Mr. Oliver Gilvarry:

I thank the committee for the invitation to discuss the European Commission's legislative proposals to reform the European system of financial supervision otherwise known as the ESFS review. I am accompanied today by Ms Iqra Zainul Abedin, Mr. Alex Costello and Mr. Shane McNamee from the Department of Finance who work with me on this file.

I would like to remind the committee of where we have come from in terms of the European model. The European system of financial supervision, ESFS, was introduced in 2011 to strengthen the supervision frameworks in Europe. The system as it is includes the European Systemic Risk Board, ESRB, the three European supervisory authorities, namely, the European Banking Authority, EBA, the European Securities Markets Authorities, ESMA, and European Insurance and Occupational Pensions Authority, EIOPA, along national supervisors.

Earlier this year, the Commission published a consultation paper on the framework. Member states, including Ireland, submitted views with many signalling that at this point, targeted amendments to the framework was the preferred approach, rather than a more fundamental change with additional new roles for the various supervisory bodies. Following that consultation, the Commission is now proposing legislative measures to amend the ESFS with the stated aim of strengthening the Union's integrated supervision framework in order to promote the capital markets union, market integration and financial stability, and to respond to the new challenges which the Union is facing following the decision of the United Kingdom to leave the Union.

The Commission's proposal is amending a number of pieces of existing legislation and introduces new powers and roles for the European supervisory authorities, ESAs, a number of which will have a significant impact on our financial services sector and on the work of our relevant competent authorities in here in Ireland. The Commission's proposal maintains the board of supervisors' position as the main body of the ESAs in charge of its overall guidance and decision making. However, the proposal seeks to change the composition of the board to include full-time members of the relevant ESA. These full time staff members will be part of a new executive board, the main function of which will be to examine, give an opinion, and make proposals on all matters to be decided by the board of supervisors. It would also be the decision-making body for certain tasks of a non-regulatory nature, such as dispute settlements, breach of Union law and independent reviews.

We have previously supported the concept of introducing permanent staff members to the board of supervisors of the different European supervisory authorities, ESAs, but the executive board as proposed by the Commission dilutes the power of the national competent authorities too far. These are the people with the required expertise and knowledge of their local markets.

The proposals also aim to significantly strengthen the existing powers of the ESAs through independent reviews of national authorities' activities and early intervention in cases of possible supervisory arbitrage. The Commission has argued that these extra powers are required to ensure European rules are applied equally by all member states or, in other words, that we ensure supervisory convergence across the union. We fully support a move towards a greater focus of the ESAs on supervisory convergence, but the Commission is introducing new powers for them which will, in effect, provide them a role in the day-to-day authorisation and supervision of relevant entities. This is not warranted. For example, one of the new powers envisaged for the ESAs is the ability to co-ordinate the supervisory actions of national competent authorities in the area of outsourcing and delegation of activities to third-country entities. The Commission's proposal will compel national regulators to notify an ESA every time they receive a request for authorisation by a firm that delegates part of its activities outside the union. We see the framework being proposed for the delegation of activities to third countries as adding further unnecessary complexity, when the existing powers available to the ESAs could achieve the same result of ensuring supervisory convergence. The European Securities and Markets Authority, ESMA, issued an opinion in July 2017 to support supervisory convergence in the area of asset management which highlighted what national competent authorities should consider when allowing an entity to delegate functions such as asset management. This is a good example of how the ESAs can use their existing powers to help ensure supervisory convergence across the union.

With regard to direct supervision roles, the Commission's proposal intends to give further direct supervisory roles to the ESMA, as it believes the only way to ensure supervisory convergence is to provide a direct supervisory role for ESAs in certain cases. The Commission's proposal will give the ESMA supervisory responsibility for the approval of certain categories of prospectuses. They are wholesale non-equity prospectuses, those drawn up by specialist issuers, those of asset-backed securities and those by third country issuers. In addition, the ESMA will be given responsibility for the authorisation and supervision of certain types of investment funds structures - European venture capital funds, European social entrepreneurship funds and European long-term investment funds.

As we highlighted in our response to the Commission consultation paper, we see no need for the ESMA to be given a direct supervisory role in the area of investment funds. We stated in our response that the existing powers of the ESMA are sufficient to ensure the European rules applicable to all investment funds and also to prospectuses are applied equally across the union and thus ensure supervisory convergence between member states.

The use of peer reviews is a very powerful tool to ensure the single rule book is applied equally. The existing toolkit should be used more frequently by the ESAs before the Commission considers such a fundamental change as moving supervision of some investment funds and approval of certain prospectuses to a central European body.

Along with a majority of member states, we have voiced concerns over the scale and impact of the proposals at council. In particular, the increased role being proposed for the ESMA has been criticised by a large number of member states. This file will be progressed under the Bulgarian presidency and we expect further meetings at a technical level to commence in January. We will continue to engage, make our valid points known, work with other member states and seek to have a more proportionate outcome from this review.

To conclude, in this proposal, the Commission has introduced significant changes to the European supervisory authorities' framework with the stated aim of creating a stronger and more integrated European financial supervision system for the capital markets union. Ireland has been an enthusiastic supporter of the capital markets union project, as we see the provision of more non-bank financing would be of significant benefit to the real economy, not only in Ireland but across the union. However, we believe the proposed changes will not help to achieve the aim of developing Europe’s capital markets. They will instead add further complexity and costs for entities engaging with European markets. In addition, we also fully believe in the need to prevent regulatory arbitrage and to ensure the rules agreed between the co-legislators are applied equally across the union. That does not mean we believe in a significantly reduced role for national competent authorities.

The proposed changes to the ESAs will dilute the input of national competent authorities in decision-making processes. We must remember that these are the people with the expert knowledge of local markets and, in particular, who have the corporate knowledge of the firms operating there.