European legislation has been dominated by directives, which are useful as they cater for differences in legal systems across EU member states. However, flexibility in the application of directives can result in divergences in national rules and open up the risk of regulatory arbitrage. The single rulebook thus aims to provide a unified regulatory framework for EU institutions.
The European Supervisory Authorities’ (ESAs) founding regulations were reviewed and amended in 2019 and 2020 respectively, yet the Covid-19 pandemic and Brexit have since dramatically altered the financial landscape. In this context, the Capital Markets Union Action Plan (2020) requires the EC to review the framework and take steps towards convergence by Q4 2021.
Expanding the toolkit
The effectiveness and scope of the existing supervisory toolkit were discussed. While common supervisory actions and peer reviews were positively received, ESMA rated the new processes for Q&As and no-action letters as not fit for purpose.
Increasing direct supervisory powers
Most asset managers are already regulated at an EU level by the UCITS or AIFM directives, however, ESMA made the case that direct supervision could help mitigate the regulatory arbitrage associated with extensive use of cross-border delegation. Another strong proposal is to have ESMA act as a gatekeeper to the EU market, in particular vis-à-vis non-EU entities servicing the market.
However, it must be noted that granting additional supervisory powers to the ESAs may spark conflicts with the national competent authorities, which are already well-established in supervising asset managers in their jurisdictions, due to their knowledge of and proximity to local markets.
The ESAs are often not given enough time to consult on technical matters, resulting in level 2 and 3 outputs that are rushed. Adjusting the timelines, granularity and sequencing of changes would allow the ESAs to provide more appropriate responses for asset managers.
As the ESAs’ regulations were updated in the recent past, any assessments of, or changes to, the framework may be too soon. It remains that the path to convergence is expected to be winding, in particular where reforms would meddle in national prerogatives.