The European System of Financial Supervision (ESFS) was introduced in 2010. It consists of the European Systemic Risk Board (ESRB) and the 3 European supervisory authorities (ESAs), namely: the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Authority (EIOPA).
Revision of the European system of financial supervision
The European Commission adopted a proposal at the end of 2017 to amend five EU legal texts (Solvency II, MiFID II, MiFIR and ESAs’ founding texts) aiming “to improve the powers, governance and funding of the ESAs; for banking (EBA), for securities and financial markets (ESMA), and for insurance and pensions (EIOPA).
In September 2018, the European Commission further proposed to amend its September 2017 proposal in order to strengthen the role of EBA in protecting the financial system from money laundering and terrorist financing risks (AML/CFT).
The Regulation amending the three ESAs founding regulations was published in the Official Journal of the EU in 18 December 2019 (Regulation 2019/2175). All language versions of this Regulation can be found here. BIPAR welcomes this revision in general.
The Regulation entered into force on the 1st January 2020 and applied from the same date. It is binding in their entirety and directly applicable in the Member States.
Anti-money laundering powers of EBA
The reform reinforces the role of the EBA as regards risks posed to the financial sector by money laundering and terrorist financing (ML/FT) activities. The powers related to the prevention and mitigation of risks of money laundering will now be centralised for all financial institutions at the EBA.
- EBA has the mandate for collecting information from national competent authorities, analysing and further disseminating such information to ensure that all relevant authorities supervise ML/FT risks in an effective and consistent manner and that they cooperate and share information.
- To this end, EBA will establish a central database, develop common standards laying down definitions and facilitating practical implementation of data collection, will perform risk assessments on competent authorities and facilitate cooperation with non-EU countries on cross-border cases.
- EBA now has the power to act immediately when EU anti-money laundering rules are broken at national level. Precisely, where there are indications of material breaches by a financial sector operator, EBA may request the national competent authority to launch an investigation and impose sanctions on this operator.
- EIOPA and ESMA are entitled to submit written observations on any draft decisions of the committee. Furthermore, in cases where a draft decision concerns financial institutions subject to EIOPA’s/ESMA’s jurisdiction, the prior agreement of EIOPA/ESMA is required before any AML decision is taken by EBA.
Other supervisory powers of ESAs with regard to consumer protection
The reform also reviews the powers of each of the three ESAs, which are part of the ESFS.
- The reform changes the existing system for supervisory convergence with the aim of making the process more efficient, coherent and transparent. It builds on existing tools, such as peer reviews, guidelines, recommendations while introducing new ones, for example, opinions to the EP, Council and Commission and the establishment of coordination groups at EU level.
- The ESAs are also required to conduct open public consultations before publishing their regulatory technical standards, implementing technical standards, guidelines and recommendations. These consultations shall be conducted as widely as possible to ensure an inclusive approach towards all interested parties and shall allow reasonable time for stakeholders to respond.
- It is further explicitly provided that all three ESAs are entitled to coordinate mystery shopping activities with national competent authorities, if applicable, meaning that supervisors, disguised as customers, would check the financial players’ compliance with the rules. This could lead to a six-month temporary ban of fraudulent products, extendible to another six-month period, and followed by an automatic one-year prolongation.
- It is explicitly provided that all ESAs shall take due account of the nature, scale and complexity of the risks inherent in the business of an institution in their guidelines, recommendations, opinions, questions and answers, draft regulatory/implementing standards. A separate committee will be established within each supervisory authority which will provide advice on how these measures should take into account the differences in the sector.
- Moreover, when carrying out their tasks, the ESAs shall take account of technological innovation and the integration of environmental, social and governance related factors. A committee on consumer protection and financial innovation will be established within each of the ESAs, which will bring together all relevant national competent authorities in order to enhance consumer protection and achieve a coordinated approach to the regulatory and supervisory treatment of new or innovative financial activities.
- No action letters: in exceptional circumstances where EIOPA considers that i) Solvency II Directive, IMD/IDD and other EU legal acts listed in Article 1(2) or delegated acts may directly conflict with another relevant act, ii) the absence of delegated or implementing acts raise legitimate doubts concerning the proper application of these EU legal acts, EIOPA shall address a letter to the Commission including an opinion on any action it considers appropriate. This may include an opinion on the need to extend the application date of the act in question.
- Equivalence: the review recognises a formal role to the ESAs in the ongoing monitoring of the equivalence process. Each ESA should monitor the regulatory and supervisory developments and the enforcement practices in those third countries. It shall do so in order to verify whether the criteria, on the basis of which those decisions have been taken and any conditions set out therein, are still fulfilled. The Authority should submit a confidential report on its monitoring activities to the Commission on an annual basis (Article 33 of Regulations).
- Questions submitted by natural or legal persons: any natural or legal person, including national competent authorities and EU institutions, is entitled to ask questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2), associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts. The Authority shall forward questions that require the interpretation of Union law to the European Commission.
- ESMA is given direct supervision powers over third country critical benchmark administrators, as well as in respect to data reporting service providers, except for small local ones which should be identified through a delegated act.
- Under this Directive, the cooperation between the NCAs and also between EIOPA and the NCAs is strengthened in relation to cross-border activities carried out by insurance undertakings. For example, the supervisory authority of the home Member State will have to notify EIOPA and the supervisory authority of the relevant host Member State where it identifies deteriorating financial conditions or other emerging risks posed by an insurance or reinsurance undertaking carrying out activities based on the freedom to provide services or the freedom of establishment that may have a cross-border effect (Article 2(3) of the Directive< Article 152a of Solvency II- See also Article 152b on collaboration platforms).
- EIOPA has also a stronger role in promoting convergence in the validation of internal models that some large insurance companies use to calculate requirements on solvency capital (Solvency II).
- Furthermore, the power to give authorisation and to supervise data reporting services providers (DRSPs) is transferred from national authorities to ESMA (MiFID II).
- Following the changes to the Regulation establishing EBA, subsequent changes are introduced to the AML Directive in relation to its new role as the central supervisory authority for AML issues.
The reform reviews the ESAs' governance structure. It maintains the principle that decisions have to be taken by the Board of Supervisors and ensures a key role for the national competent authorities within the ESAs governance structure. In parallel, the role and powers of the Chairperson are reinforced. The Chairperson should be selected on the basis of merit, skills and experience of financial supervision and regulation, with the selection procedure respecting the principle of gender balance. The Management Board is preserved.
As regards the ESAs’ funding scheme, the final text of the Regulation preserves the existing system of contributions coming partly from the EU budget and partly from national competent authorities. It further adds the possibility of any voluntary contribution from Member States or observers.
The Directive amending the MiFID II Directive, the Solvency II Directive and the AML Directive was published in the Official Journal of the EU in 18 December 2019 (Regulation 2019/2177). All language versions of this Directive can be found here.
The Directive will start to apply with respect to MiFID II from 1 January 2022, and with respect to Solvency II and AMLD from 30 June 2021.
ESAs’ stakeholder groups
All three authorities have stakeholder groups that represent the industry and consumers in order to facilitate consultation with stakeholders in areas relevant to their tasks. BIPAR is represented in EIOPA’s Insurance and Reinsurance Stakeholder Group (IRSG).
BIPAR's responses to ESAs' consultations in 2019 and in 2020
During 2019 and 2020, BIPAR answered many ESAs' consultations on various issues.
EIOPA’s thematic review on mortgage life and other credit protection insurance
EIOPA launched in February 2020 an EU-wide thematic review looking into consumer protection issues with mortgage life and other credit protection insurance (including those sold through banks). EIOPA states that even if mortgage life and other credit protection insurance can be beneficial for consumers, national competent authorities have reported issues and risks related to these types of insurance products that may lead to consumer detriment.
As part of this EIOPA workstream, EIOPA organised a roundtable discussion on “Mortgage life and other credit protection insurance sold through banks” on 5 March 2020 in Frankfurt. BIPAR has been invited to give a presentation at this event. The aim was to consult and collect input from external stakeholders on:
- Issues and risks with the insurance products within the scope of EIOPA thematic review;
- Business models used to manufacture and distribute these products and underlying conduct risks, addressing also the different corporate arrangements arising between insurers and banks;
- Potential benefits for consumers, insurers and banks;
- Market practices that could lead to consumer detriment;
- Developments and trends in recent years.
EIOPA’s Consumer Trend Report
EIOPA is mandated by its empowering Regulation to collect, analyse and report on consumer trends. For this purpose, EIOPA publishes, on an annual basis, a Consumer Trends Report. BIPAR was consulted by EIOPA on the drafting of its 2018 Report and in particular on issues such as cross-selling, insurance on-demand and cyber insurance. In its 2018 Report, EIOPA states that whereas no major shifts have been observed in 2017, some trends reported in past years have become more noticeable, affecting a growing number of European markets:
- The continued digitalisation of the insurance and pension sector affecting the whole life-cycle of a product continues as an important trend,
- The use of telematics in health as well as motor insurance is increasing,
- On-demand products are increasingly being brought to the market alongside an increase in cross-selling of insurance with other products, such as add-on travel insurance when buying plane tickets,
- The longstanding shift from guaranteed to non-guaranteed products continues in the insurance and pension sector.
- issues due to institutional and organisational reasons related to the division of responsibilities between home and host and the exchange of information between both.
- issues related to supervision and enforcement.
- issues due to regulatory gaps and regulatory arbitrage (lack of clarity of some EU legislation and/or insufficient harmonisation).
On the occasion of the publication, Gabriel Bernardino,
Chairman of EIOPA, said: “The major trend continues to be digitalisation, improving the interaction between consumers and providers, but at the same time requiring careful monitoring by supervisors and implementation by providers. Furthermore, supervisors across Europe should pay close attention to the continued growth of cross-selling practices, in particular with regard to add-on insurance products. Business models based on high commissions and structural low claims ratios have created consumer detriment in the past and need appropriate monitoring by supervisors
ESAs report on cross-border supervision of retail financial services
The Joint Committee of the ESAs published in July 2019 a report on the cross-border supervision of retail financial services (banking, securities, insurance/pensions).
The ESAs explain that they noted the increase in cross-border provision of retail financial services due to the development of the single market and digitalisation. They add that this benefits consumers (wider offer) but at the same time challenges the competent authorities (CA) who have to supervise these institutions and activities. The ESAs report identifies the main issues that competent authorities face when supervising financial institutions that provide cross-border retail financial services within the EU and it makes recommendations to both CAs and European legislators on how to address those issues.
The ESAs report focuses on:
The ESAs note that the rules laid down in existing Directives/Regulations including IDD, MiFID II, PRIIPs, Mortgage Credit Directive, will already help to tackle some of these issues. Specific attention is given to the passporting rules, cooperation between authorities etc.
The report reminds that EIOPA has end of 2018 provided additional recommendations for the insurance sector to the European Commission in its Report on Supervision and Capital Management with a Group of Insurance or Reinsurance Undertakings, and FOS and FOE under Solvency I. These included recommendations for further enhancing supervisory reporting requirements regarding information on cross-border business, the establishment of cooperation platforms, an enhanced role for EIOPA in mediating certain cross-border issues, as well as for the obligations of a CA to share information with EIOPA at the earliest stage on cross-border developments that can be a source of potential issues.
- Published on June 2020 -