Steven Maijoor, the chair of the European Securities and Markets Authority, talks to Danielle Myles about preventing a post-Brexit regulatory race to the bottom, overhauling the equivalence regime, and the importance of supervisory convergence in building a capital markets union. 

Steven Maijoor

Steven Maijoor is one of the most respected figures in EU financial regulation. Rulemakers and market participants alike regard him as a fair, considered and effective market overseer. What is even more impressive is that he has earned this reputation despite the colossal task on his hands.

As the chair of the European Securities and Markets Authority (ESMA), Mr Maijoor is charged with, inter alia, completing the single EU rulebook by creating technical standards for the wave of post-crisis reforms that has upended the bloc’s financial markets. These technical standards are the industry’s touchpoint for compliance: they provide the all-important detail that bridges the gap between legislative principles and market realities.

MiFID compliance

In recent years, ESMA has had its hands full with the second iteration of the Markets in Financial Instruments Directive. Better known as MiFID II, it is one of the biggest EU financial regulatory packages to date, and covers everything from high-frequency trading and bond transparency to investment research fees and structured product governance.  

While banks, investors and trading platforms (among others) are racing to comply with MiFID II before it takes effect in January 2018, ESMA has been issuing numerous technical standards, opinions and guidelines – as well as collecting data and getting IT systems in place – to make sure market participants have a framework with which to comply. 

Nevertheless, speaking with Mr Maijoor it is clear that MiFID II has not detracted from ESMA’s other initiatives to build and oversee a single EU securities market.

Tough competition

Alongside the European Central Bank’s supervisory chief, Danièle Nouy, Mr Maijoor is among the more vocal EU watchdogs when it comes to warning about the risk of regulatory arbitrage in a post-Brexit environment. While Ms Nouy has cautioned banks relocating to the continent that they must retain sufficient capital and resources within the EU, Mr Maijoor is concerned about a race to the bottom among member states competing to lure business from London.

The best hypothetical example is a UK firm being licensed by the appropriate EU authority, but then being permitted to outsource or delegate significant activities to the UK office. “It is fine for EU financial centres to try to attract business from the UK based on things such as efficiency and speed. The problem I have is when it relates to regulatory interpretation and supervisory approach,” Mr Maijoor tells The Banker. “This is also recognised by ESMA’s board as a whole, which includes all national competent authorities [NCAs]. They want to be certain that their fellow regulators are applying the same standards.”

ESMA is responding by drafting a general opinion on matters such as outsourcing, delegation and the extent to which earlier decisions of UK regulators can be taken into account. This will be followed by detailed industry-specific opinions for asset management, investment firms and trading venues. All four opinions will be released before mid-2017.

Mr Maijoor also plans to launch a platform through which NCAs and ESMA can co-ordinate on key issues when considering UK firms’ requests for authorisation within a member state. “These decisions involve a lot of judgement. We can issue general principles, but at the end of the day everything will depend on how they are applied to specific cases,” he says. “That’s why we are in the process of designing this mechanism that will allow information on authorisations to be shared at an EU level.”

Three concerns

Brexit has also thrust into the spotlight problems with the EU’s third-country framework, which allows foreign firms to operate within the single market – usually without direct supervision by EU authorities – on the basis that their home country rules and supervision are deemed equivalent to the EU’s. Equivalence decisions are made by the European Commission (EC), on the basis of technical advice provided by ESMA or another EU supervisory authority, as appropriate.

Mr Maijoor insists that the framework needs improvement. He first pointed out its shortcomings as early as August 2015, but the UK’s pending withdrawal from the EU single market gives extra urgency to his three concerns, along with his suggested solutions. 

First, he points out, the process for assessing and recognising equivalence changes from instrument to instrument. It means, for example, the third-country mechanism for MiFID, the Alternative Investment Fund Managers Directive and Undertakings for the Collective Investment of Transferable Securities are all different. While some nuances are necessary, Mr Maijoor proposes greater uniformity. Today’s patchwork of equivalence rules has also drawn criticism from third countries – notably Switzerland – which must follow the different paths to equivalence.  

A second, and more modest, proposal is to allow ESMA to charge third-country applicants a small fee to compensate for the huge amount of time and resources that an equivalence determination requires of the agency.

Finally, he is concerned by ESMA’s limited ability to monitor and collect information from third-country entities. Notwithstanding the underlying premise of equivalence, he queries the appropriateness of relying so heavily on a foreign authority regarding activities in the single market. “We have excellent co-operation with third-country regulators, but at the same time, why would they fully take into account the risks that their market participants might be creating in the EU?” asks Mr Maijoor. “In terms of setting priorities, you can imagine that risks in your own region would rank higher than those outside.”

Give us the tools

As a result, Mr Maijoor is calling for more supervisory and enforcement tools regarding third-country entities’ EU operations. He is quick to pre-empt any criticism. “I want to emphasise that this isn’t about doubling up on regulations and supervision. In my personal view, it would be a system whereby for general supervision, one would of course still rely on the third-country regulator,” he explains. “But for those risks that are especially relevant to the European environment, that’s where you need to have the regular EU supervisory and enforcement tools.”

In the first months of 2017, flaws in the equivalence regime have been discussed in an EC staff paper on equivalence, and the possibility of enhanced supervision of third-country central counterparties is being mooted. However, a fourth problem with the framework is out of EU authorities’ hands: the fact that no other major market is willing to adopt a similar framework and grant European firms the same rights to operate overseas.

ESMA’s appeal for better enforcement tools is not limited to third-country firms. Mr Maijoor also wants the power to impose higher fines on the entities it directly supervises. While regulators have gained a reputation for issuing increasingly bigger penalties (some estimate the global finance sector has paid $375bn in fines and costs over the past five years), ESMA remains an anomaly. Since its inception in 2011, it has imposed just three fines totalling €1.47m.

Mr Maijoor is seeking changes to the parameters for setting fees, suggesting that they should be calculated with reference to the entity’s size. “Our experience is that a lot can be accomplished on the basis of regular dialogue and supervisory requests. But a credible supervisory framework needs a credible enforcement mechanism,” he says. “That’s not to say you use it day to day, but it should be there as an ultimate stick.”

Supervisory consistency

For ESMA, 2017 is shaping up as a pivotal 12 months. After spending years creating the single regulatory system, the slowdown in legislation emanating from the European Parliament and EC means ESMA is nearing the point at which it can dedicate more energy to another of its key goals, namely supervisory consistency across the EU’s member states.

Mr Maijoor wants to achieve a level supervisory playing field, whereby NCAs take into account more than just their own member state. To achieve this, ESMA can use everything from guidelines and opinions to workshops and peer reviews, but its chief would like more powers. He gives the example of ESMA’s ability to intervene when a national regulator does not apply EU law. “This applies in the case of regulations and it would be useful to clarify that these powers also relate to provisions of directives that establish unconditional obligations for market participants,” he says.

ESMA is also appealing for more powers regarding granular reporting requirements. “I fully accept and understand that basic reporting requirements are, and should be, political decisions. But when you get to the details, things such as reporting formats, it’s important for us to be more agile and respond to possible data and administrative burdens,” says Mr Maijoor.

This acceleration of ESMA’s pursuit of supervisory convergence coincides with the EC’s capital markets union (CMU) policy – which aims to break down national barriers to facilitate cross-border fundraising across the bloc – and the EC’s review of the EU supervisory authorities. Both initiatives offer opportunities for ESMA to call for stronger convergence power, for which Mr Maijoor makes a compelling case. “Despite there being reasonably well-harmonised rules and regulations across the EU, if the supervisory practices are very different, that undermines the CMU,” he says.

Indeed, if the EC is serious about deepening pan-European markets, his suggestions should not be taken lightly.

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