Category Archives: Financial Services: General Framework

The integration of financial markets means that capital can be allocated more efficiently and makes for better long term economic performance. The European Union has established a legislative framework geared to strengthening the financial services sector, in particular in order to improve the performance of financial operators and boost liquidity, competition and financial stability.
European policy on financial services shares some concerns with that on the free movement of capital when it comes to facilitating, and improving the security of, financial activity. Such issues stem in particular from the cross border character of this activity, but also from the massive growth in services based on new technologies.
Financial services policy covers three main sectors: the banking system, insurance and securities. Apart from laying down rules for operators and investors (banks, insurance and securities), the Union also intends to give greater protection to consumers in specific areas such as retail financial services.

Internal Market

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Internal Market

Internal Market Contents

  • Internal market: general framework
  • Living and working in the internal market: Free movement of people, asylum and immigration, free movement of workers
  • Single Market for Goods: Free movement of goods, technical harmonisation, product labelling and packaging, consumer safety, pharmaceutical and cosmetic products, chemical products, motor vehicles, construction, external dimension
  • Single market for services: Free movement of services, professional occupations, services of general interest, transport, Information Society, postal services, financial services, banks, insurance, securities markets
  • Single market for capital: Free movement of capital, economic and monetary union, economic and private stakeholders, fiscal aspects, combating fraud, external relations
  • Businesses in the internal market: Company law, public procurement, intellectual property

See also

Living and working in the internal market.
Overviews of European Union: Internal market.
Further information: the Internal Market and Services Directorate-General of the European Commission.

Distance contracts for financial services

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Distance contracts for financial services

Outline of the Community (European Union) legislation about Distance contracts for financial services

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Distance contracts for financial services

Document or Iniciative

Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directives 90/619/EEC, 97/7/EC and 98/27/EC [See amending acts].

Summary

Scope

The Directive covers contracts for retail financial services (banking, insurance, payment and investment services, including pension funds) that are negotiated at a distance (e.g. by telephone, fax or over the Internet), i.e. by any means which do not require the simultaneous physical presence of the parties to the contract.

Right to reflect

The Directive gives the consumer the right to reflect before concluding a contract with a supplier. The supplier is thus required to transmit a draft contract to the consumer, in writing or on a durable medium (e.g. floppy disk, CD-ROM or e-mail), including all the contractual terms and conditions. The reflection period is 14 days, during which all the terms and conditions remain valid. The parties are nonetheless free to agree on a longer period or to negotiate other conditions.

Right to withdraw

The consumer has the right to withdraw within 14 days (30 days in the case of life assurance and personal pension operations) in the following circumstances:

  • when the contract has been signed before the consumer has received prior notice of the contractual terms and conditions (e.g. consumer takes out an insurance policy in order to obtain immediate cover);
  • when the consumer has received the contractual terms and conditions but has been unfairly induced to conclude the contract during the reflection period.

If the consumer exercises the right of withdrawal after having already agreed to partial performance of the service, he may be required to pay the supplier for the service rendered. If the service has been rendered in its entirety before the right of withdrawal is exercised, that right can no longer be exercised and the consumer will have to pay for the service. Consumers must be informed in advance of the price to be paid (or of the basis on which it will be calculated).

In order to avoid speculative manoeuvres, the right of reflection or withdrawal does not apply to services whose price is liable to fluctuate as a result of developments on financial markets (e.g. the securities market).

Right to reimbursement

Certain financial services, notably futures (e.g. an instruction given by a consumer to purchase a certain number of shares at a fixed price), may sometimes be totally or partially unavailable at the time of performance of the contract. In this case, the consumer is entitled to reimbursement of the sums paid over to purchase the services.

Cancellation of payment by card in the event of theft

In the event of fraudulent use of his credit card, the consumer may request cancellation of the payment or reimbursement of any amount already paid.

Protection against unsolicited supply of services

Customers are protected by Directive 2005/29/EC, which regards the unsolicited supply of services as an unfair commercial practice. Failure to reply to an offer to supply services does not put the customer under an obligation and does not constitute tacit consent.

Complaints procedures

Member States must ensure that adequate and effective complaints and redress procedures (court, administrative and out-of-court) are put in place for the settlement of possible disputes between suppliers and consumers.

Sanctions

Member States must also ensure that operators and suppliers of communication means put an end, technology permitting, to illicit activities performed using means of distance communication.

Background

The proposal for a Directive is intended to supplement European Parliament and Council Directive 97/7/EC, which ensures appropriate consumer protection in respect of most products and services other than financial services (excluded in view of their specific characteristics). It aims to rectify this legal omission by establishing common rules to govern the conditions under which distance contracts for financial services are concluded.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2002/65/EC

09.10.2002

09.10.2004

JO L 271 of 09.10.2002
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2005/29/EC

12.06.2005

12.12.2007

JO L 149 of 11.06.2005

Directive 2007/64/EC

25.12.2007

1.11.2009

OJ L 319 of 5.12.2007

Successive amendments and corrections to Directive 2002/65/EC have been incorporated in the basic text. This consolidated version  is for reference purpose only.

Review of the Lamfalussy process

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Review of the Lamfalussy process

Outline of the Community (European Union) legislation about Review of the Lamfalussy process

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Review of the Lamfalussy process

References

Communication from the Commission of 20 November 2007 entitled “Review of the Lamfalussy process – Strengthening supervisory convergence” [COM(2007) 727 final – Official Journal C 55 of 28.2.2008]

Summary

The Lamfalussy process was launched in 2001 for the purpose of strengthening the European regulatory and financial sector supervision framework. It consists of four levels. It starts with the adoption of the framework legislation (Level 1) and detailed implementing measures (Level 2). For the technical preparation of the implementing measures, the Commission is advised by committees, made up of representatives of national supervisory bodies, which exist in three sectors: banking, insurance and occupational pensions, and the securities markets. These committees then contribute to the consistent implementation of Community directives in the Member States, ensuring effective cooperation between the supervisory authorities and convergence of their practices (Level 3). Finally, the Commission enforces the timely and correct transposition of EU legislation into national law (Level 4).

Based on the review of this process, the Commission proposes practical improvements to strengthen the Community supervisory framework, especially during periods of market instability.

The evaluation of the Lamfalussy process is positive on the whole. However, despite undeniable contributions (flexible regulatory system, convergence, cooperation, etc.), there is a need for certain improvements.

Improvements in the legislative process and enforcement

Experience with the adoption of framework legislation and implementing measures has generally been positive, with only a few adjustments necessary between institutions with regard to supervision and implementation.

The evaluation of the schedules for the sequencing of the measures for the adoption of legislation and implementation (Levels 1 and 2) proves to be complicated as the deadlines are so variable. Consequently, it is difficult to set reasonable deadlines for both transposition and application. To resolve this, the transposition deadline for the whole legislative package could be linked to the adoption of the last implementing measures identified in Level 1. Work on the Level 1 and Level 2 measures could also be carried out more in parallel for greater coherence and facility.

The Lamfalussy process has enabled sound regulatory principles to be introduced and applied. In particular it has led to improved quality of legislation and enhanced transparency and predictability of European Union (EU) policy-making. However, Member States must refrain from adding further national rules (“gold-plating”). For greater transparency regarding consultation, the systematic publication of contributions should also become general practice. Finally, impact assessment should be extended to all significant implementing measures.

In order to increase transparency regarding transposition, the impact of the various disclosure instruments put in place (under the Capital Requirements Directive, etc.) should be strengthened. The Commission publishes regular statistics on the state of play of transposition by Member States, especially concerning Level 1 and Level 2 directives. For their part, Member States should provide the Commission with transposition tables. In the case of late implementation, infringement proceedings will be launched under Article 226 of the EC Treaty.

Supervisory cooperation and convergence

Supervisory cooperation and convergence are one of the innovations of the process, but have not always had the expected effects.

Strengthening the Level 3 Committees [or committees of regulators] is essential. As regards political accountability, an overall two-step approach (political guidance from the European Parliament, the Council and the Commission and committee reports) should enable them to deliver more results. In addition, the mission of the national supervisors is to be extended to include a cooperation and convergence requirement at European level. As regards the legal status of Level 3 Committees, changes to the legal framework will be considered concerning the decisions setting them up and the definition of their role.

Reducing the practical obstacles at European and national levels would strengthen mutual trust and the implementation of the measures. Decision-making, especially of the committees of regulators, should be facilitated (extension of qualified majority voting and definition of solutions in the case of a blocking minority) and carry more authority (even if non-binding) in relation to the national regulators and supervisors.

Member States also have a key role to play to guarantee the application in full of the standards and guidelines concerning:

  • the powers of national supervisors and sanctions. In view of the divergence of the national systems, the regulators and supervisors should have sufficient supervisory powers and tools, including sanctions, to be able to fulfil their obligations;
  • the guarantee of the operational independence of national supervisory authorities in four fields: institutional, regulatory, budgetary and supervisory;
  • the proposals strengthening cooperation between home and host regulators. The Commission’s role is to raise awareness, evaluate and take measures (delegation of tasks, multilateral memoranda of understanding, role of ‘lead’ supervisor, etc.).

The development of common standards to ensure optimum cooperation between colleges of supervisors would guarantee greater coherence and uniformity of application and would allow the problems of competences between home and host countries to be resolved.

Cross-sector cooperation is based on a joint protocol on cooperation, signed in 2005, and is provided for when added value can be expected from a joint action. Level 3 Committees have agreed on joint annual work programmes since 2006 to deal with priority subjects such as financial conglomerates and common reporting standards.

As regards crisis management, rapid information procedures must be provided for to ensure efficient, collective action in the case of a major market disturbance or financial crisis.

The Commission considers that some financial assistance from the EU budget may be appropriate in response to the calls made on the committees of regulators arising from their Community obligations.

White Paper on Financial Services Policy

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White Paper on Financial Services Policy

Outline of the Community (European Union) legislation about White Paper on Financial Services Policy

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

White Paper on Financial Services Policy (2005-2010)

This White Paper presents the European Commission’s financial services policy priorities from 2005 to 2010. The Commission considers it essential that the progress of the Financial Services Action Plan (FSAP) continue in order to open up untapped potential for economic growth and employment in the financial services sector of the European Union. The consolidation of the progress achieved the elimination of remaining barriers and the improvement of legislation and controls are the leitmotifs of the White Paper for the period 2005-2010.

Document or Iniciative

Commission White Paper of 1 December 2005 on Financial Services Policy 2005-2010 [COM(2005) 629 final – Not published in the Official Journal].

Summary

The dynamic consolidation of financial services

Completing the single market in financial services is a crucial part of the Lisbon economic reform process.

In this context, the integration of European financial markets envisaged by the Financial Services Action Plan for 1999-2005 (FSAP) proves to be essential, as it will open up considerable potential in terms of growth and employment that has not yet been tapped.

In the White Paper, the Commission lays down the main aims of its policy for the next five years:

  • consolidation of the progress achieved;
  • completion of current measures;
  • enhancement of supervisory cooperation and convergence;
  • removal of the remaining barriers to integration.

The document thus identifies a number of priorities, in particular the increased efficiency of the pan-European markets for long-term savings products, the completion of the internal market for retail services and a more efficient venture capital market.

Better Lawmaking

Open consultations and impact assessments attached to new legislative proposals will continue to play a central role and will be required before any legislation is deemed necessary.

The Commission considers it important to strengthen the control mechanisms for the effective application of Community legislation; to do this, increased cooperation between the Member States is considered necessary. In order to facilitate the effective monitoring of progress:

  • the annual Progress Report on financial services will give an account of the overall rate of transposition and the online FSAP transposition matrix will be updated regularly;
  • the transposition workshops with Member States and European regulators will continue to play a central role in the implementation of particular provisions of EC legislation.

The ex-post evaluation of all legislative measures is a priority in the upcoming years. By 2009, the Commission will endeavour to have completed a full economic and legal assessment of all FSAP measures.

The Commission is planning a number of targeted initiatives to strengthen the coherence and consistency of the body of law which includes the Community and national implementing measures for legislation on financial services. In detail, the plans are to:

  • bring together the relevant Community instruments on the Internet;
  • check sectoral consistency in the securities field;
  • detect, through a study to be carried out in 2008, any inconsistencies in the information supplied in response to the requirements in the existing EC rules;
  • publish a Communication/Recommendation in 2006 concerning collective investments in order to resolve uncertainties from an information angle;
  • codify sixteen insurance Directives concerning the framework for the Solvency II project into a single directive;
  • where any incorrect implementation of Community law is found, take appropriate action, including the opening of infringement proceedings.

Users make an important contribution to the definition of European policy on financial services. Accordingly, the FIN-USE forum plays an essential role.
Furthermore, the Commission considers that it is necessary to improve the transparency and comparability of financial products and to help consumers understand them better. The Commission will therefore write a periodic newsletter to explain the most relevant user/consumer aspects of its ongoing work.

The efficiency of FIN-NET, the network for the out-of-court settlement of cross-border disputes in the financial services sector, will be improved. In the coming years, the Commission plans to strengthen the synergy between financial services policy and other policy areas, particularly competition, consumer affairs and taxation.
With regard to taxation, the Commission intends to present a legislative proposal to adapt the rules on VAT on financial services to changes in the single market for financial services.

EC regulatory and supervisory structures

Community policy on the regulation and supervision of financial services is based on the four levels of the Lamfalussy process. The Commission intends to develop this process over the next five years. The key regulatory policy issues are:

  • to continue the debate on comitology reform;
  • to improve the system of accountability and transparency;
  • to develop cross-sectoral regulatory cooperation;
  • to ensure that the four levels of the Lamfalussy process respect the Better Lawmaking agenda;
  • to contribute to the global convergence of standards.

It is extremely important for the supervisory authorities to cooperate and exchange information, and the Commission wishes to encourage this by:

  • clarifying and optimising the responsibilities incumbent upon, respectively, the Member State of origin and the host Member State;
  • exploring the possibility of delegating certain types of tasks and responsibilities;
  • improving the efficiency of supervision, without increasing obligations and, consequently, reporting and information costs;
  • ensuring faster and more consistent cooperation, and contributing to the development of a European supervisory culture.

Ongoing and future legislative activities (2005-2010)

The Commission is currently involved in four legislative projects:

  • retail banking: the Commission will publish a White Paper on mortgage lending in 2006; two proposals for Directives will also be presented, one concerning payment services and the other consumer credit;
  • Solvency II: in connection with this project, the Commission will present a comprehensive draft text in 2007 with the aim of modernising regulation and supervision in the insurance sector;
  • review of qualifying shareholdings: the supervisory authorities must ensure more clarity and transparency. In particular, the Commission is planning to amend the Banking Directive (Article 16) and the Insurance Directive (Article 15) and to establish common supervisory criteria;
  • clearing and settlement: the Commission will carry out an extensive consultation and an impact analysis to assess the need for a framework Directive to make cross-border transactions for clearing and settlements carried out by operators in the sector efficient, safe and low-cost.

The Commission intends to conduct in-depth reflection in five fields, namely the elimination of unjustified barriers to cross-border consolidation, the E-money Directive, Insurance Guarantee Schemes, the Hague Securities Convention and the feasibility of optional instruments (“Article 26 scheme”) in the financial services sector.

The Commission is planning two future initiatives in the field of investment funds and retail financial services which should bring benefits to the EU economy:

  • In 2006, the Commission will publish a White Paper on enhancing the legislative framework for investment funds. The general purpose of this document, which will be the result of a process of extensive consultations, is to offer soundly structured, well administered collective investment instruments which deliver the highest possible returns consistent with the individual investors’ financial capacity and risk appetite. The risks and costs incurred by this type of activity must be duly communicated to investors;
  • In the Commission’s opinion, the retail financial services market is still too fragmented and new measures need to be taken. In particular, the obstacles associated with all types of bank accounts (current, savings or securities accounts) must be removed, consumer choice widened and competition between service providers improved. In the field of credit intermediaries, the Commission believes that further investigation is needed.

The external dimension

As the standards set today on accounting, auditing and equity capital have an international dimension, the EU deems it essential to take a leading role in setting standards at global level, and in particular in the opening of the global financial services markets. The Commission intends to develop the dialogue on financial markets between the EU and the United States, and to extend cooperation to include other countries such as Japan, China, Russia and India. The EU needs to be represented strongly in international bodies, where it must be able to speak with one voice on sensitive issues such as money laundering, terrorism financing and tax evasion. European coordination in international fora (the Basel Committee, IAIS, IOSCO or UNIDROIT) needs to be stepped up.

The Commission undertakes to draft a report each year outlining the developments and progress achieved. Annex I to the White Paper gives an overview of the tasks or activities planned in the field of financial services.

Background

In 2004, as the legislative phase of the FSAP was coming to an end, the Commission decided to take stock of progress on the integration of the financial markets in Europe and to launch a general consultation on the basis of reports from four high-level expert groups. The Green Paper on Financial Services Policy, which opened a public consultation in mid-2005, focused mainly on the implementation of existing measures and on cooperation, not on the proposal of new legislation. The resulting White Paper sets out the priority means for achieving the integration of the financial services market.

Related Acts

Commission Green Paper of 3 May 2005 on Financial Services Policy 2005-2010 [COM(2005) 177 final – Not published in the Official Journal].

This document presents the Commission’s initial ideas concerning Community priorities for the financial services policy. This work is the result of the two-year consultation process which started with the work of four expert groups, followed by a wide public consultation.

Community programme to support financial services, financial reporting and auditing

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Community programme to support financial services, financial reporting and auditing

Outline of the Community (European Union) legislation about Community programme to support financial services, financial reporting and auditing

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Community programme to support financial services, financial reporting and auditing (2010-2013)

Document or Iniciative

Decision No 716/2009/EC of the European Parliament and of the Council of 16 September 2009 establishing a Community programme to support specific activities in the field of financial services, financial reporting and auditing.

Summary

The aim of the Programme is to support the activities or actions of certain bodies in the fields of financial services, financial reporting and auditing. It applies to two types of activity:

  • activities supporting the implementation of Community policies aimed at the convergence of supervisory practices;
  • activities developing or providing input to the development of standards.

Beneficiaries of the Programme

The following bodies may benefit from the Programme:

  • the European Financial Reporting Advisory Group (EFRAG);
  • the International Accounting Standards Board (IASB);
  • the Public Interest Oversight Board (PIOB);
  • CEBS Secretariat Limited, based in London, which supports the Committee of European Banking Supervisors (CEBS);
  • a French not-for-profit organisation, based in Paris, which supports the Committee of European Securities Regulators (CESR);
  • a German not-for-profit organisation, based in Frankfurt, which supports the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).

Other bodies may also benefit from the Programme provided they meet the following criteria:

  • they must be non-profit-making legal persons which carry out activities connected with public interest and pursue an aim of general European interest;
  • they must not be in the situation described in Articles 93(1), 94 and 96(2)(a) of the Financial Regulation.

Award of grants

The European Commission awards grants to the EFRAG, the IASCF and the PIOB in the form of operating grants, to cover expenses such as the running of secretariats and the remuneration of employees.

The support structures of the European supervisory committees receive funding in the form of action grants covering the following activities:

  • information technology projects;
  • training programmes and staff secondment schemes for staff from national supervisors;
  • hosting conferences, seminars, training sessions and meetings of experts;
  • preparing and issuing publications, preparation and execution of other information activities;
  • carrying out research and preparing studies;
  • other specific supporting activities in the field of accounting, auditing and supervisory convergence or cooperation.

The Commission awards funding in the form of grants to other bodies which have submitted an appropriate work programme and estimated overall budget.

Grant beneficiaries are obliged to indicate, on a website or in the annual report, that they have received funding from the budget of the European Union.

The financial reference amount is EUR 38.7 million for the period 2010-2013.

Monitoring procedures

The Commission shall ensure that a technical and financial report, and an activity and financial report are submitted annually by the beneficiary of the grant. It may exercise supervision and financial control, as may the Court of Auditors.

Context

This Programme is introduced as part of the period of reflection which followed the financial crisis of October 2008. This period has been marked by a range of initiatives such as the adoption of the Communication from the Commission of 29 October 2008 – From financial crisis to recovery: A European framework for action, and the establishment of the De Larosière Group of experts responsible for considering the future supervisory architecture in Europe.

At the same time, the G20 summit held in Washington on 15 November 2008 also highlighted the need to improve international coordination between financial supervisory bodies.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Decision 716/2009/EC

15.10.2009

1.7.2010

OJ L 253 of 25.9.2009

Related Acts

Communication from the Commission of 29 October 2008 – From financial crisis to recovery: A European framework for action [COM(2008) 706 final – Not published in the Official Journal].

This Communication emphasises the need to redefine the regulatory and supervisory model of the European Union financial sector.

European financial supervision

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European financial supervision

Outline of the Community (European Union) legislation about European financial supervision

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

European financial supervision

Document or Iniciative

Communication from the Commission of 27 May 2009 – European financial supervision [COM(2009) 252 final – Not published in the Official Journal].

Summary

This Communication sets out the basic architecture for a new European financial supervisory framework. The European Commission proposes that this framework be composed of two new pillars:

  • the European Systemic Risk Council (ESRC);
  • the European System of Financial Supervisors (ESFS).

The European Systemic Risk Council (ESRC)

The financial crisis revealed the shortcomings of a system that was lacking in macro-financial supervision. Under the new system, it is essential to be able to identify risks to stability and to introduce an effective warning system. The current macro-prudential measure is too fragmented. It should be developed further.

The ESRC should be an independent body, responsible for safeguarding financial stability in the area of macro-prudential supervision at European level. It will not have any legally binding powers and shall be responsible for the following tasks:

  • collecting information and identifying potential threats;
  • prioritising risks according to their significance;
  • issuing warnings where applicable;
  • making recommendations if required;
  • monitoring the measures that are taken;
  • cooperating with the IMF, the FSB and third country counterparts.

Macro-prudential supervision will mainly be carried out by central banks. In this regard, the Commission proposes that the ESRC be composed of:

  • the President of the European Central Bank (ECB), responsible for the presidency of the ESRC;
  • a Vice-President (elected by the members of the ESRC);
  • the central bank governors from the 27 Member States;
  • the Vice-President of the ECB;
  • the Chairpersons from the three European supervisory authorities;
  • a member of the European Commission.

Each national central bank governor shall be accompanied by a representative of the national supervisory authorities, admitted as observers.

It is planned that the ESRC shall form part of the European legal and institutional framework. The Commission proposes that the ESRC should be established on the basis of Article 95 of the EC Treaty as a body without legal personality.

The European System of Financial Supervisors (ESFS)

The ESFS corresponds to a micro-prudential approach. Its duties are to set up a system which is in line with the objective of a stable and single market for financial services in the European Union. It will also be responsible for linking national supervisors into a strong Community network.

The ESFS shall form an operational European network. The three Committees of Supervisors are to be replaced by the following authorities, having a legal personality:

  • the European Banking Authority (EBA);
  • the European Insurance and Occupational Pensions Authority (EIOPA);
  • the European Securities Authority (ESA).

These three authorities shall:

  • establish a single set of harmonised rules;
  • ensure consistent application of EU rules;
  • manage disagreement between national supervisors;
  • make recommendations if there is a manifest breach of Community law;
  • create a common supervisory culture and consistent supervisory practices;
  • have full supervisory powers for some specific entities;
  • ensure a coordinated response in crisis situations;
  • collect micro-prudential information.

The ESFS shall be composed of:

  • the three supervisory authorities described above;
  • a steering committee;
  • national supervisory authorities.

With the establishment of the ESFS, and the three European Supervisory Authorities described above, the Commission intends to introduce a “single rule book” which will ensure uniform application of rules in the EU in order to safeguard the effective functioning of the internal market.

The ESFS is to be established on the basis of Article 95 of the EC Treaty.

Context

The October 2008 financial crisis revealed many shortcomings in financial supervision. As a response to this crisis, the Commission mandated a group chaired by Mr Larosière to propose recommendations in order to strengthen European supervisory arrangements. The Larosière Group thus presented a report on 25 February 2009 introducing a new system, which is set out in this Communication.

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Remuneration policies in the financial services sector

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Remuneration policies in the financial services sector

Outline of the Community (European Union) legislation about Remuneration policies in the financial services sector

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Remuneration policies in the financial services sector

Document or Iniciative

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector.

Summary

This Recommendation sets out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

The Recommendation applies to:

  • financial undertakings having their registered office or their head office in the territory of a Member State;
  • remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

The Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial undertaking, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.

The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.

The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.

In the event that remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.

The procedures followed should be clear and documented and internally transparent.

The (supervisory) board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.

Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.

Remuneration policy should, at least on an annual basis, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the (supervisory) board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

  • information on the decision-making process which defines the remuneration policy chosen;
  • information on linkage between pay and performance;
  • performance measurement criteria;
  • the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
  • the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities and take into account when doing so parameters such as:

  • the size of the financial undertaking;
  • the nature of its activities;
  • the complexity of its activities.

Financial undertakings should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

Context

Remuneration practices in the financial undertakings sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were, partly, at the origin of the October 2008 financial crisis. The Communication “Driving the European recovery”, published in spring 2009, presents a plan which aims at restoring and maintaining a stable and reliable financial system. This Recommendation on remuneration policies is part of the strategy proposed by the plan.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies in the financial services sector [COM(2010) 286 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/384/EC in the different Member States.
It notes disparities in the application of the principles laid down in the Recommendation. At present, only 16 Member States have fully or partly applied the Recommendation and 7 Member States apply the measures advocated in the Recommendation across the financial services sector.
Moreover, the Report also notes the reluctance of financial institutions to modify their remuneration practices. These institutions are continuing to filter most of the information relating to their individual remuneration practices.

In view of these still considerable obstacles, the Commission intends to pursue the action undertaken and to contribute to the introduction of global rules on remuneration policy in the financial services sector within the context of the G20 and the FSB.

Regime for the remuneration of directors of listed companies

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Regime for the remuneration of directors of listed companies

Outline of the Community (European Union) legislation about Regime for the remuneration of directors of listed companies

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Internal market > Financial services: general framework

Regime for the remuneration of directors of listed companies

Document or Iniciative

Commission Recommendation 2009/385/EC of 30 April 2009 completing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (Text with EEA relevance).

Summary

The existing Community framework is based on the principle of performance-based remuneration of directors of listed companies (hereinafter referred to as “directors”). This Recommendation aims at giving additional guidelines on the way in which best practices can be defined to prepare an appropriate remuneration policy. To this end, it deals with some aspects of the structure of the remuneration of directors and governance thereof.

Remuneration policy

Structure of the policy on directors’ remuneration

In order to ensure that remuneration is performance-related, the new Recommendation requires a balance to be established between fixed and variable remuneration and makes the allocation of the variable component conditional upon predetermined and measurable performance criteria.

In order to promote the long-term sustainability of companies, the new Recommendation also provides for:

  • a balance between long-term and short-term performance criteria;
  • deferment of payment of the variable component;
  • a minimum period for the vesting of share options and shares;
  • the retention of a minimum number of shares until the end of the mandate.

Termination payments (“golden parachutes”) are also subject to quantified limitations and should not be paid in the event of failure. It is suggested that payments do not exceed the equivalent of two years of the non-variable component of the remuneration.

The new Recommendation also introduces the principle of proportionality of remuneration within the company, namely a rating which compares the remuneration of directors to that of other executive directors on the board and employees or executives of the company.

As a last resort, companies should reclaim variable components of remuneration that are paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

This Recommendation is based on Recommendation 2004/913/EC which stipulates that each listed company must publish a statement on its remuneration policy. This Recommendation goes further by stating that this statement must be clear and easily understandable.

The statement on remunerations should also provide information on:

  • the choice of performance criteria;
  • the methods applied to determine whether performance criteria have been fulfilled;
  • the payment of variable components of the remuneration;
  • the payment of termination payments;
  • the vesting of share-based rights to remuneration;
  • the policy on the retention of shares;
  • the composition of peer groups of companies the remuneration policy of which has been examined in relation to the establishment of the remuneration policy of the company concerned.

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration committees play a key role in establishing a responsible remuneration policy. In order to strengthen the functioning and responsibility of the remuneration committee, the Recommendation suggests that at least one of its members should have sufficient expertise in remuneration matters. Furthermore, the Recommendation contains an obligation for members of the remuneration committee to attend the board meeting at which the statement on remuneration is on the agenda in order to be able to provide explanations to shareholders. Finally, in order to avoid conflicts of interests for remuneration consultants, the Recommendation provides that consultants who advise the remuneration committee must not also advise other departments of the company.

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the Recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

Context

The financial crisis of October 2008 revealed more and more complex remuneration structures. They are often based on short-term performance, which can lead to excessive remuneration of directors, not justified by performance. This Recommendation complements and strengthens Recommendations 2004/913/EC and 2005/162/EC which constitute the Community framework for the remuneration of directors of listed companies.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation on directors´ remuneration) complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies [COM(2010) 285 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/385/EC in the different Member States. It emphasises that 10 Member States have already applied at least half of the recommendations. Moreover, some Member States are working on the implementation of several recommendations in their law or Corporate Governance Code. According to the Report, the Member States’ poor understanding of certain aspects of the Recommendation such as the concept of deferment or share based remuneration is the reason for this unsatisfactory implementation. The Commission therefore intends to improve the coherence and effectiveness of EU action in the area of the remuneration of directors of listed companies.

Packaged retail investment products

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Packaged retail investment products

Outline of the Community (European Union) legislation about Packaged retail investment products

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Packaged retail investment products

Document or Iniciative

Communication from the Commission to the European Parliament and to the Council of 30 April 2009 – Packaged retail investment products [COM(2009) 204 final – Not published in the Official Journal].

Summary

This Communication presents the measures planned by the European Commission in the packaged retail investment products sector and more specifically in terms of mandatory information and commercial practices. The aim is bring the Community framework into line with market reality. In this regard, the Commission intends to introduce, at European level, a horizontal approach in the field of retail investment products.

Characteristics

Packaged retail investment products have the following points in common:

  • they offer exposure to underlying financial assets;
  • their primary function is capital accumulation;
  • they are designed with the mid- to long-term in mind;
  • they are marketed directly to retail investors.

These products include the following types:

  • investment (or mutual) funds;
  • investments packaged as life insurance policies;
  • retail structured securities;
  • structured term deposits.

Current weaknesses

Packaged retail investment products can be at the origin of risks where there is a sharp asymmetry in information and expertise between the manufacturers and distributors of products and retail investors.

Another main weakness of this type of product is related to the inconsistencies in the European regulatory framework in force. It is currently inadequate with regard to the retail investment market reality and is not able to offer investors a satisfactory level of protection.

The main failings of the Community framework for packaged retail investment products have their origin in the lack of key investor disclosures and in the regulation of commercial practices.

Proposals for a horizontal approach

Key investor disclosures

Information for retail investors should be harmonised and standardised as much as possible so that they are better able to compare products.

Key information made available to investors should comply with the following criteria:

  • be fair, clear and not misleading;
  • guide investors, enabling them to make informed investment decisions (performance, risks, charges, etc.);
  • be short and simple;
  • be provided at the right time.

Selling of packaged retail investment products by intermediaries and other distributors

The MiFID (Markets in Financial Instruments Directive) provisions are considered to be a benchmark on conduct of business and the management of conflicts of interest. The Commission suggests that the scope of MiFID be extended to all packaged retail investment products.

The horizontal approach governing the regulation of commercial practices would be based on the following principles:

  • investors should be fairly treated;
  • products sold should correspond to the profile and needs of the investor;
  • risks should be clearly communicated to the investor if they decide not to take advice;
  • conflicts of interest must not adversely affect investors;
  • investors should receive clear and effective disclosures of remuneration arrangements and all charges, commissions or fees paid;
  • those assessing the suitability of products should fully understand all their features.

It is still necessary however to establish a generic definition of the concept of “a packaged retail investment product”, and a clear designation of the products that fall within scope.

Context

This Communication is the result of work carried out following the request by the ECOFIN Council in May 2007, and has the aim of restoring confidence with regard to financial markets. It is part of the reforms launched by the European Union since the start of the financial crisis in October 2008. This demonstrated the importance of ensuring transparency in financial products and brought to light the disastrous consequences of irresponsible marketing.

Derivatives

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Derivatives

Outline of the Community (European Union) legislation about Derivatives

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Derivatives

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank of 20 October 2009 – Ensuring efficient, safe and sound derivatives markets: Future policy actions [COM(2009) 563 final – Not published in the Official Journal].

Summary

This Communication defines ways to make more efficient, safer and sounder derivatives markets. The latter contributed substantially to the financial crisis due to their risky nature and the lack of transparency of the financial markets. The Commission therefore decided to adopt measures aimed at making derivatives more efficient, safer and sounder.

Role of derivatives

Derivatives enable economic agents to transfer the risks inherent in certain economic activities to other economic agents who are willing to bear those risks.

However, derivatives have unreliable aspects in that they allow leverage to increase and interconnect market participants. These aspects contributed towards the financial crisis of 2008.

Mitigating counterparty credit risk

The 2008 crisis showed that market participants did not price counterparty credit risk correctly. The latter may be managed bilaterally between the two counterparties or at central market level, by means of a central counterparty (CCP).

The Commission and the G20 have identified the CCP as the main tool to manage counterparty risks. CCPs are currently regulated at national level. For this reason, the Commission intends to propose a European framework for CCPs laying down standards in matters of security, regulation and operation.

The European CCP framework is to cover the different asset classes for which the CCPs provide services. These asset classes generally include cash equities, fixed income and derivatives.

However, not all derivatives are suitable for central clearing. As a result, the Commission intends to submit a proposal aimed at requiring financial firms to post initial margin specific to counterparty characteristics and variation margin depending on the change in the value of the contract.

The Commission also intends to subject non-centrally cleared contracts to higher capital requirements.

The Commission also intends to make it mandatory to clear standardised derivatives through CCPs.

Reducing operational risk

Operational risk includes legal risk and risk relating to losses resulting from inadequate or failed internal processes or from external events.

The Commission intends to take measures to reduce operational risk by facilitating the standardisation of contracts in terms of processing and standard legal terms.

Increasing transparency

Over-the-counter or OTC derivatives markets are characterised by a lack of transparency of prices, transactions and positions. This lack of transparency has hindered regulators from supervising the derivatives market.

It therefore appears necessary to report all transactions to trade repositories and to impose new reporting obligations on market participants. These bodies should be regulated and comply with a common legal framework. The Commission believes that the European Securities and Markets Authority (ESMA) should be responsible for supervising these bodies.

During the G20 at Pittsburgh in September 2009, it was agreed that all standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms.

At European level, these transactions should take place on organised markets. It appears necessary to increase transparency of trading on these markets.

Enhancing market integrity and oversight

The Commission intends to review the Market Abuse Directive in order to cover derivatives markets effectively

In addition, the Commission intends to propose rules to give regulators the possibility to counter concentrations of speculative positions and disproportionate price movements.

Context

In the light of the considerable development of derivatives on global markets, a robust and convergent international regulatory framework must be ensured. This Communication is in line with the objectives outlined in the G20 meeting of 25 September 2009 calling for the improvement of OTC derivatives markets.