guiLanguage=fr. 42 Inter-institutional Monitoring Group: Final Report Monitoring the Lamfalussy Process, p.11., http://ec.europa.eu/internal_market/finances/docs/committees/071015_final_report_en.pdf 43 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1–44 amended with Directive 2006/31/EC of the European Parliament and of the Council of 5 April 2006 amending directive 2004/39/EC on markets in financial instruments, as regards certain deadlines (Text with EEA relevance) OJ L 114, 27.4.2006, p. 60–63.

7 the degree of the autonomy, protection and paternalism of retail investors44, which surpasses tasks of the Parliament on the level 1. However, in spite of the Parliament’s role in MiFID, Commission made considerable efforts to engage Parliament in level 2 on an informal way, through constant informing, taking into account Parliament’s views, by explaining its position regarding certain measures and etc45. On that way, the relation between Parliament and level 2 committees significantly improved. Report also suggests that regulatory self-restraint in all levels of Lamfalussy process is the essential key for success. CESR itself published the “Questionnaire on Assessment of CESR’s activities between 2001 and 2007”46. That questionnaire was addressed to any interested market participant or consumer who is interested in the work of CESR. Addressees could choose to find CESR’s activities and influence on the EU internal market as “quite high” or “very high” or “quite low” or “very low.” Given data show that none of the market participant evaluated CESR’s activities as “quite low” or “very low.” Thus, it clearly demonstrated how the market participants recognized CESR as an important and influential factor in law-making proceeding in EU financial market. Further, CESR acted independently as a unified actor in other sectors, “playing other international roles” and “placing it in a legal no man’s land”47. For example, in the IOSCO action regarding rating agencies, CESR actively took a stand, thus significantly influencing on the area beyond its competences. CESR took that action independently, before making a report to the Commission48. It is without any doubt that CESR’s powers expanded from the initial technical advisory body in the Lamfalussy process.

44 Moloney, N. op cit., p. 1038. 45 Moloney, N. op cit., p. 1067. 46 Available at: www.cesr-eu.org. 47 Posner, Elliot: "The Lamfalussy Process: Polyarchic Origins of Networked Financial Rulemaking in the EU" in EU Governance: Towards a New Architecture? Eds., Charles F. Sabel and Jonathan Zeitlin Oxford: Oxford University Press, 2010, p.53. 48 Ibid, p.53.

8 Till now, there were four Directives under the Lamfalussy model in the securities sector: Markets in Financial Instruments Directive (MiFID)49, Market Abuse Directive50, Prospectus Directive51 and Transparency Directive52. It is interesting how the Lamfalussy process evolved through each Directive. The Market Abuse Directive was the first that went through the level 2 committees and it set the path for others. However, that path evolved. For example, except in MiFID, other Directives set a list of general principles to guide Commission in level 2, thus restricting and controlling the role of committees and Commission in adopting legislation53. Such measures reflect concerns from the Parliament, which primary goal was to control the extent of the level 2 delegated law-making powers. However, it seems that control diminished in MiFID, where Parliament identified key objectives solely, instead of opening the entire list of general principles to be followed on level 254. On the other hand, however, Parliament provided excessive details in MiFID on level 1, and it inserted “the qualification that no level 2 implementing measures could change the essential provisions of MiFID55”, from which it can be concluded that in the entire evolution of the Lamfalussy process, Parliament had the constant need to control the level 2 implementing measures. Also, Lamfalussy process helped that the Financial Services Action Plan (FSAP)56 was brought on time. In the banking sector, the progress is made by adopting the Capital Requirements Directive57. In the insurance sector, recently the Solvency II Directive58 was adopted.

49 Op.cit in fn. 43. 50 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ L 96, 12.4.2003, p. 16–25. 51 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Text with EEA relevance), OJ L 345, 31.12.2003, p. 64–89. 52 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38–57. 53 Moloney, N. op cit., p. 1054. 54 Ibid., p. 1060. 55 Ibid., p. 1059. 56 Available at: http://www.financial-services-action-plan.com. 57 The Capital Requirements Directive, comprising Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ L 177, 30.6.2006, p. 1–200 and its subsequent amendments, and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast), OJ L 177, 30.6.2006, p. 201–255. 58 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA

9 Further, the IIMG re-analyzed the functions and the role of the committees on the level 3, which naturally includes CESR. The primary responsibility of the committees was to give technical advice to Commission, and the IIMG found that the committees met the original expectations under the Lamfalussy process regarding that role. The IIMG evaluated that CESR assisted Commission in drafting all the Level 1 directives under the Lamfalussy process, as well as the implementation of the legislation on the Level 259. However, committees also have the supervisory role on Level 3. This role was evaluated as not sufficiently developed since the primary focus of the committees was on giving the technical advices, i.e. on the advisory role on first two levels. Exactly to improve the supervisory role of the committees, the IIMG tried to analyze whether the committees should have “specific supervisory responsibilities as institutions in their own right, and what role they should play in times of stress in the markets”60. In fact, the IIMG stressed out that the key to crisis prevention is to have an effective “supervisory convergence and cooperation” between the national and the EU regulatory and supervisory bodies61. The conclusion was that exactly that role should be more effectively performed by the committees on level 3 of the Lamfalussy process. Based on the conclusions of the IIMG, the Commission published the Communication on the Review of the Lamfalussy process, where the highlighted issue was strengthening supervisory convergence on the level 3.62 Commission repeated that the current functioning of the level 3 is not satisfactory. It confirmed that committees, where CESR’s problem occurred regarding the MiFID, have problem with establishing “Transaction Reporting Exchange Mechanism” with the Parliament, Council and Commission63, which was a reason for Parliament to seek more transparency on the level 2 and level 3 processes. CESR also showed a lack in decision-making policy. On one hand, Commission had to make some decisions relevance), OJ L 335, 17.12.2009, p. 1–155. Directive introduced the model for insurance supervision very similar to the banking model on supervision. 59 Inter-institutional Monitoring Group: Final Report Monitoring the Lamfalussy Process, p.14., http://ec.europa.eu/internal_market/finances/docs/committees/071015_final_report_en.pdf 60 Ibid, p.14. 61 Ibid, p.19. 62 Communication from the Commission - Review of the Lamfalussy process - Strengthening supervisory convergence, COM/2007/0727 final, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=CELEX:52007DC0727:EN:NOT. 63 Ibid, p.7.

10 because members of CESR could not reach an agreement (example with the MiFID)64, and on the other hand, even reached agreements, i.e. decisions are non-binding for the national supervisory bodies in spite of the fact that their representatives sit in CESR 65. Financing the level 3 committees is found to be insufficient, since they are financed by Member States, which often do not provide enough financial support, thus disabling committees to fully perform their duties66. Remarks made by Commission lead to conclusion that CESR’s role and authority should be extended and that is should gain greater independence in decision-making policy. The following step in strengthening CESR’s authority was made by Commission at the beginning of the 2009. Commission revised the Decisions establishing the EU Committees of Supervisors: CESR67, CEBS68 and CEIOPS69 in order to strengthen the supervisory framework for EU financial markets. The goal was to provide committees with clearer operational framework, more efficient decision-making process and with the financial support from the EU budget70.

4. The role of CESR under new legislative proposals in 2009 The new approach was endorsed with the Report of the High Level Group71, chaired by Jacques de Larosière which was mandated by the Commission to give advice on the future of European financial regulation and supervision. Report deals with the causes for the present financial crisis, where it is stated that one of the factor which induced it is also “weak supervision and poor macro-prudential oversight”72. In order

64 Decision making process was originally construed as a consensus model under which it was necessary that all Member States reach an agreement before bringing any decision. However, further development of CESR required a system under which an agreement can be brought even if some Member States do not agree. For that reason, lateron it was adopted a system of „Qualified Majority Voting“, while bringing the decision by consensus still remained as CESR's objective. 65 Ibid, p.9. 66 Ibid, p.12. 67 Commission Decision establishing the Committee of European Securities Regulators, C(2009) 176 final, http://ec.europa.eu/internal_market/finances/docs/committees/c-2009-176_en.pdf. 68 Commission Decision establishing the Committee of European Banking Supervisors, C(2009) 177 final, http://ec.europa.eu/internal_market/finances/docs/committees/c-2009-177_en.pdf 69 Commission Decision establishing the Committee of European Insurance and Occupational Pensions Supervisors, C(2009) 178 final, http://ec.europa.eu/internal_market/finances/docs/committees/c-2009- 178_en.pdf. 70 Financial markets: Commission adopts measures to strengthen supervisory committees and standard- setting bodies for accounting and auditing, IP/09/125, 26/01/2009, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/09/125&type=HTML&aged=0&language=EN&guiLanguage=fr. 71 Report of the High-Level Group on financial supervision in the EU, chaired by Jacques de Larosière, 25 February 2009, http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf. 72 Ibid., p.13.

11 to correct the weak supervision, Report suggests thorough changes of the EU supervision system. Among other, Recommendation 6 of the Report states: “Competent authorities in all Member States must have sufficient supervisory powers, including sanctions, to ensure the compliance of financial institutions with the applicable rules”73. The most important novelty which the Report proposed is the establishment of the European Systemic Risk Council (ESRC) and the European System of Financial Supervision (ESFS)74. The task of the ESRC will be to form judgements and make recommendations on macro prudential policy, issue risk warnings and other75. ESFS is, by the Recommendation 18, construed as a decentralised network of existing national supervisors, which would rely on the work of three European Authorities (a European Banking Authority, a European Insurance Authority and a European Securities Authority) which would replace existing CESR, CEBS and CEIOBS. The role of the ESFS would be to “coordinate the application of supervisory standards and guarantee strong cooperation between the national supervisors”76. Also, the ESFS should be independent of the political authorities, but still accountable to them. In its work, it should be enabled to approach the high- quality information in order to make the proper assessment. One of the important roles is also to ensure effective and binding mediation/arbitration between the supervisors in cases when dispute arise77. The three newly established Authorities, based on the already existing committees, would preserve all authorities which the committees already have, but would also be given new specific tasks and authorities. For example, in the area of regulation, Report suggests that Authorities’ decision on the level 3 should be legally valid and binding throughout the EU, and in the area of supervision, Report even suggests that in exceptional circumstances the Authorities “should be able on a temporary basis to acquire the duties which the national supervisor is failing to discharge”78. By this recommendation, Report calls for significant empowering of the committees. Committees, especially CESR grew into a body on which opinions and interpretation of the existing legislative provisions third parties were entitled to rely in relation to their national supervisory bodies and

73 Ibid., p.23. 74 Ibid., p.47. 75 Ibid., p.44.. 76 Ibid., p.48. 77 Ibid., p.51. 78 Ibid., p.48..

12 potentially to the national courts79. However, its recommendations, interpretations and answers to questions are soft law instruments, which are not legally binding. If accepted, the possibility that committees could issue binding decisions shall have a significant impact to the EU internal market. Report by the Recommendation 22, among other, confirms the importance that Authorities have their own autonomous budget80. Report introduced completely new structure of functioning and the role of the committees which were established under the Lamfalussy process. It is clear that the suggested reforms bring much higher competences and responsibility to the committees. Commission evaluated the Report of the High Level Group as “pragmatic vision for a new system of European financial supervision”81. Based on the Report, Commission proposed new radically changed architecture of the financial supervision in EU. It proposed the establishment of the European Systemic Risk Board (ESRB)82, as the entirely new European body, independent from existing structures, with primary responsibility for macro prudential oversight of the financial system. It was necessary since prior studies and analysis of systemic risks were not published, as they were

79 Wymeersch, E.: The institutional reforms of the European Financial supervisory System, an interim report, Financial Law Institute, Working Paper Series, 2010, available at: http://ssrn.com/abstract=1541968, p. 6. 80 Ibid, Recommendation 22: “In the second stage (2011-2012), the EU should establish an integrated European System of Financial Supervision (ESFS). The level 3 Committees should be transformed into three European Authorities: a European Banking Authority, a European Insurance Authority and a European Securities Authority. The Authorities should be managed by a board comprised of the chairs of the national supervisory authorities. The chairpersons and director generals of the Authorities should be full-time independent professionals. The appointment of the chairpersons should be confirmed by the Commission, the European Parliament and the Council and should be valid for a period of 8 years. The Authorities should have their own autonomous budget, commensurate with their responsibilities. In addition to the competences currently exercised by the level 3 committees, the Authorities should have, inter alia, the following key-competences: i) legally binding mediation between national supervisors; ii adoption of binding supervisory standards; iii) adoption of binding technical decisions applicable to individual financial institutions; iv) oversight and coordination of colleges of supervisors; v) designation, where needed, of group supervisors; vi) licensing and supervision of specific EU-wide institutions (e.g. Credit Rating Agencies, and post-trading infrastructures); vii) binding cooperation with the ESRC to ensure adequate macro-prudential supervision. National supervisory authorities should continue to be fully responsible for the day-to-day supervision of firms.” 81 Communication From The Commission: European financial supervision, COM(2009) 252 final, 27.5.2009, p.2., http://ec.europa.eu/internal_market/finances/docs/committees/supervision/communication_may2009/C -2009_715_en.pdf.; Financial services: Commission proposes stronger financial supervision in Europe, IP/09/836, 27/05/2009, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/09/836&format=HTML&aged=0&language=EN&guiLanguage=en. 82 Proposal for a Regulation Of The European Parliament And Of The Council on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board, COM(2009) 499 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_499_en. pdf.

13 conducted for private needs of financial institutions. Its objective is to prevent or mitigate systemic risks within the financial system which can induce the financial crisis, by monitoring, analyzing information, issuing warning and recommendations, coordinating with other institutions and other83. Recommendations made towards national supervisors oblige supervisors to answer whether they will comply. If not, supervisors must state reasons why they will not act according to the recommendations (“act or explain”)84. Commission proposed that the European Central Bank is given important task to provide analytical, statistical, logistical and administrative support to the ESRB85. Also, Commission proposed establishment of the European System of Financial Supervisors (ESFS) as the network of the national and Community supervisory bodies which will rely on the work of the level 3 transformed committees. Legislative proposal suggests three new Authorities: the European Banking Authority (EBA)86, the European Insurance and Occupational Pensions Authority (EIOPA)87 and the European Securities and Markets Authority (ESMA)88. These Authorities form the supervisory network of the ESFS, which shall closely cooperate with the ESRB. Authorities are given some independent powers, and the role of the Commission is reduced. However, supervisory matters shall primarily remain national, in accordance with the existing mechanisms of supervisory bodies (day-to-day supervision). The sole exception is the supervision over the credit rating agencies, which is put directly under the jurisdiction of ESMA as a sole European supervisor. ESMA shall act as a legal person, which can “acquire or dispose of movable and immovable property and be a party to legal proceedings” under the national law of

83 Ibid, Article 2 and Article 3. 84 Ibid, Article 17. 85 Proposal for a Council Decision entrusting the European Central Bank with specific tasks concerning the functioning of the European Systemic Risk Board, COM(2009) 500 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_500_en. pdf. 86 Proposal for a Regulation Of The European Parliament And Of The Council establishing a European Banking Authority, COM(2009) 501 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_501_en. pdf. 87 Proposal for a Regulation Of The European Parliament And Of The Council establishing a European Insurance and Occupational Pensions Authority, COM(2009) 502 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_502_en. pdf. 88 Proposal for a Regulation Of The European Parliament And Of The Council establishing a European Securities and Markets Authority, COM(2009) 503 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_503_en. pdf.

14 the Member States89. ESMA has all the powers and authorities which the CESR had. Additional authorities which are given to ESMA are significant. ESMA will have power to take binding individual decisions addressed to competent authorities in the specific cases, i.e. in emergency situations which jeopardize the functioning of the financial market and in the settlement of disagreements between the competent authorities90. However, the issue of enforcement of such decisions remained open, as it is not regulated e.g. which jurisdiction shall be competent to enforce such decisions towards national supervisor91. ESMA will also have power to take individual decisions addressed to financial market participants, in cases where it is necessary to ensure consistent application of Community rules and in cases of emergency situation which jeopardize the functioning of the financial market. Exercising those powers, ESMA can request both the competent authorities and market participants to comply with the action as well as to cease with the ongoing practice92. Since such actions set out concrete and serious consequences for the addressee, Commission also provided the rules for decision-making procedure by ESMA. First step is that ESMA must inform the addressee of its intention to adopt the decision. The addressee must be given a certain time limit where it can express its views93. In the decision, ESMA must state the reasons for such an action94. After the decision is made, ESMA must inform the addressee of the available legal remedies95. Decisions made in order to ensure the consistent application of Community rules must be reviewed at appropriate intervals96. Importantly, ESMA’s decisions should be made public and it should display the identity of the addressee, i.e. competent authority or financial market participant, as well as the main content of the decision97. The last provision can, undoubtedly, create resilience since certain market participants can have the interest of not revealing such information to the public. For that reason, Commission allowed the exception that this provision shall not apply, but solely 89 Ibid., Article 3. 90 Ibid., Article 10 and Article 11. 91 Wymeersch, E., op. cit. p. 11. 92 Proposal for a Regulation Of The European Parliament And Of The Council establishing a European Securities and Markets Authority, COM(2009) 503 final, 23.9.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_503_en. pdf., Article 9(6), Article 10(3), and Article 11(4). 93 Ibid., Article 24 (1). 94 Ibid., Article 24 (2). 95 Ibid., Article 24 (3). 96 Ibid., Article 24 (4). 97 Ibid., Article 24 (5).

15 under the condition that addressee proves to have legitimate interest in the protection of its business secret98. Commission also provided the procedure for appeals against decision brought by ESMA. With that purpose, it suggested the formation of the Board of Appeal as a joint body of EBA, EIOPA and ESMA, with the task to conduct appeal proceedings commenced against decisions brought by any of the three Authorities99. Right to appeal is given to all natural or legal persons against decision of ESMA addressed to that person or if it is of direct and individual concern to that person100. The appeals must be submitted to ESMA, within two months from the moment the person is notified about ESMA’s decision101. However, the appeal shall not have suspensive effect, except if the Board of Appeal finds that the circumstances of the case require it102. If the appeal is admissible, parties to the appeal proceedings shall be entitled to make an oral presentation before the Board of Appeal103. Its decisions must be made public104. Although decisions brought by the Board of Appeal are binding, they can be appealed before the Court of First Instance or the Court of Justice, as the highest competent authority105. Also, it is possible to appeal before the Courts against decisions made by EBA, EIOPA or ESMA, in cases where there is no right to appeal before the Board of Appeal as the first instance authority. Member States expressly requested insertion of fiscal safeguards, in order to prevent that decisions made by ESMA and other authorities affect their fiscal responsibilities106. In particular, it is provided that Member States can notify the Authority and the Commission and elaborate that decision taken by authority impinges its fiscal responsibilities. In that case, the decision of the authority shall be suspended107. However, the safeguard procedure is provided for fiscal area solely, and Member States can invoke it only in two situations: when decisions are brought within emergency measures and mediation decisions108.

98 Ibid., Article 24 (5). 99 Ibid., Article 44 and Article 45. 100 Ibid., Article 46 (1). 101 Ibid., Article 46 (2). 102 Ibid., Article 46 (3). 103 Ibid., Article 46 (4). 104 Ibid., Article 46 (7). 105 Ibid., Article 47 (1). 106 Ibid., Article 23. 107 Ibid., Article 23 (2). 108 It invokes decisions which can be brouht, as already explained, under the Article 10 and Article 11 of the Proposal.

16 Other powers which are given to ESMA are the following: to develop draft technical standards which shall be adopted by the Commission by means of Regulations or Decisions and published in the Official Journal of the European Union109; to issue guidelines and recommendations in order to achieve consistent and effective supervision110; to issue recommendations setting out the action necessary to comply with the EU law111; to issue opinions to the European Parliament, the Council, or the Commission on all issue relating to its area of competence112 and other. In October 2009, Commission proposed a new Directive, as additional changes to existing financial services legislation which would further strengthen structure of European financial supervision113. The goal of Directive is to ensure a single set of harmonised rules which would more accurately regulate scope and integration of new powers of European Supervisory Authorities to already existing EU legal structure114. Till now, Commission’s legislative proposals in 2009 are not yet adopted by the Parliament and Council.

5. Conclusion

As it was demonstrated, CESR’s role radically changed from its initial, technical advisory role in law making process. Reasons for such a change are numerous. Most certainly, CESR drew power from the fact that all market participants saw its role as highly influential, thus respecting its opinions and recommendations. Also, Commission regularly adopted CESR’s advice on the implementation of the level 1 legislation. Good interinstitutional dynamics represented CESR as a body competent to balance between extensive consultations with market participant and EU institutions, as are Commission, Parliament and Council. It also showed to be competent in bringing useful observations and in flexibility of its actions. It seems

109 Ibid., Article 6 (2).a and Article 7. 110 Ibid., Article 8. 111 Ibid., Article 9(3). 112 Ibid., Article (19). 113 Financial services: Commission adopts additional legislative proposals to strengthen financial supervision in Europe, IP/09/1582, 26/10/2009, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/09/1582&format=HTML&aged=0&language=EN&guiLanguage=en. 114 Proposal for a Directive Of The European Parliament And Of The Council Amending Directives 1998/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 2005/60/EC, 2006/48/EC, 2006/49/EC, and 2009/65/EC in respect of the powers of the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, COM(2009) 576 final, 26.10.2009, http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20091026_576_en.pdf, p.9.

17 that all of these qualities designated it as a body to which EU institutions can thrust to bring solutions regarding the problem of the present financial crisis. However, significant measures which are necessary cannot be brought within the competences which CESR and other level 2 and level 3 committees have. For that reason, Commission introduced a new set of legislative proposals which radically change the EU network of supervision and law-making in the EU financial market. Legislative proposals also radically change the operation of the Lamfalussy process. Undoubtedly, Commission has a serious task of correcting and adequately implementing the Lamfalussy process in new legislative framework. It is yet to be seen whether new EU structure of supervision over the financial market shall be accepted, and if accepted, whether it shall bring the expected results, i.e. to prevent and cure possible financial crisis as the present one.