Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

2. Key Topics on the European Regulatory Agenda

In November 2008, reacting to the weaknesses in the European Union supervisory framework highlighted by the global financial crisis, the Commission President mandated a high level group chaired by former Bank of France Governor Jacques de Larosière to make proposals to, inter alia, “ensure the prudential soundness of institutions, the orderly functioning of markets and thereby the protection of depositors, policy holders and investors.” (European Commission, 2008 (IP/08/1679)) While the report proposed a new architecture for European financial supervision, which has now been implemented, it also highlighted areas of regulatory weaknesses and suggested reforms to the framework – including better integration of non-financial risks in the Basel II framework – as well as closing of important gaps in regulation: regulation of all entities with potential systemic impact (including alternative investment funds), regulation of over-the-counter (OTC) derivatives and structured products, harmonisation of money market funds definitions and eligible assets, independence and liability of depositaries, and required improvements in corporate governance, notably with respect to remuneration policy and internal risk management (de Larosière Group, 2009). Building on this report and on input from other stakeholders, the European Commission proposed an ambitious reform programme with five stated objectives: (i) to establish a supervisory framework that allows for early detection and management of potential risks; (ii) to fill the gaps where the European or national laws are insufficient or incomplete; (iii) to protect investors, consumers and small

and medium enterprises; (iv) to improve risk management in financial institutions and align pay incentives with sustainable performance; and last but not least (v) to ensure effectiveness of sanctions.

The new European supervisory framework

In September 2009, the Commission presented proposals for a new supervisory architecture, consisting of the European Systemic Risk Board (ESRB) and three European supervisory authorities for the banking, securities and insurance and occupational pensions sectors. Since the end of 2010, the ESRB is responsible for the macro-prudential oversight of the financial system and contributes to the prevention or mitigation of systemic risks to financial stability. Three European Supervisory Authorities (ESAs) have been active since January 2011: the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). 26 Their main task is to ensure that rules are applied in a rigorous and consistent fashion throughout the European Union – the aim is to create a single rule book for the Union and the key means are the draft technical standards that ESAs will develop and that will be adopted into European law, their guidance and recommendations with which national supervisors and firms must strive to comply, and their powers to investigate failures to apply or breaches of EU law by national supervisors. 27 ESAs also have powers to exert EU-wide coordination and decision making in times of crisis, and to act as mediators or arbiters in conflicts between regulators.

26 - They replaced the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). 27 - On the basis of these investigations, an ESA can issue a recommendation to a national regulator to be followed by a formal opinion from the Commission if the recommendation is not acted upon, and then to override the national supervisor and remedy directly if the latter does not comply with the formal opinion.

42

An EDHEC-Risk Institute Publication