The European Commission in September put forward proposals to reform the European supervisory authorities (ESAs). How far do you think these proposals will help to strengthen the supervision of European financial markets and make them more integrated?

The establishment of European Securities and Markets Authority (ESMA) in 2011 was an important step in responding to risks in the EU financial markets and to implement the necessary regulatory reform in response to the financial crisis. Since then ESMA has a strong record of accomplishments in the four main areas of activity under its mandate: the single rule book, the direct supervision of some specific entities, supervisory convergence, and risk analysis. 

The review of the operations of the ESAs is an important milestone, allowing us to take into account the experience of the past six years and the objectives of the Capital Markets Union (CMU) to establish an integrated EU capital market and to increase the role of financial markets in our economy.

Looking at the challenges EU financial markets are facing today, I believe that successful European capital markets require a strengthened European supervision. This becomes even more important with the United Kingdom’s decision to exit the EU. The EU27 will have to work even closer together to remove barriers and avoid a regulatory race to the bottom by ensuring the same rules and standards apply everywhere throughout the EU.

However, we also need to rethink and overhaul the framework for third countries in financial markets legislation and supervision. The point of departure should stay the same:  achieving consistent regulation and supervision of global financial markets, and strengthening the EU as a stable global financial region. In support of this, ESMA has made a number of recommendations related to its functioning and powers regarding the international aspects of EU financial markets: a mandate and more resources to improve our ability to better assess equivalence of third countries, including at shorter time intervals, and the supervision and enforcement of certain third country entities.

And do you think there are any other areas that might have been ready for single supervision?

In terms of supervision, the European System of Financial Supervision (ESFS) has always had elements of EU supervision but as of today, national competent authorities directly supervise the vast majority of financial market players.  The EU level, so far, has been much about standard setting, supervisory convergence and risk assessments. Unlike the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), ESMA also has direct supervision powers - we directly supervise credit rating agencies and trade repositories and we also have a role in the supervision of central counterparties (CCPs).

Direct supervision at EU level may in many cases be the most effective way of delivering supervisory convergence. From an ESMA perspective, it is important to stress that we see the benefit for EU supervision for entities of pan-EU systemic relevance such as credit rating agencies, trade repositories and CCPs. The same argument may be valid for other capital market players, which needs a case-by-case assessment. I see a clear case for direct supervision of the parts of the wholesale financial markets with a strong European dimension, while the supervision of consumer markets, where local proximity is very important are better supervised at national level. Finally, the decision of the UK to leave the EU reinforces the need for strengthening EU capital markets and supports the case for more integrated supervision within the EU27.

What is ESMA doing to ensure a level playing field and avoid regulatory arbitrage, especially in the context of the UK's decision to leave the EU?

The UK plays a prominent role in EU financial markets with the City of London being the region’s major financial centre. However, with Brexit becoming a reality, many UK firms are currently looking at different options to maintain access to the EU’s single market post-Brexit, and relocation of entities, activities and functions to the EU27 is one option. However, such relocation requires a common effort, at EU level, to safeguard investor protection, the orderly functioning of financial markets and financial stability.

ESMA and the EU27 national regulators agreed a common approach to dealing with relocating firms that wish to continue to benefit from access to EU financial markets. It is pivotal that firms are subject to the same standards of authorisation and ongoing supervision across the EU27 in order to avoid competition on regulatory and supervisory practices between Member States.

Outsourcing and delegation of certain activities or functions to UK-based entities, including affiliates, is an important topic in this context. It is necessary to ensure that the conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks. New authorisations must be granted in full compliance with EU law and in a coherent manner across the EU27. Any outsourcing or delegation arrangement from entities authorised in the EU27 to third country entities should be strictly framed and consistently supervised.

Outsourcing or delegation arrangements, under which entities confer either a substantial degree of activities or critical functions to other entities, should not result in those entities becoming letterbox entities nor in creating obstacles to effective and efficient supervision and enforcement. In order to achieve this, ESMA has established a forum – the Supervisory Coordination Network – to report on and discuss cases of relocating UK market participants. This helps to promote consistent decisions and ESMA is prepared to take further measures to support supervisory convergence, including issuing guidance and conducting peer reviews.

How do you think the work of ESMA contributes to improving consumer protection across the EU?

Financial services exist to serve investors’ needs. Therefore, it is important that investors feel confident they are adequately protected and can take informed decisions.

ESMA is committed to a harmonised and high degree of protection for investors by ensuring good conduct from firms which sell or advise consumers to buy financial instruments. ESMA is committed therefore to ensuring that firms treat their customers in a fair and transparent way and put customers’ interests at the centre of their business models and corporate culture.

ESMA plays an important role in developing rules and guidance in the area of investor protection. A significant part of ESMA’s work in this area is in contributing to the implementation and supervision of the Markets in Financial Instruments Directive (MiFID and, very soon, MiFID II) by national authorities, which are in charge of the day-to-day supervision of banks and investment firms. This is an important piece of European legislation which regulates all aspects of firm conduct with investors, from authorisation to organisational requirements to conduct of business obligations. Recent ESMA work has included a range of guidelines, for example on product governance and knowledge and competence of firms’ staff, and a large number of Q&As. Besides providing additional clarity to stakeholders on the MiFID II rules, this will contribute to delivering on one of the ESMA’s strategic objectives, the supervisory convergence among national supervisors.

Furthermore, when MiFID II enters into force on 3 January 2018, ESMA and national authorities will receive some new powers to intervene on products across the EU. While these powers are subject to a number of legal conditions and limitations, including their temporary nature, this will provide a new tool to supervisors to combat fraudulent products and improve investors’ safeguards.  

In addition to MiFID II, ESMA has done extensive work on Packaged Retail and Insurance-Based Investment Products (PRIIPs) and, more generally, through its commitment to improve the overall functioning of the financial system.

As you just mentioned, MiFID II is a major piece of legislation that will change the way markets work. As January gets closer, how are you preparing for its implementation? Do you think industry is ready? 

MiFID II is the biggest regulatory project for over a decade. Once in force, it will alter the way European financial markets work and how financial instruments are traded by, for example, including an obligation on European investment firms to trade in shares and certain derivatives on a regulated trading venue. Furthermore, it will increase transparency in the market thus helping the price formation process which ultimately will benefit the end investor.  MiFID II will also further increase the protection of investors amongst many other things.

Implementing MiFID II is both a challenge for the industry as well as for regulators. ESMA believes that the implementation should be complemented by supervisory convergence measures. Therefore, in the past 12 months ESMA issued a large number of Q&As to ensure coherent and consistent application of the rules coming into force. I believe that ESMA’s work has provided the industry with clarity on many aspects of the legislation but we continue to work closely with European regulators and market participants in order to further clarify some areas that might still be uncertain. As mentioned before, a distinctive part of this convergence work relates to ESMA’s efforts to strengthen consumer protection, which was clearly one of the main aims of the entire MiFID reform.

In addition, ESMA has issued a large number of opinions on commodity derivative position limits and pre-trade transparency waivers which is a requirement from the legislation and essential for firms to correctly implement MiFID II. Finally, together with the national competent authorities we have set up complex IT systems to facilitate the technical delivery of the legal requirements.

Being aware of the magnitude of the change, it will be inevitable that there will be some teething problems and one should not underestimate the size and complexity of this project, and thus the risk of potential glitches in the initial operational period. However, I remain optimistic about our overall readiness to operate within the new framework.

ESMA does acknowledge the multiple challenges for everyone involved, and will address remaining issues with the available tools in our toolkit. However, we expect market participants to take all necessary steps to ensure compliance with the MiFID II requirements from the date of application.

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