Ten Years of the European Securities and Markets Authority: Taking stock and looking forward
21 May, 2021
This year ESMA, the EU’s securities and markets regulator, turned 10 years old. As ESMA takes its first steps into the next decade, it is time to reflect on the significant power it has established as a key component of the EU’s regulatory framework. It seems set on an acute trajectory of ever ascending and increasing powers, yet, as an authority that deals largely with technical matters – do the corresponding democratic accountability mechanisms stand up? Discussions of ESMA, however, prove salient even beyond the financial zone, stretching towards the more generally increasing ambitions of EU agencies.
Financial regulation in the EU can be divided into pre- and post- ESMA periods, exerting noteworthy influence during its relatively short existence. The period following the global financial crisis (GFC) saw the EU overhaul and strengthen the supervisory frameworks for banking and financial markets. The GFC seriously challenged the previous Lamfalussy system of financial supervision, highlighting a need for significant reform. In response was the creation of the European System of Financial Supervision (ESFS). Together with the other European Supervisory Authorities (European Banking Authority and the European Insurance and Occupational Pensions Authority) and the European Systemic Risk Board, ESMA makes up the ESFS.
So, what does ESMA do? The ESMA Regulation established ESMA as an independent union ‘body’ with a legal personality, requiring it to act in the interest of the EU alone. With the main objective directed to single market setting and the protection of public interest by contributing to the short, medium, and long-term stability and effectiveness of the financial system, for the EU economy, its citizens, and businesses. With this goal in mind, the main tasks and powers conferred on ESMA can be separated into four areas: regulatory governance, supervisory convergence, risk assessment and direct supervision. Although the other ESA’s carry out similar tasks, direct supervision is a distinct feature of ESMA’s design, making it worthy of further discussion.
In terms of direct supervision, ESMA has powers to direct National Competent Authorities (NCAs), as well as market participants, to take specific actions when ‘exceptional’ circumstances occur. In addition, there are some sector-specific intervention powers in relation to short-selling, product/service intervention, and commodity derivatives markets. Finally, the agency has exclusive and direct supervisory jurisdiction over two sets of EU regulated actors: trade repositories and credit rating agencies. ESMA’s powers under EU financial market legislation seem to be ever expanding its scope of action, with two new direct supervisory powers applicable for ESMA from 1 January 2022. The new powers, which include the new responsibility for the recognition of third-country benchmarks and the power to authorise and supervise different types of data service providers, arrive following the Commission’s review of ESAs and the European Market Infrastructure Regulation (EMIR), which lays out rules on OTC derivatives, central counterparties, and trade repositories.
EU Agencies – a legitimacy problem?
ESMA’s ever-expanding influence is both a function of the different forces that have shaped it, but also a growth in the EU agency sector generally (as well as the significant deployment of ‘decentralised agencies’). The topic of delegation has long been an area of critical debate in EU policymaking. Undoubtedly, it is at the heart of the European integration process, with national governments delegating ever more rule-making powers to the supranational level since the 1950s – in doing so, both strengthening the EU and solving problems of collective action.
Agencies in the EU can be classified in several ways, perhaps most simply is, however, by those ‘least’ powerful and largely information-oriented like the European Agency for Health and Safety at Work, to the most powerful like the European Chemicals Agency (ECHA) and ESMA who, more generally have direct decision-making powers (in ECHA’s case it has the power over the registration of products under the EU’s REACH system). But, as the reliance on delegation to combat the attachment between technical knowledge and political decision-making develops, so do questions surround the democratic legitimacy of such institutions.
In 2012, the UK brought action against ESMA on this very issue at the European Court of Justice. The case sought to annul Article 28 Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps, in which ESMA had been given the power to take a legally binding decision targeting a specific financial market participant or specific conditions in relation to certain financial instruments. The UK argued that ESMA received ‘a very large measure of discretion’ and could issue generalised rules based on ‘highly subjective judgement’. The UK’s case here was built upon the Meroni judgement. In the Meroni case, the court distinguished between discretion and clearly defined executive power and sees discretionary powers to be prohibited under the necessary balance of powers. The judgement in ESMA’s short-selling case is widely agreed to have blown apart, or more nicely ‘significantly expanded’, the scope of agency delegation in the EU, with the Court’s ruling allowing executive discretion when subject to limitations. Undoubtedly, this is not an example of unchecked power, rather a move towards decentralisation and continued acceptance of agencification in the EU.
There are a few issues to unpack here. Firstly, the agency’s fast rise to the role of a powerful direct supervisor, specifically stemming from a series of Commission proposals during 2017 and 2018, has significant implications for the nature of ESMA’s influence. Secondly, the convergence of the completion of the Capital Markets Union agenda and the UK’s withdrawal from the EU has constructed the prospect for future reforms to occur and in doing so, place significant stress on its initial governance arrangements. Finally, ESMA is institutionally distinctive in nature, part agency, and part international standard-setter. Historically, ESMA evolved from the Committee of European Securities Regulators, which was a network of NCAs that promoted consistent supervision across the EU and advice to the European Commission. Its previous status as a network has remained a characteristic of its setup. All these complexities have arguably set ESMA on a possibly unsustainable evolutionary trajectory.
Although perhaps not the right place for a detailed discussion of the optimal relationship between efficiency and accountability for ESMA, or other similar technocratic agencies, questions on the legitimacy of technocratic agencies must continue to be answered as their powers increase and evolve. As EU agencies continue to evolve, the interplay between those agencies and society is increasingly important. Created at arm’s length from national and European authorities, agencies have been granted significant creative scope to tailor their organisation and mandate to the political circumstances. However, whatever the impact of such creative scope on their daily operations, EU agencies – like any other public organisation – are answerable to citizens. Despite the status of an ‘intermediary agent’, the expectation remains for agencies to fulfil the outlooks of national and EU principals.
Substantial challenges are faced by agencies in establishing a trust-based relationship with citizens. The technical nature of financial regulation and supervision often fall victim to silence within political and public discourse, despite their direct impact on the lives of European citizens (most effectively demonstrated in the aftermath of the GFC). Even the existing division of roles between ESMA and the Commission prevent any direct judicial accountability – problematic not in the least by the possibility of the Commission rubber stamping draft technical standards whose substance has been determined by the separate entity that is ESMA. Looking forward to the increased powers of 2022 and the continued response to Brexit, continued attention must be paid to the progression of financial supervision in the EU.