European Supervisory Authorities Research Articles

The Role of European Supervisory Authorities in Consumer Protection Standard Setting on the Financial Services Market – Based on the Example of the European Banking Authority

The purpose of the article is to present the genesis of the emergence and the scope of powers of the European Supervisory Authorities (ESAs) (the EBA, ESMA, and EIOPA), with particular reference to the EBA as regards the building of its supervisory normative standard and the protection of the consumer of financial services. The authors will propose de lege ferenda postulates which, in their view, would allow for an improvement in the quality of the financial services offered to consumers and ensure a higher level of protection of their interests and, at the same time, legal certainty for their providers. Increasingly sophisticated and complex financial products cause interpretation difficulties for both the courts and consumer protection authorities, but above all for consumers themselves, which consequently poses a challenge for both sides of the market (supply and demand). It is also a challenge for the post-crisis ESAs as the EU bodies not only designated to monitor and manage both the stability and security of the financial market, along with the actual level of consumer protection within it. In the preparation of the article, the legal-dogmatic and legal-theoretical method, which is standard for such studies, was applied, which allows for an analysis of the provisions of EU law and the identification of the norms stemming from them using interpretation and the assessment of the content of the provisions through the prism of the principle of consumer protection from Articles 12 and 169 TFEU and the EBAs’ competence provisions. Due to the fact that, in principle, the powers and competences of all three ESAs are analogous and only differ in terms of the scope of their application (i.e., financial institutions operating in the relevant financial market sectors – banking, insurance, and pension and investment), the authors will present their considerations with reference to the European Banking Authority (EBA), which is an exemplification of the powers of the other supervisory authorities. Thus, the secondary piece of EU legislation to be considered in this article will be the Council and European Parliament Regulation, hereinafter known as “EBA Regulation” and the actions taken by the EBA on that basis.

Uncovering lobbying strategies in sustainable finance disclosure regulations using machine learning

PurposeWe analyse lobbying behaviour by using Machine Learning approaches. In the context of Sustainable Finance Disclosure Regulation (SFDR), we gain detailed insights, assign these to existing strategies, and measure how strongly which participant influences the regulation. Study design/methodology/approachWe use tri-gram analysis, sentiment analysis, and similarity analysis as methods to obtain insights into the political commentary process of European Supervisory Authorities (ESAs) drafts dealing with SFDR. FindingsOur metadata helps to identify stakeholders and lobbying strategies. We found that the most negative comments came from the regulated, who argued strongly subjectively in a very objective environment of ESG disclosure. We also identified typical lobbying strategies based on arguments, persuasion, and classic cost-benefit considerations. Originality/valueWe generate emotion values and synthesise detailed argument differences and show that modern algorithms can contribute to the identification of interest groups and lobbying strategies. Furthermore, we generate similarity values of arguments that can be taken into account in the analysis of the success of a lobbying strategy.

Unintended consequences of the risk-based approach? De-risking tendencies in anti-money laundering and countering the financing of terrorism compliance

This paper provides an overview of the regulatory approach taken by the European Union (EU) to counter unwarranted de-risking activities by financial institutions in the field of money laundering and terrorist financing. As an integral part of the network to combat money laundering and terrorist financing in the EU, financial institutions are subject to a comprehensive regulatory framework that follows a risk-based approach. In the course of the revision of this legal framework and driven by different developments such as migration, the phenomenon of unwarranted de-risking has increasingly come to the attention of EU regulators. Some related factors to unwarranted de-risking are typically the risk of non-compliance with rules in the field of anti-money laundering (AML) and countering the financing of terrorism and respective sanctions, including reputational damage, the increasing administrative burden that potentially comes with risky customers, as well as the associated high compliance costs and necessary training for employees. Additionally, the phenomenon of unwarranted de-risking can only be fairly assessed when being distinguished from de-risking decisions taken by financial institutions in accordance with their business strategy. Given the high impact unwarranted de-risking can have on important areas such as financial inclusion and as a result of observing an increase in unwarranted de-risking activities, EU regulators have focused on clarifying legal uncertainties faced by financial institutions, for example in the AML package published in 2021 and in the revision of existing and issuance of new Guidelines by the European Supervisory Authorities in 2023, as examined in this paper.

Article 29a – Towards a new Strategic Dimension in Supervisory Convergence?

Abstract 409As part of the 2019 reform of the European System of Financial Supervision, the three European Supervisory Authorities were granted a completely new convergence tool in Article 29a to promote a common supervisory culture. This tool allows them to identify up to two Union Strategic Supervisory Priorities that the National Competent Authorities shall take into account when drawing up their work programme. The article provides a doctrinal legal analysis of each procedural step in Article 29a; from information gathering to assessment of national work programmes and follow-up measures. On this basis, it is argued that Article 29a has expanded the scope of the ESAs’ existing toolkit; from the operational to the strategic level. Hereby the USSPs have essentially brought a new strategic orientation to the former level 3 of the Lamfalussy process. However, this institutional development also raises several key challenges related to the ESA/NCA relationship that call for attention in the further development of this convergence tool.410

Soft rulemaking through multi-level administrative practice: replicating the aesthetics of law

ABSTRACT The complexity and the dynamic evolution of global finance require forms of transnational regulation that do not rely solely on traditional lawmaking and call for the participation of actors at multiple levels. One of the examples of these forms is regulation through legally non-binding guidelines and recommendations produced by the European Supervisory Authorities and enforced by national authorities. Even if these soft law acts cannot be considered as law in the traditional sense, their real impact is very much law-like. The only distinction from traditional legal acts seems to be the non-mandatory wording and the lack of direct enforceability or judicial control. Otherwise, these acts replicate the aesthetics of law. This article argues that the entire transnational administrative practice, which consists of soft rulemaking and the effective enforcement of such rules, is powerful because it successfully mimics law-making and law enforcement procedures.

Програми реструктуризації кредитів в умовах пандемії коронавірусу: порівняльний аналіз вітчизняної та міжнародної практики

Introduction. Loan restructuring is one of the toolkit for the resolution of problem loans. It directly affects the quality of assets, profitability and capitalization. This credit risk management tool always requires fine-tuning with the involvement of the regulator, as problem loans may be misclassified, namely restructured rather than classified as non-performing, and provisions may be inadequate to the risk, i.e. understated. Problem Statement. In the conditions of a systemic crisis, the probability of defaults on loans increases, and it is extremely important that lenders go to exactly those borrowers who maintain their viability and are ready to resume debt service immediately after the normalization of working conditions. It depends on the position of the regulator to what extent this practice is uniform among banks to prevent distortion of reporting. Along with this, reaching an agreement between the parties is always a difficult process of finding compromises and balancing interests. Purpose. To study the domestic and international experience of commercial banks and banking supervisory bodies in restructuring problem loans for borrowers who have experienced financial difficulties due to the coronavirus pandemic. Methods. The study was conducted by comparing domestic and international practice in the field of credit restructuring regulation and analyzing the disclosure of relevant information in financial statements by banks using the methods of statistical analysis of series dynamics and factor analysis of data. Content analysis was used in the review of scientific publications and reports. Results. The actions of the National Bank of Ukraine on the regulation of credit restructuring can be assessed as palliative, since they do not establish clear rules and do not guarantee the prevention of manipulations by banks, and also do not encourage creditors to grant concessions to borrowers. Banks with foreign capital (of Western countries) were guided by the instructions of the European supervisory authority EBA and the instructions of the parent bank regarding the recognition of the quality of restructured loans. Independent auditors of Ukrainian banks used different approaches to disclosure of information about restructuring in annual reports. In Ukraine, as in most countries of the world, the regulatory body gave temporary consent to the exclusion of restructured loans from the amount of problem loans. The benefit for banks is the ability not to accrue reserves for such exposures. However, the suspension of principal payments did not exempt him from paying interest, and in fact the borrower overpaid for the loan. It seems correct if the regulator would require recognition of the loan as problematic in case of repeated restructuring. Conclusions. The NBU is called upon to summarize the results of the work carried out by banks on credit restructuring and to provide banks with specific recommendations so that the banking sector would be ready for possible new upheavals It is expedient to determine 9 months as the maximum period of moratorium (credit holidays) that can be applied by banks.

Data risks and security in the financial sector: Adapting to a new environment

Huge increases in data generation and storage volumes in recent years, coupled with technological innovations, are changing the nature of data risks in the financial sector. Several factors determine the nature of data risks: (a) the way technology is used; (b) the profile of financial sector entities and their interconnections; (c) the cyberthreat landscape; and (d) awareness and practices among legitimate users of data. How these factors are evolving in an increasingly complex digital environment is described. To manage the changing data risk profile, the EU regulatory framework is adapting. Key regulatory developments in the financial sector include the Digital Operational Resilience Act (DORA) proposal and the recent advice from the European Supervisory Authorities in relation to digital finance. More broadly, the Digital Services Act and the Digital Markets Act aim to create a safer digital space for EU citizens.

Brexit, International Finance, and Fiscal Capacity in the Long Run

The elements that influence, according to this paper, the approach to international finance and financial governance is evolving, with significant employ for the EU's ability to implement its preferences globally. It appears that two related factors are driving this transition. First, European Supervisory Authorities (ESAs) have recently gained popularity in international financial governance due to its unique incentives, priorities, and capacities. Second, as international financial regulation shifts from standard-setting to operational concerns, administrative organizations such as the ESAs have a greater opportunity to exert control. This article examines the consequences of the existence of a social democratic organizational channel by which the EU can engaged with global finance governance using the European Securities and Markets Authority as a research study. The data based on secondary and data collect from the world development indicators. The results analysis run from the smart PLS software and measure the performance of international finance and fiscal capability in the long run. Results indicate that there is inverse but significant relationship between international finance fiscal capability in the long run. The European Securities and Markets Authority has the best track record of any ESA in the world. It also makes some predictions on how the UK's relationship with international finance, also its governance and the ESAs as global organizations, would be affected by the Brexit decision.

The Broadening ‘Soft Law’ Powers of the European Banking Authority

The European Banking Authority (EBA), one of the pillars of the European System of Financial Supervision, has a power to issue guidelines and recommendations, both representing soft-law instruments, in order to achieve effective and common regulatory and supervisory standards in the banking industry. In the recent decision (15 July 2021), the Court of Justice of the European Union clarified the power of the EBA to issue soft law instruments, a decision that has important repercussions on all European supervisory authorities. Court of Justice of the European Union, European Banking Authority

Ban on Distributing Certain Unit Linked Life Insurance Contracts as the Supervisory Product Intervention of the Polish Financial Supervision Authority (PFSA)

The article aims at discussing practical aspects of a legal regulation providing the European Supervisory Authorities (ESAs) and national supervisory authorities with the power to apply supervisory product intervention measures, particularly for insurance investment products. In addition to presenting the essence of product decisions, the author outlines the legal basis for product intervention powers of both the EU and national supervisory authorities related to unit linked life insurance contracts. Moreover, the article analyses the reasons and contents of the product decision issued by the Polish Financial Supervision Authority regarding the ban on distributing certain unit linked life insurance contracts, with the ban being effective from January 1, 2022.

A Critical Analysis of the Rationale for Financial Regulation Part I: Theories of Regulation

The aim of this paper is to critically examine and comment on the continued validity of the theories and the generally accepted objectives of financial regulation in the light of the policy response to the financial crisis and the regulatory activism of the last decade in the EU and US. The main position of this paper is that the post-crisis policy response and the current state of affairs may be explained as a combination of factors that surface from past theories of regulation and that the causes of the financial crisis and subsequent regulatory measures, such as the Dodd Frank Act in the US and the establishment of the European Supervisory Authorities (‘ESAs’) in the EU, sustain the continued validity of the objectives of financial regulation. However, recent measures, such as, the Financial Choice Act in the US, and the European Market Infrastructure Regulation (‘EMIR’) Refit in the EU, seem to have objectives which go beyond existing and internationally accepted objectives of regulation. It is also argued that regulatory and supervisory action to realise a specific objective of financial regulation could, at times, generate tensions with and weaken the realisation of other regulatory and economic objectives. This paper also demonstrates the difficulties that could surface in finding the right balance between achieving the objectives of financial regulation, while avoiding instances of over-regulation by respecting the principles of proportionality, subsidiarity and the fundamental rights of members of society such as the promotion of fair competition and consumer choice.

Non-performing loans in the hotel industry: The case of Greece

Throughout the Greek economic crisis, the problem of rising stock of non-performing loans (NPLs)[1] gradually evolved into one of the most challenging structural deficiencies faced by the Greek banking sector. Despite outstanding performance of the Greek tourism sector, which over the last five years attracted record number of tourists each year, NPLs in the hotel sector remain widespread. The objective of this study is to identify macroeconomic factors and sector-specific characteristics, which led to NPL stock piling in Greek tourism sector. Our findings are supported by rare dataset on NPLs in Greek hospitality sector compiled from publicly available sources. We apply descriptive quantitative analysis to the data from the Bank of Greece, the Hellenic Statistical Authority and other official sources. We found that, despite the record performance of the Greek tourism sector, hotel loans are as problematic as loans issued to other sectors of the Greek economy. Our findings contribute to the NPL literature by providing valuable insights for the Greek hotel industry’s NPL stock, especially in view of the fact that such academic research has not been conducted before.
 
 [1]The term ‘NPLs’ is used as a shorthand term to denote all Non-Performing Exposures (NPEs) (ECB, 2017).When a customer delays payment of a loan that is subject to a specific contract with a bank for more than a predetermined number of days then this is considered NPL. Depending on the country, bank, and applicable provisions, the number of days may refer to more than 30, 60 or 90 days (IMF, 2011). The European Supervisory Authorities consider a loan as non-performing when the borrower has been late for more than 90 days to pay the agreed installments to the financial institution that has contracted the contract. According to the European Central Bank (2016), loans repaid by the borrower within the agreed term are considered to be "serviced". Due to the fact that the definition of NPLs is based on a variety of different interpretations, the European Banking Authority attempted to give a single definition through the term ‘NPEs’. NPEs include not only loans but all debt instruments (loans, advances and debt securities) as well as off-balance sheet exposures. NPEs include either of the two criteria:
 - Long-term openings that have exceeded the 90-day limit,
 - "Uncertainty collection" exposures qualifying as non-serving, although they are either current or have a delay of less than 90 days.

The European Supervisory Authorities: role-models or in need of re-modelling?

The three European Supervisory Authorities (ESAs) are, for almost a decade now, part of the financial landscape, arbiters as well as players in what has turned out to be a complex and frail system. They have served well, but should they remain unchanged? The present article analyses the way they were conceived and set up, their architecture, their legal and substantive characteristics and deals with the question of their reform.

Market risk assessment

PurposeThis study aims to examine whether the methodology proposed by the European Supervisory Authorities (ESAs) within Delegated Regulation (European Union) 2017/653 for the calculation of market risk of certain packaged retail and insurance-based investment products (PRIIPs) is the most appropriate.Design/methodology/approachRisk models are put into effect to validate the appropriateness of the methodology announced by ESAs. ESAs have announced that the unit-linked (UL) products, labeled as Category II PRIIPs, will be subject to the Cornish–Fisher value-at-risk (CFVaR) methodology for their market risk assessment. We test CFVaR at 97.5% confidence level on 70 UL products, and we test Cornish–Fisher expected shortfall (CFES) at the same confidence level, which acts as a counter methodology for CFVaR.FindingsThe paper provides empirical insights about the Cornish-Fisher (CF) expansion being a method that incorporates the possibility of financial instability. When CFVaR by ESAs is calculated, it is shown that CF is in general a more robust risk model than the simpler historical ones. However, when CFES is applied, important points are derived. First, only in half of the occasions the CF expansion can be considered as a reliable method. Second, the CFES is a more coherent risk measure than CFVaR. We conclude that the CF expansion is unable to accurately estimate the market risk of UL products when excessive fat-tailed or non-symmetrical distributions are present. Hence, we suggest that a different methodology could also be considered by the regulatory bodies which will capture the excessive values of products in financial distress.Originality/valueLiterature, both theoretical and applied, regarding PRIIPs, is not extended. Although business and regulators research has begun to intensify in the last two years, to our knowledge this is one of the first studies that uses the CFES methodology for market risk assessment of Category II PRIIPs. In addition, we use a unique data set from a country in the headwinds of the recent financial crisis. This research contributes both to the academic and business community by enriching the existing literature and aiding risk managers in assessing the market risk of certain Category II PRIIPs. Considering the recent efforts of the regulatory authorities at the beginning of 2020 to implement certain amendments to the PRIIPs, we indicate relative risks related with the calculation of the market risk of the aforementioned products. Our findings could contribute to regulatory authorities’ persistent efforts in wrapping up this ongoing project.

ISO/IEC 27701: Threats and Opportunities for GDPR Certification

The paper assesses the possible consequences for Article 42/43 certification of the recently published ISO/IEC 27701:2019 standard. The new ISO standard establishes a management system that aims to manage ‘the processes for protecting the capture, accountability, availability, integrity, and confidentiality of personal data.’ The conformity with the standard’s requirements is certifiable by the private certification bodies interested in providing this service to businesses. The paper shows that ISO/IEC 27701:2019 based certification possesses many assets to dominate the market of data protection certification and, thus, compete with the approach supported by the European supervisory authorities on data protection. ISO based certification offers many operational advantages to businesses which are looking for a workable solution to streamline information security and data protection in their organization. In the meantime, the EU supervisory authorities are still wandering on the right option to approve certification schemes under Article 42/43 regime. A strong uptake of ISO/IEC 27701:2019 based certification alongside Article 42/43 certification could confuse the general public and eventually threaten Article 42/43 implementation. But it could also offer an opportunity to the European supervisory authorities to spread data protection principles beyond EU borders and clarify the relationships they intend to establish between Article 42/43 certification and ISO standards based one.

Law and practice of financial appeal bodies (ESAs’ Board of Appeal, SRB Appeal Panel): A view from the inside

This paper offers some lessons drawn from the first years of experience of both the joint Board of Appeal (BoA) of the European Supervisory Authorities and the Appeal Panel (AP) of the Single Resolution Board.The paper outlines their institutional design and the main substantive and procedural issues that have arisen in the cases so far decided by both bodies. It offers a view “from the inside”, which shows not only the certainties of appeal bodies, but also their many challenges. The paper also discusses design strengths and weaknesses of the current EU adjudicatory system of public law disputes in the Banking Union and the Capital Markets Union, bearing in mind the importance of independent review, and the Vaassen criteria for “courts”. The paper concludes by offering preliminary stocktaking and reflections on a possible way forward to enhance the complementary (and supporting) role of financial appeal bodies to the EU courts.

The European Supervisory Authorities (ESAs) As 'Direct' Supervisors in the EU Financial System

The European Supervisory Authorities (the ‘ESAs’) form part of a large network of EU agencies and are classified as regulatory agencies, their principal tasks being the development and completion of the ‘single rulebook’ for the EU financial system. The ESAs also promote supervisory convergence in order to create a level-playing field in financial supervision and supervisory practices in the EU. In the absence of an explicit legal basis in the TFEU for the allocation of competence to EU agencies, their powers are delimited, shaped and amenable to judicial review in light of relevant CJEU jurisprudence, most importantly, the Meroni doctrine, laying down the core principles governing relations between EU institutions and EU agencies. In this study, we look into the gradually emerging (and increasing) asymmetry in supervisory terms between the ESMA, on the one hand, and the EBA and the EIOPA, on the other. The former’s direct supervisory powers have been progressively expanding and technocratic influence widening, accentuated by recent relevant case-law modernising the Meroni doctrine and the recent amendment of the ESAs’ founding Regulations mirroring the ambition to move towards further centralisation of supervision of EU capital markets. The aim of this paper is to contribute to the ongoing debate arising from the ESAs’ developing role and position within the EU financial system.

Aufsichtsrechtliche Implikationen der COVID-19-Krise und Maßnahmen der Aufsichtsbehörden

The coronavirus is currently holding the world hostage. Within a short period of time, the virus has reached Europe and also Austria. Cases of the disease in some countries are still increasing at an enormous rate. The outbreak of the COVID-19 pandemic and the countermeasures taken by many countries inside and outside the European Union have significant economic consequences. All this has an enormous impact on the economy and thus also on the financial markets and their participants. Accordingly, the Austrian legislator has reacted to the current crisis in various ways, specifically by enacting several socalled “COVID-19 laws”. The Austrian Financial Market Authority (“FMA”) and the European supervisory authorities have also reacted accordingly and announced numerous measures, many of which have already been implemented. However, it is not easy to keep an overview of this veritable flood of measures. Some of the steps taken by the supervisory authorities and by the Austrian legislature will therefore be described below, but not exhaustively. Measures taken by the European Insurance and Occupational Pensions Authority (“EIOPA”) will not be dealt with in this article.

Turning Gold into Green: Green Finance in the Mandate of European Financial Supervision

Following the Paris Agreement and pursuant to its objective of reordering financial flows to ensure climate change mitigation and adaptation, green finance has become a legislative priority for the European Union. This was illustrated by a unique, albeit limited, change in the mandate of the European Supervisory Authorities (ESAs). This article takes this amendment as a starting point to discuss the responsibility of supervisory authorities in facing climate change. Despite clear limits stemming from Union law, a sweeping legal analysis sheds light on obligations for supervisory authorities across Europe to consider climate change as part of their mandate. This finding is supported by the growing recognition of climate change as a source of systemic risk. Consequently, the mandate of European financial supervision is turning green, regardless of a legislative intervention. NB: This paper is a non-edited version of the article published in the Common Market Law Review.

ISO/IEC 27701 Standard: Threats and Opportunities for GDPR Certification

The paper assesses the possible consequences for Article 42/43 certification of the publication of the ISO/IEC 27701:2019 standard. This new ISO standard establishes a management system that aims to manage ‘the processes for protecting the capture, accountability, availability, integrity, and confidentiality of personal data.’ The conformity with the standard’s requirements is certifiable by the private conformity assessment bodies interested in providing this service to businesses. The paper shows that ISO/IEC 27701:2019 based certification has many assets to dominate the market of data protection certification. It offers operational advantages to businesses that are looking for a readymade solution to streamline information security and data protection. A strong uptake of ISO/IEC 27701:2019 based certification could threaten Article 42/43 certification by creating two competing approaches of data protection compliance. But it could also offer the opportunity to improve the general level of data protection and encourage the European supervisory authorities to clarify the relationships they intend to establish with ISO privacy standards.