Reform of Financial Services Sector at EU Level

Again while the national focus is on the role of the Central Bank and Financial Services Authority of Ireland in response to the on-going banking crisis, the media and indeed the Oireachtas has paid scant attention to a radical reform of financial services at EU level that have major implications for the Authority and the sector.

In recognition that the complete failure of national supervision was the root causes of the banking crisis, in particular that there were serious shortcomings in the existing system of financial supervision in Europe, the Commission brought forward proposals to overhaul the current advisory committees that failed Europe. These proposals are consistent with G20 commitments on the need for reform of the global financial services industry. The US, China, India and Brazil are also working to improve the supervision of their financial sector.

With the European Parliament voting by a significant majority in favour of the package, the new arrangements commence on 1 January 2011 and will consist of a new European Systemic Risk Board (ESRB) and three new European Supervisory Authorities (ESAs) for the financial services: a European Banking Authority (EBA), a European Insurance and Occupational Pension Authority (EIOPA) and a European Securities and Markets Authority (ESMA). These ESAs will comprise the 27 national supervisors. Thus the CBFSAI will sit on all these bodies.

The ESRB will provide an early warning of system-wide risks that may be building up and issue recommendations for action where necessary. The creation of the ESRB will address one of the fundamental weaknesses highlighted by the crisis, which is the vulnerability of the financial system to interconnected, complex, sectoral and cross-sector systemic risks.

The ESAs will play a pro-active part in monitoring how rules are being enforced by national supervisory bodies. They will mediate in the event of disputes and will have power to ban certain products such as the short selling of shares, derivatives and sovereign bonds. In emergency situations, the ESAs will have the power to issue instructions to the CBFSAI. The ESMA will have direct supervisory powers over credit ratings and can request information, launch investigations and perform on-site inspection.

Further wide-ranging reforms are in the pipeline with the aim that all measures will be in force by the end of 2012. Thus credit rating agencies will be regulated at EU level as will the activities of hedge funds.

What all this means in practice is that a new and much tougher regulatory regime is being put in place with everything that Ireland does subject to peer review and scrutiny; no bad thing in current circumstances.

Where does the Oireachtas fit into this picture?