I thank the joint committee for giving us the opportunity to appear before it to discuss the very important report of the high level group on financial supervision in the European Union which was published on 25 February and which makes very important recommendations, in particular in regard to the future direction of financial regulation in the European Union. The Department of Finance has not yet finalised its position on the report and is consulting on its recommendations. However, our initial reaction is very positive. The report strikes the right balance in proposing extensive reform of financial supervisory arrangements in the European Union, while maintaining at the heart of the regulatory system national regulators in each member state. However, for the future it is clear that national regulators must work in a closely co-ordinated and integrated fashion on the basis of much greater trust and confidence within an EU system of financial regulation where a single rule book is in place and applied in a uniform way. Discussions at EU level on this issue are expected to progress quickly. The European Commission is consulting on the report. Its consultation period expires on 10 April and its intention is to move forward to develop proposals for implementation of the report.
In order to inform the Department's contribution to the Commission's consultation, we have asked stakeholders for their views on the 31 recommendations contained in the report. The Department has provided an initial reaction to each of these recommendations in its consultation document, a copy of which has been provided for the committee. At this stage, it is expected that draft Council conclusions will be considered at the ECOFIN Council meetings in April and May, with a view to agreeing reforms in the EU system of financial supervision at the June European Council.
Before commenting on the various recommendations contained in the report, it might be useful to provide some background information for the committee on the origins of the report. Last October the President of the Commission mandated the high level group, chaired by Jacques de Larosière, formerly of the French Central Bank and the IMF, to report on a number of issues, including the following: the causes of the current financial crisis; the organisation of European financial institutions to ensure prudential soundness; the orderly functioning of markets and stronger European co-operation on financial stability oversight; and early warning mechanisms and crisis management, including the management of cross-border and cross-sectoral risks.
The report provides a thorough analysis of and commentary on the causes of the current problems. On the basis of its analysis and assessment of the weaknesses in the current system, it presents a broad range of recommendations relating to important technical features of the existing regulatory regime and also for a phased and measured reconfiguration of the current system of financial supervision in the European Union. The recommendations relating, in particular, to what is described in the report as EU supervisory repair would have important implications for the whole of the European Union, including Ireland. In this context, I draw the committee's attention to the proposed creation of a European systemic risk council and the transformation of the existing level three committees of EU financial supervisors for the banking, insurance and investment services sectors into three new European authorities, with a legal role and responsibility for achieving convergence of supervisory standards and guaranteeing strong co-operation between national supervisors.
As I mentioned, the report contains 31 main recommendations, many of which contain a number of sub-recommendations. Therefore, the actual number of recommendations probably exceeds 100. It will require a major effort to work through all of the elements of the recommendations in order that there is a strong common understanding among all member states of the detailed design of the de Larosière report.
All of the recommendations are important for the development of an effective EU financial regulatory regime. Many of them are in regard to specific sectors, for instance, the solvency II proposals for insurance companies or credit rating agencies which were already under consideration by the EU institutions. Recommendations in regard to hedge funds are also very important and are being examined. However, others, especially with regard to the proposed new supervisory structures, are new and more radical. I would like to concentrate on the recommendations which refer to reform of the EU supervisory structures.
I draw the committee's attention to recommendations 16 to 24 which, in our view, are the most important in the report. In overall terms, they propose: the establishment of a new European systemic risk council under the auspices of the European Central Bank; that an effective risk warning system be put in place; and that a European system of financial supervisors be established. In the first stage, in 2009-10, the powers of national supervisors should be strengthened and aligned. A harmonised rule book should be developed which would comprise a single EU rule book for financial regulation. The work of the existing level 3 committees of EU financial supervisors, on which each member state's regulatory authorities are represented, should be placed on a firmer footing and benefit from EU funds. In the second stage, between 2011 and 2012, the level 3 committees should be transformed into authorities, with a specific legal basis and new legal powers which are not available to the existing committees. The new authorities would have binding powers on mediation, supervisory standards and technical decisions regarding specific financial institutions. The authorities would also be granted powers on colleges of supervisors and the licensing and supervision of EU wide entities such as credit rating agencies. National supervisors would continue to be responsible for the day-to-day supervision of firms in their jurisdictions.
These are very important issues. At this stage we would strongly support this type of approach subject to certainty, for example, on the legal basis for these changes and appropriate accountability arrangements. A significant amount of careful work will be required to align the role and responsibilities of the new bodies with the role and responsibilities of member states in such areas as crisis management and resolution. As ever, the details in any future European Commission proposals will be crucial.
Recommendations 16 and 17 should be considered together. In these, the group has proposed the establishment of a European systemic risk council, ESRC. It would be under the auspices of the ECB and it is proposed that it would be chaired by the President of the ECB. Its role would involve macro-prudential analysis and providing early warnings of financial risks. It could issue recommendations in the form of instructions to national supervisors. The proposed composition of the ESRC means that national supervisors would not be members of it — they would just be represented by the chairmen of their EU Level 3 Committees of EU Supervisors. The creation of the ESRC does not directly involve the transfer of national powers to a new body. However, it might be noted that the last indent of recommendation 17 appears to give the new body powers over national supervisors.
Recommendations 18 to 24 should also be considered together. The report envisages a two-stage process. In the first stage, national supervisors would be strengthened to upgrade the quality of supervision in the EU; as the committee will be aware, the Government is currently considering proposals for the reform of the institutional structures for financial regulation in Ireland. All national regulatory authorities should have attractive, modern personnel policies, facilitate staff exchanges with the private sector and align competences and powers on the basis of the most comprehensive system in place in the EU. The EU would work towards the harmonisation of financial regulation and consistent supervisory powers and sanctioning regimes.
In the second stage, between 2011 and 2012, the three level 3 committees would be transformed into three new European authorities, managed by a board comprised of the heads of the national supervisory bodies. The authorities would have a range of key competencies, including: the power of legally-binding mediation between national supervisors; the adoption of binding supervisory standards; the adoption of binding technical decisions applicable to individual financial institutions; and the oversight of colleges of supervisors.
The authorities would have the power to adopt interpretations of EU rules which would be legally binding for national supervisors. This aspect of their proposed role could raise some legal doubts which will require clarification as, in principle, it would override the exclusive competence of the European Court of Justice to interpret European law.
Recommendation 23 may already have been overtaken by events. It recommends the immediate establishment of a high-level group to come up with a detailed implementation plan for the second stage before end-2009. However, the Commission, in its communication of 4 March 2009, stated that it intends to opt for a one-stage process, not a two-stage one. It is fair to say that member states have differing views on this issue.
A harmonised rule book would remove many of the discretions or exemptions that currently exist in EU law. Member states have sometimes used these discretions other than when objectively warranted by specific national factors. However, there are occasions when discretion is required to take account of the different legal regimes that exist throughout the EU.
The report recommends that greater use be made by the EU institutions of regulations for enacting EU financial services legislation, which would not require transposition and would apply directly to all member states.
The existing committees of supervisors for the banking, insurance and investment services sectors, the so called "level 3 committees", would have their roles strengthened in the short term, with a view to replacing them within four years with new authorities with a legal foundation.
We support the establishment of the new authorities on the basis that the development and implementation of a single rule book could not be achieved otherwise. We would have to give very careful consideration to the type of powers that would be bestowed on them. Several member states have raised the question that if the authorities had powers to overrule national supervisors and the use of such powers resulted in, say, the collapse of an institution, who would bear the cost of that collapse? The binding nature of these new powers is a concern for many. The question has also been raised whether a single authority, rather than three, would be preferable in view of the large measure of overlap and co-ordination that will be required in any event.
The European Commission wants these new authorities to be established as soon as possible, whereas the report recommends a two-stage period of approximately four years. We would prefer the two-stage approach. We are concerned that a too hasty decision on an EU-wide architecture could have unintended consequences and might cause more harm than good. A period to allow for considered debate and evaluation of the options appears to us to be the most sensible approach. However, it is important to bear in mind that, in the interim, progress would be achieved by strengthening the existing level 3 committees. It is a phased implementation, which will also allow all the issues relating to the boundary between the roles of the authorities and that of member states to be examined and solutions found. The new authorities would also be responsible for supervising entities that operate on an EU-wide basis such as credit rating agencies. The European Commission's proposal for the regulation of credit rating agencies will, hopefully, be agreed in the near future and the new authorities would be ideally placed to be play a supervisory role for them.
I highlight the fact that this is a report which was prepared for the European Commission. Although the report contains many recommendations, no legislative proposals are on the table at this time. The European Commission has presented its initial positive reaction to the report and is expected to present a suite of legislative proposals in the coming months. The Department of Finance has a very positive view of the report and believes the recommendations cover the main areas that need to be addressed, in the short and in the medium term. We would be happy to answer any questions the committee might have.