EUROPEAN COMMISSION Brussels, 20.9.2017 COM(2017) 536 final 2017/0230(COD) Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) No 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) No 345/2013 on European venture capital funds; Regulation (EU) No 346/2013 on European social entrepreneurship funds; Regulation (EU) No 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Text with EEA relevance) {SWD(2017) 308 final}

{SWD(2017) 309 final}



EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL •Reasons for and objectives of the proposal Integrated financial markets bring significant benefits to the funding of the European economy and for promoting jobs and growth on a sound and sustainable basis. To promote financial integration and market integrity while safeguarding financial stability, the EU internal market for financial services requires common rules and strong supervisory coordination. When the EU overhauled its financial system in response to the financial crisis, and in line with global efforts, it therefore introduced a Single Rulebook for financial regulation in Europe and created the European Supervisory Authorities ("ESAs"). The ESAs constitute an institutional cornerstone of the comprehensive reform package and have played a key role in ensuring that the financial markets across the EU are well regulated, strong and stable. They contribute to the development and consistent application of the Single Rulebook, solve cross-border problems, and thereby promote both regulatory and supervisory convergence. Despite the post-crisis measures, there remains significant potential to enhance regulatory and supervisory convergence in the internal market. Integrated financial markets require more integrated supervisory arrangements to function effectively, while more centralised supervisory arrangements can, in turn, foster market integration. For this reason, the EU has engaged in further integration across the broader financial sector on a sound and stable basis. In particular, the Capital Markets Union ("CMU") has been launched so as to lay the foundations for a fully functional internal market for capital markets. In this context, the Five Presidents' Report on Completing Europe's Economic and Monetary Union of June 2015 highlighted the need to strengthen the EU supervisory framework, leading ultimately to a single capital-markets supervisor. More recently, the Commission Reflection Paper on the deepening of the Economic and Monetary Union suggests that a review of the EU supervisory framework – in particular of the European Securities and Markets Authority ("ESMA") - should deliver the first steps towards such a single supervisor by 2019. The Reflection Paper also called for completing the Financial Union - comprising both a Banking Union and a Capital Markets Union– by 2019 so as to guarantee the integrity of the euro and improve the functioning of the euro area and the EU as a whole. Global financial markets are strongly interconnected, and the EU's regulatory framework is largely based on international standards agreed in the wake of the financial crisis notably among G20 countries. As the EU is striving to accelerate the completion of the CMU, it is therefore essential that EU supervisory arrangements continue to develop in a manner which allows to reap the full potential of internationally integrated financial markets while ensuring that cross-border risks between the EU and the rest of the world can be monitored and managed effectively. The ESAs have a key role to play in this regard. Finally, the decision of the United Kingdom to leave the EU reinforces these challenges for supervisory arrangements within the remaining EU27. The future departure of the EU’s currently largest financial centre means that EU27 capital markets need to develop further and supervisory arrangements must be strengthened to ensure that financial markets continue to support the economy on an adequate and sound basis. The objective of the present proposal is to adjust and upgrade the ESAs framework to ensure they can assume an enhanced responsibility for financial market supervision. The ESAs must be adequately equipped in terms of powers, governance and funding. First, where existing powers of the ESAs have proven partially insufficient and unclearly defined, for example as regards the consistent application of EU law, the drafting of technical advice or the provision of ongoing support to equivalence decisions, they must be strengthened and improved. The current scope of the ESAs' mandate must also be reconsidered in light of the policy objectives of the CMU. More common direct supervision in targeted areas is necessary to ensure more consistent supervisory practices and implementation of EU financial services rules. The 2017 review of the ESA Regulations concluded that the supervision of certain activities and entities with particular importance for the Union as a whole or with a significant degree of cross-border business should be carried out by the ESAs instead of by national competent authorities. Similarly, the ESAs should be more involved in the authorisation and supervision of entities from non-EU countries that are active in the Union. Second, this proposal aims at establishing a more effective governance of the ESAs. The incentive structure in the decision-making process of the ESAs as it stands today leads to the absence of decisions in particular in the area of regulatory convergence and supervisory convergence, or promotes decisions that are predominantly oriented towards national instead of broader EU interests. This reflects, to some extent, an inherent tension between the European mandate of the ESAs and the national mandate of the competent authorities that are members of the ESA Boards. This position is not well aligned with the objective of supervisory convergence. A greater role for the ESAs in deepening financial integration or strengthening the stability of the internal market will also require more effective convergence powers. Third, the ESAs need an appropriate funding base which allows them to allocate resources in relation to their needs to fulfil their objective. Current budget arrangements constrain and will continue to constrain the ESAs' activities, as Member States for different reasons might be unwilling to increase national contributions further. The present proposal sets out specific amendments to the ESA Regulations and various sector acts to reinforce the powers, governance and funding framework of the ESAs, as these are the areas which need to be reinforced to allow the ESAs to meet the challenges outlined above. The impact assessment report accompanying this proposal considers the costs and benefits of these amendments. It sets out a number of options of measures intended to enhance the powers of the ESAs at EU level, improve their governance (including decision- making), and to ensure that their funding framework is sustainable and commensurate with current and future tasks. The impact assessment provides comprehensive evidence that the proposed amendments contribute effectively to reinforcing the ESA framework and thereby to the overall stability of the EU financial system, while keeping costs to the EU General Budget and stakeholders at a minimum. The proposed amendments also contribute to the further development and deepening of the CMU, in line with the political priorities of the Commission. •Consistency with existing policy provisions in the policy area This proposal is consistent with a number of other existing EU policy provisions and ongoing initiatives with the aim of ensuring effective and efficient EU-level supervisory arrangements. Since the start of the financial crisis, the EU and its Member States have engaged in a fundamental overhaul of financial supervision and regulation. The EU has initiated a number of reforms to create a safer, sounder, more transparent and responsible financial system that works for the economy and society as a whole. This has included the creation of the Single Supervisory Mechanism and the Single Resolution Mechanism and Single Resolution Board for specific and discreet responsibilities over supervision. This proposal is consistent and complementary with the tasks and functions of these bodies. This proposal is also consistent with the Single Rulebook for financial legislation to which the ESAs provide a significant contribution through their work. The purpose of the Single Rulebook is to set common rules across the EU that ensures financial stability and a level playing field, as well as a high level of consumer and investor protection. For example, the proposal is consistent with the existing Capital Requirements Directive/Regulation (banks) and the Solvency II Directive (insurance undertakings) which aim at making the financial sector more stable. This proposal is also consistent with the existing framework for payment services and mortgages in relation to consumer protection. As regards ongoing initiatives, the Commission is also proposing today a legislative initiative to reinforce the European Systemic Risk Board ("ESRB"), which together with the ESAs form the European System of Financial Supervision introduced in the wake of the financial crisis. Other recent examples include: the Commission's proposal for targeted amendments to EMIR to enhance the EU level supervision in relation to the authorisation of Central Counterparty ("CCPs") and requirements for the recognition of third-country CCPs; and the Commission's proposal regarding personal pension products enhancing EIOPA's role by granting it powers to authorise these new products in order to grant them a high-quality label at pan-european level and allow their distribution on an EU-wide basis. Finally, this proposal is consistent with existing EU policy provisions in relation to the implementation and enforcement of third-country provisions in EU financial legislation as set out in the Commission's staff working document on equivalence. The staff working document provides an overview of the equivalence process with third countries in EU financial services legislation. It sets out the relevant experience and identifies certain areas for increased attention which are party addressed in this proposal. In view of EU policy objectives, tax good governance and anti-money laundering based on global standards are important elements for further policy development. To ensure policy coherence and to strengthen safeguards against tax avoidance and money laundering, the Commission will continue to integrate these matters into the appropriate EU legislation, including for financial services, and could consider their integration into equivalence processes

•Consistency with other Union policies This proposal is consistent with the Commission's ongoing efforts to further develop the CMU. A more effective supervisory framework is a key element for more integrated capital markets as it contributes to more consistent implementation of the rules for the financial sector. In this context, the Five Presidents' Report of June 2015 highlights the need to strengthen the EU supervisory framework, leading ultimately to a single capital-markets supervisor. The need to further develop and integrate the EU capital markets is stressed in the Communication on the CMU of September 2016 and the Communication on the mid-term review of the CMU. This proposal is also consistent with the Commission's commitments undertaken in the CMU to respond to two new challenges in today's markets: sustainable finance and financial technology ("FinTech"). With regard to sustainable finance, the Commission has committed within the framework of the CMU initiative to strengthen the EU's leadership on sustainable investment and finance. New environmental, social and governance related risks and opportunities are changing the financial sector and require adaptations to the supervisory framework and approach. Moreover, the financial sector has a key role to play to ensure the transition to a low-carbon more energy-efficient economy. A strong coordination and convergence of supervisory attitudes towards sustainability is necessary at EU level. In this regard, this proposal is consistent with the Energy Union Strategy, the EU's commitments to a Circular Economy and the Sustainable Development Goals. The ESAs should also contribute to harnessing the potential and opportunities of Financial Technology ("FinTech"), whilst addressing possible risks in this area, for example through more consistent practices in the application of regulatory requirements. This implies a better integration of FinTech-related aspects in the ESA supervisory work. In this context, this proposal is also consistent with the Digital Single Market Strategy. New technologies are changing the financial sector. This also requires adaptations to the supervisory framework and approach. National supervisors have taken various initiatives, which could harm the proper functioning of the internal market if not properly coordinated. A stronger coordination and convergence of supervisory attitudes towards technological innovation is necessary at EU level, for instance through the setting up of an EU innovation hub in the ESAs. The targeted changes in the current governance model are also in line with the Commission's efforts to make decision-making fora within the EU decentralised agencies more operational and independent. In the area of financial services other European agencies or institutions, such as the European Central Bank or the Single Resolution Board have a permanent and independent preparatory body, which has its own powers and tasks, and can decide on certain issues or participate in the decision-making process. The establishment of Executive Boards for the ESAs with permanent members and with an exclusive mandate is in line with the existing safeguards for enhancing the EU dimension in the agencies decision-making process. Finally, with regard to funding, while the majority of the EU decentralised agencies are funded by the EU Budget, there are several EU agencies which receive mixed of fully private funding. In that respect, the shift to industry contributions for the ESAs' budget is in line with existing EU practice. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY •Legal basis Legal basis of all amendments is Article 114 of the Treaty on the Functioning of the European Union ("TFEU"). This provision is the legal basis of all Regulations covered by this proposal. It is proposed to adapt the ESAs founding Regulations to new developments, so as to improve the functioning of the ESAs in the interest of convergence in the internal market and thus a smoother functioning of the latter. The analysis carried out as part of the impact assessment report identifies the areas of the ESAs' framework that need to be amended to reinforce the stability and effectiveness of the EU supervisory arrangements and hence the EU financial system. Further changes to the sector legislation are necessary in order to allow the ESAs to use the full potential of their enhanced powers. The impact assessment report and the accompanying evaluation demonstrate that EU action is justified and necessary to address the problems identified in the area of powers available to the ESAs, their governance framework and their funding framework. •Subsidiarity (for non-exclusive competence) Because the ESAs are Union bodies their governing regulations can only be amended by the Union legislator. Moreover, the amendments serve a more consistent functioning of the internal market, an objective that cannot be reached by Member States acting individually. In the case of funds covered by the EuVECA, EuSEF and ELTIF Regulations, the establishment of ESMA as a single supervisory body ensures that uniform requirements and conditions of the three Regulations are applied consistently across all Member States. The single supervision will decrease the amount, and diversity, of costs and time spent on administration and will thus allow managers to lower transaction and operational costs. It will streamline administrative processes underpinning authorisation/registration of the EuVECA, EuSEF and ELTIF funds as well as strengthen the level playing field by centralising their supervision regardless of where the funds are established. The single supervision will further support market integration in these sectors and enhance market funding to the EU economy through those funds. With regards to the Markets in Financial Instruments Regulation/Directive and similarly to critical benchmarks, data reporting services are an inherently Union-wide business and the resulting regulatory and supervisory problems cannot be addressed by Member State action alone. With respect to the new ESMA coordination function this is already defined in the ESMA Regulation and the respective Union legislative acts. It can therefore only be enhanced through changes to Union law. With respect to the Benchmark Regulation, critical benchmarks are of major economic importance as they are used in financial instruments (especially derivatives), financial contracts and by investment funds in the entire Union. The requirement to form colleges of supervisors for some of the critical benchmarks from at least the Member States of the benchmarks' administrators and of the benchmarks' supervised contributors already points to the fact that such benchmarks cannot be supervised by a single national supervisor and it is therefore necessary to set out the necessary arrangements at Union level. Having all administrators of critical benchmarks under direct supervision by ESMA is proportionate as these benchmarks are of crucial importance for the Union and the current supervisory colleges are large with the risk of not being sufficiently flexible enough in a crisis situation. Benchmarks provided in third countries can be used in the Union if they are either recognised or endorsed by a competent authority in the Union or the regulatory and supervisory regime of the country in which they are located has to be recognised as equivalent to the regime established by the Benchmark Regulation. While the equivalence decision is taken by the Commission and the supervisor of the third country has to establish cooperation arrangements with ESMA, endorsement and recognition are decided upon by national competent authorities. This requires numerous national competent authorities to deal with such requests and carries the risks that benchmark administrators from third country try to select a national competent authority that seems to be more liberal in its decisions and in the resulting supervision of the administrator ('forum shopping'). As the administrator is located in a third country, the main argument for national supervision, proximity to the supervised entities, does not apply. Establishing ESMA as the competent authority for third country benchmark administrators would increase efficiency and reduce the risk of forum shopping and divergences in supervision of these entities. This can, however, not be achieved through Member State action alone.

In order to ensure that ESMA is able to directly supervise certain benchmark administrators, it is necessary to amend the Benchmark Regulation with a number of delegated acts to further specify some provisions of that Regulation. In relation to the Prospectus Regulation, since 2011, ESMA has invested significant time and effort to foster regulatory convergence amongst national competent authorities with regard to the scrutiny and approval of prospectuses. This has led to the creation of "Supervisory Briefings" which sets out commonly-agreed principles which national competent authorities are invited to apply when approving prospectuses. ESMA has also carried out two peer reviews on the prospectus approval process in 2012 and 2015, as evidence emerged of diverging practices among Member States. While being very useful, those actions have not fully achieved their objective of promoting full supervisory convergence and, given issuers' ability, in a certain number of cases, to choose which competent authority will approve their prospectus, the persistence of divergent practices amongst national competent authorities still leaves room for regulatory arbitrage and efficiency losses. The Commission has identified certain types of prospectuses which, due to the nature of the securities and issuers concerned, involve a cross-border dimension within the Union, a level of technical complexity and potential risks of regulatory arbitrage which are such that their centralised supervision by ESMA would achieve more effective and efficient results than their supervision at national level. These are the wholesale non-equity prospectuses offered only to qualified investors, the prospectuses which relate to specific types of complex securities, such as asset backed securities, or which are drawn up by specialist issuers and the prospectuses drawn up by third country issuers entities in accordance with Regulation (EU) 2017/1129. The centralisation of their approval, as well as all related supervisory and enforcement activities, at the level of ESMA will enhance the quality, consistency and efficiency of supervision in the Union, create a level playing field for issuers and lead to a reduction of the timeline for approvals. It will eliminate the need to choose a 'home Member State' and prevent forum-shopping. •Proportionality This proposal makes targeted changes to strengthen the EU supervisory framework to improve sustainably, stability and effectiveness of the financial system throughout the EU and to enhance consumer and investor protection. For that purpose it sets out targeted and well calibrated changes to the EU level supervisory framework with a more effective and efficient governance. It recalibrates existing tasks and powers of the ESAs and grants the ESAs new powers to enable the ESAs to address new developments, including in the area of technology, but also to address further increase in intra-EU cross-border activities and the likely further integration between EU financial markets and the rest of the world. In addition, the proposal contains an adapted funding system to ensure that the ESAs' funding is sustainable, proportionate as well as commensurate with their task. As regards sector specific acts, the amendments proposed are in essence confined to introducing direct supervision by ESMA. They have been selected in relation to the specificities of the sectors concerned. Moreover, it is necessary make synchronise the amendments to the so-called MIFIR Regulation) with limited changes into 2009/138/EC (“Solvency II”). Therefore, a separate proposal amending that directive is also proposed. None of the elements proposed goes beyond what is necessary for attaining the objectives set. Moreover, in accordance with the principle of proportionality anchored in the Treaty, the content and form of the ESAs' actions and measures shall not exceed what is necessary to achieve the objectives of this Regulation and shall be proportionate to the nature, scale and complexity of the risks inherent in the financial activity or business of the institutions or undertaking that is affected by the action of the relevant ESA. •Choice of the instrument This proposal seeks the amendment of the current ESA Regulations and various pieces of sectoral financial legislation. All acts to be amended by the present proposal take the form of Regulations; the corresponding amendments are therefore proposed as a single (omnibus) amending Regulation. In addition, it is proposed to amend the Directive on Markets in Financial Instrument,. (mainly to mirror the amendments to the so-called MIFIR Regulation) and to introduce limited changes into 2009/138/EC (“Solvency II”). For these two purposes, an amending Directive is proposed separately. Finally, and equally through a separate document, the Commission adjusts its recent proposal for a Regulation amending both ESMA and EMIR. . 3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS •Ex-post evaluations/fitness checks of existing legislation The impact assessment and evaluation accompanying this proposal provides an analysis of the existing ESA framework to see whether it has allowed the ESAs to meet their objective to sustainably reinforce the stability and effectiveness of the financial system and enhance consumer and investor protection. As regards effectiveness and efficiency of the ESAs, the analysis made concludes that the ESAs have broadly delivered on their current objectives. However, targeted improvements are needed to face future challenges. In particular the analysis concludes that: a.ESA powers could be enhanced in certain areas to ensure that tasks can be better performed. As a result, better regulatory and supervisory outcomes for all market participants consumers across the EU, and effective and efficient handling of cross border risk could be expected; b.the current ESA governance framework makes it difficult to manage conflicts between EU and national interests, creating the risk that ESA decisions are not always taken in the common interest of the EU, that decision-making is delayed or that there is an inaction bias, notably as regards non-regulatory activities (binding mediation, breach of EU law procedures, initiation of peer reviews);

c.the current funding framework is not commensurate to the tasks the ESAs perform and even less so going forward and considering the tasks the ESAs will shoulder in the future; it also seems to lead to uneven contributions by national competent authorities which are not easy to justify. In terms of coherence, the ESAs work on regulatory issues is fully coherent with the building up of the broader EU supervisory framework. It is also coherent with the completion of the Single Rulebook. However, constraints coming from the governance and funding structure and the effectiveness of the ESAs powers have not allowed the ESAs to focus sufficiently on promoting consistent application of the relevant financial services legislation adopted by the EU. In terms of relevance, the analysis concluded that the ESAs framework is relevant. Finally, the ESAs' framework has clearly created added value for the EU because their work is indispensable for promoting the Single Market for financial services. •Stakeholder consultations The Commission service conducted an extensive public consultation in the spring of 2017 on the operations of the ESAs. The consultation attracted almost 230 responses. Contributions came from a wide variety of respondent groups: 26% public authorities or international organisations, 71% organisations or companies and 3% private individuals. A number of comments, position papers and contributions were also received outside the public consultation, including official positions provided by some governments. Even though they are not reflected in the statistics from EU survey, they have been taken into account in the analysis underlying this proposal. Overall, respondents consider the establishment of the ESAs a major improvement and an important step towards supervisory convergence in the Union. Most support a greater role for ESAs in improving supervisory convergence. Many stakeholders acknowledge that the implementation of the CMU and the decision of UK to leave the Union create a new situation which requires reflections about strengthening EU-level supervision, in particular with regard to cross-border activities and equivalence with third countries. With respect to the ESAs' powers, while many respondents object to significantly increasing ESAs' powers at this stage, some recognise their limitations and would like to see targeted improvements. Most respondents argue the available tools broadly suffice and should be better and more fully used. There is broad support for extending/clarifying powers on equivalence monitoring. Consumer organisations see significant shortcomings in the enforcement of consumer protection rules which they see as either inefficient or detached from most detrimental problems at national level. They see a need for extending the ESA's fields of activity in the area of consumer protection. Most respondents argue that it is difficult to ensure a proper balance in the ESA stakeholder groups together with the geographical balance. Representatives of consumers and users complain that they are outnumbered by the representatives of financial institutions and thus the opinions of stakeholder groups are not balanced. A number of organisations find that the ESAs' powers to ban products should be extended to those that are prone to consumer detriment. Respondents to the ESA public consultation explicitly support the direct supervision at EU level of central counterparty clearing houses ("CCPs") and of data reporting service providers ("DRSPs") which service the whole EU rather than specific national markets. Many respondents do not reply to the question on direct supervision. Some reply to the question whether ESMA should be entrusted with direct supervision of pan-European collective investment funds and support it, but mostly they do not distinguish between different types of funds. Views expressed against extending direct supervision by ESMA to new areas mainly refer to the following arguments: national-based supervision is considered best suited to deal with the different market structures of Member States. Supervision by ESMA could conflict with national competence for retail investor protection and financial stability as well as taxation, litigation and conflict resolution. Operational difficulties such as control of local requirements related to distribution arrangements or marketing are also raised. Instead, existing tools to ensure supervisory convergence should be better explored to develop integrated capital markets. The main arguments in favour of direct supervision by ESMA mentioned are: some respondents recognise potential merits in ESMA supervision over entities or instruments with a pan-European dimension which would allow elimination of differences between supervisory practices, but would not prevent different market structures from being taken into account where relevant. They consider that such solutions are appropriate to address the problem of fragmentation due to diverging application of the relevant EU rules and ensuring risks of regulatory arbitrage, characterising the current regime. In the area of ESA's governance overall, stakeholders consider that the ESAs’ boards and chairpersons have performed well. About half of the respondents see added value in the governance changes referred to in the public consultation document. While the majority of public authorities do not support ESA governance changes, some of these views may be attributed to some extent to them not wanting to see their influence diminish. There are varying degrees of support for adding independent members with voting rights and specific tasks to ESA Boards. While public sector mostly oppose it (though half do not even reply), private sector views are split with several pointing out inherent conflicts of interest in the current set-up. With respect to empowering the Chairpersons, a majority, mainly public authorities oppose it, while the majority of the industry associations argue for improvements. As regards funding, many of the stakeholders recognise ESAs' current resource constraints as well as the constraints on the EU and national budgets. A high number of respondents agree that the ESAs will need adequate and sustainable funding in order to meet ambitious targets and enhance their operations. Many respondents note that the level of funding for the ESAs should depend on their responsibilities and be based on the outcome of the ESA review. Roughly half of the respondents take a position on whether the ESAs should be partially or fully funded by the industry. A clear majority do not support revising the current funding framework replacing contributions from national competent authority by contributions from the industry. Though still in a minority, there is greater support for a partly industry funded system. •Impact assessment The Commission carried out an impact assessment of relevant policy options. These options were assessed against the key general objective of sustainably reinforcing the stability and effectiveness of the financial system throughout the EU and to enhance consumer and investor protection. In preparing the impact assessment, the Commission carried out an evaluation of the operations of the ESAs which highlighted some important shortcomings. These included: (a) insufficiently defined powers to ensure effective supervision to the same standards across the EU; (b) the absence of powers to effectively deal with cross-border risks relating to interconnectedness within the EU and between the EU and the rest of the world; (c) a governance framework that leads to a misalignment of incentives in the decision-making processes; and (d) a funding framework that is not ensuring sufficiency in relation to the tasks allocated to the ESAs.

The scope of the impact assessment covered the areas of: (1) powers; (2) governance; and (3) funding of the ESAs, to meet the identified shortcomings and new challenges, such as regulatory and supervisory convergence. Shortcomings for governance and funding are common to the three ESAs, as they share the same rules. Changes to their powers are mainly targeted to specific sectors for ESMA and to supervisory convergence oversight for all ESAs. The options assessed were: In governance: (a) no policy action; no modifications to the current governance structure is envisaged; (b) targeted changes to the current governance model, such as differentiation of the decision-making powers by their nature, enhancing the selection procedure of the Chairperson and (c) opening up the Board of Supervisors to independent, permanent (non-voting) members. In powers: (a) no policy action; current powers in relation to regulatory and supervisory convergence tasks remain unchanged as well as ESMA's direct supervisory responsibilities; (b) an option to clarify certain existing powers and strengthen oversight; (c) an option to clarify certain existing powers and to provide ESMA with additional direct supervisory powers in targeted areas; and (d) centralise the supervision of financial services, banking and insurance in the three ESAs. In funding: (a) no policy action; (b) adjusted public funding to take into consideration the size of the domestic financial sector in any given Member State; (c) mixed public-private funding in which contributions from domestic private sectors replace contributions from the national CAs; and (d) a funding system fully financed by the private sector. The above options were then compared using various criteria to identify those that best address the shortcomings identified in the problem definition of the impact assessment and in the evaluation. Following this analysis, ·the preferred option as regards governance includes independent members with voting powers alongside the national competent authorities in the decision-making process; introduces a new appointment process and role for the Chairperson and replaces the Management Board by an independent Executive Board composed of full time members that are externally appointed. ·the preferred option as regards powers clarifies some powers, such as giving a formal role to the ESAs in the ongoing monitoring of the equivalence process, improving the ability for the ESAs to ensure the correct application of Union law, and transfers supervisory powers to the ESAs in targeted areas with predominantly third country or cross-border relevance. ·the preferred option as regards funding keeps the current annual EU contribution to ESAs' budget , but replaces the residual funding from national CAs with private sector funding. The preferred options identified were those that best ensured that the ESAs would be able to cope with the growing workload and anticipate the changes to the supervisory framework coming from sectoral legislation. In addition, the preferred options were mostly focusing on targeted changes to the current regime, rather than a complete overhaul. This was in line with the conclusion in the evaluation that the ESAs' framework has been working relatively well in relation to the significant challenges that they had to face and the available means to meet their mandates. The impact assessment also reviewed the cumulative impact of the preferred options, both in qualitative and quantitative terms. The analysis indicated that applying the preferred options, the ESAs will be better able to fulfil their existing mandates and ensure greater supervisory convergence in addition to the preparation of regulatory products. More specifically, there are three reasons for the ESAs' expected better performance: first, the incentive structure in the governance of the ESAs will be improved by balancing out incentives to protect national interests in the decision-making process so that, in particular, powers to promote regulatory and supervisory convergence can be used more effectively. Second, the decision to reduce the reliance on public funding from national competent authorities, to be complemented with private sector money, can ensure that the ESAs will be adequately resourced to perform their existing tasks and to adapt more easily to future changes. Finally, targeted amendments to certain parts of the ESAs' powers can ensure that the ESAs can perform their tasks efficiently and effectively in the light of the experience gathered during the six years of their existence, as well as developments in the various financial markets and in EU level legislation. These targeted changes are also aligned with the stakeholders' view that a greater coordination role by the ESAs is warranted and that ESAs should make better use of their existing powers. Regarding the net impact in term of costs to the various stakeholders and with the exception of granting direct powers to ESMA, the preferred options is expected to have limited impact to the private sector since their contribution to privately funded national authorities would go down as the national CAs will not be any longer required to pay into the ESAs' annual budget. The net impact on EU budget will be neutral – although the pre-funding from the EU budget will be needed in the first years after adoption of the proposal, the pre-funded amounts will be afterwards repaid to the EU budget upon entry into force of new funding mechanisms. Moreover, the net impact on national CAs will also be neutral as on the one hand national CAs would stop contributing to ESAs funding and on the other hand they should reduce (in a proportionate way) their needs for revenues to cover this expenditure. No impact, in terms of costs, is expected on consumers. The impact assessment was submitted to the Regulatory Scrutiny Board ("RSB") on June 14 2017. The RSB gave a negative opinion on the impact assessment and made a number of recommendations for improvements. The document was revised accordingly and resubmitted on 19 July. On 27 July the RSB provided a positive opinion with reservations and listed considerations for improvement that have been taken into account to the extent feasible. The key changes introduced in the impact assessment to take into consideration the RSB's comments were the following: 1. The analysis of challenges for the supervisory systems related to the likely evolution of banking, insurance and securities markets over the next years should be completed. Various impacts of the UK's withdrawal from the EU on the core activities of the ESAs should be included. The impact assessment has been revised to more clearly explain that the policy initiative is for the sake of the EU Single Market and its integration and follows on the commitment announced in the 5 Presidents Report and the commitment expressed most recently in the reflection paper on the deepening of the EMU, to move towards a genuine Financial Union, including a single supervisor for capital markets. The challenges that these documents set out for the EMU in general and its financial markets in particular provide the frame of reference for the impact assessment. A stronger focus has been put on the departure of the United Kingdom and its consequences throughout the main chapters of the Impact Assessment. 2. The assessment of costs and funding gaps of ESAs implied by the baseline and the various options should be completed. More discussion and quantification has been provided of the resources needed for the ESAs to take on additional tasks (direct and indirect powers); the impact on resources resulting from governance modifications and the impact on resources from changes in the funding methodology for indirect supervision. Costs between direct and indirect supervision and other activities have been differentiated and who is bearing the cost of preferred options has been better explained.

The discussion on net impacts (in terms of costs) of preferred options have been further developed to better address the issue of funding gaps and impact of overall supervisory costs for the sector. In particular, 1.The overview cost table has been updated in line with the legislative financial fiche. We now have a very detailed estimation of costs and impact of both changes to the current ESAs framework and for the new direct powers. 2.The comparing options section in funding has been completely redrafted, as requested, to reflect the full costs and benefits of option 3 compared to the baseline and option 2 in particular. 3.The collection mechanism section has been completely redrafted to meet IA standards and added to the main text as this is part of the legislative proposal. Regarding the net impact on the individual sectors, this could not be assessed exhaustively at this stage as it depends on the model used to finance national CAs within a Member State. For example, if market participants in a given Member State do not currently pay for their supervision (i.e., as the case of fully publicly funded national CAs) then, by definition, the allocation methodology of the preferred option would result in increased cost for these market participants at the benefit of taxpayers and national budgets in those Member States. At the same time, if market participants already pay for the ESAs via contributions to their national CAs' budgets then the net impact (incremental cost/benefit) would depend on the various methodologies that national CAs use to charge fees to individual entities as well as the weights they apply to entities for ESAs funding. In this case, in order to come up with a precise, reliable estimate of the incremental cost/benefit across the EU, a thorough comparative analysis is needed, which would require the involvement of those national CAs applying own methodologies on fees allocation. In any case though, it could be reasonably argued that establishing a level playing field across the Single market with a uniform fee setting mechanism among financial entities would ultimately benefit all market participants. In addition, it should be noted that the amounts required to fund ESAs should not, in principle, pose a threat to individual entities’ operational models. 3. The comparison of options should be improved and the choice of the preferred option should be better supported by available evidence and analysis. More detailed descriptions and further additions to the description of the options and analysis has been provided to the extent feasible, especially in the parts on powers and funding but also to the part on governance. The discussion on powers is substantiated by further information and argumentation in the annex to the impact assessment. Any lack of evidence to support the preferred option in the power section can in some instances be explained by the fact that the policy direction is some cases have been motivated by a political decision. The discussion on options in the governance section has been extensively explained and substantiated with examples and anecdotal evidence as well as underpinned by the results of evaluations made both by the European Parliament and the Commission. The nature of the defined problem in governance makes it very difficult to obtain hard core verifiable data. In relation to funding, for example, the section on the preferred option 3 in funding has been improved to add additional assessment elements and to better clarify existing argumentation. 4. The evaluation should be more evidenced based and substantiated. The evaluation has been revised to better distinguish between assessment and argumentation related to desktop work from opinions resulting from stakeholders consultations. Some more discussion has been added and where feasible more evidence has been included to improve the evaluation. There are limitations to the type of evidence used; some parts of the evaluation rely heavily on anecdotal evidence and stakeholder experiences with the ESAs. To compensate for that there has been an attempt to provide many examples from various different information sources, see e.g., the governance section. Other parts, such as funding, rely on more references and substantiated arguments. The evaluation is also a retrospective exercise which is a backward looking exercise comparing the past years with the baseline scenario which is one in which the ESAs do not exist. The evaluation therefore by its very nature focuses less on the need for new, additional direct supervisory powers necessary for ESMA. •Regulatory fitness and simplification This proposal is not linked to a REFIT or simplification exercise. The aim of this proposal is to improve the ESAs framework and strengthen current supervisory arrangements. The proposed changes to the ESAs powers, governance framework and funding system should render EU level supervision more effective and efficient. An enhanced ESA framework will improve legal and economic certainty in addition to financial stability and risk containment. This is in line with the Commission's Better Regulation Agenda. To the extent this proposal leads to the centralisation at EU level of some of the supervisory work with ESMA, the initiative removes the duplication of tasks among national authorities. This should create economies of scale at EU level and diminish the need for dedicated resources at national level. As far as financial institutions and financial market participants are concerned they should mainly benefit from a reduction in the administrative burden by the introduction of a single supervisor in certain areas. •Fundamental rights The proposal respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union. In particular, it contributes to the objective of a high level of environmental protection in accordance with the principle of sustainable development as laid down in Article 37 of the Charter of Fundamental Rights of the European Union. 4.BUDGETARY IMPLICATIONS

The current funding of the ESAs relies on a general contribution from the EU General Budget (40%) and contributions from national competent authorities (60%). For ESMA, this distribution is slightly different, as entities that are directly supervised by ESMA (such as credit rating agencies and trade repositories) also pay supervisory fees to this Agency. This proposal will change the funding structure of the ESAs. The ESAs budget would now rely on three different sources of financing: ·Annual contributions paid by financial institutions that are indirectly supervised by the ESAs; ·Supervisory fees paid by entities that are directly supervised by the ESAs. This is especially relevant for ESMA, as the legislative proposal provides for the transfer of direct supervisory powers from the national competent authorities to ESMA (for some EU funds, data reporting services providers, some benchmarks administrators and some prospectuses); ·A balancing contribution from the EU that would not exceed 40% of the overall revenues of each agency. The amount of this balancing contribution will be set in advance in the Multiannual Financial Framework (MFF). However, the new source of revenue for the ESAs (i.e., the annual contributions paid by the financial institutions indirectly supervised) will require the adoption by the Commission of a delegated act that will provide for: (i) a distribution of the total amount of the annual contributions among the different categories of financial institutions; and (ii) objective criteria allowing the calculation of the individual annual contribution to be paid by each financial institution. During the transitional period (i.e., until the adoption of the delegated act determining some parameters of the annual contributions), the current funding structure relying on contributions from the EU (40%) and from the national competent authorities (60%) will be maintained. This will have an impact on the EU budget as well as on the budget of the various national competent authorities. The proposed changes to the governance structure, the indirect supervisory powers, the funding system and the direct supervisory powers of the ESAs will require new resources. EBA, EIOPA and ESMA will respectively require 29, 35 and 156 additional full-time employees when the different provisions of the proposal will enter into application. It should be noted that for ESMA, most of those additional FTEs relate to direct supervisory tasks (97 out of 156). The ESAs will also incur additional IT costs (estimated at EUR 10.2 million for the period 2019-2020) and translation costs (estimated at EUR 1.8 million for the period 2019-2020). It should be noted that any budgetary demands from the ESAs will still be subject to all accountability and audit mechanisms put in place in the ESA Regulations, for the preparation, adoption and execution of their annual budgets. Moreover, the annual decision on the EU balancing contribution to the ESAs and their establishment plans (e.g. decision on the staffing level) would still be authorised by the Parliament and the Council, and subject to discharge from the Parliament on a recommendation from the Council. The financial and budgetary impact of this proposal is explained in detail in the legislative financial statement annexed to this proposal. It should be noted that the information provided in the legislative financial statement is without prejudice to the post-2020 MFF proposal to be presented by May 2018. It should also be noted in this context that while the headcount necessary for direct supervision will depend over time on the development of the number and size of capital markets participants to be supervised, the respective expenditure will in principle be funded by fees to be collected from those market participants. The financial and budgetary impact of this proposal is explained in detail in the legislative financial statement annexed to this proposal. 5.OTHER ELEMENTS •Implementation plans and monitoring, evaluation and reporting arrangements The implementation of this Regulation will be reviewed in two ways: as part of the regular reviews of the ESAs every three years and as part of the reviews of the sectoral Regulations, in most cases two or three years after the respective date of application. ·Detailed explanation of the specific provisions of the proposal (1)Amendments to the ESAs Regulations According to the 11th recital of the ESAs Regulations, the ESAs act with a view to improving the functioning of the internal market, in particular by ensuring a high, effective and consistent level of regulation and supervision. According to Article 1(2) of the ESAs Regulations, the Authorities act within the scope of the acts referred to therein, i.e., in a proportionate framework set and updated regularly by the Union legislator. Changes to the EBA Regulation, to the EIOPA Regulation and to the ESMA Regulation are dealt with in Articles 1, 2 and 3 respectively of the Regulation proposed. (a) Powers The changes highlighted below pertain to the general powers of ESAs that this proposal enhances. New direct supervisory powers entrusted with ESMA are dealt with in sections 2 to 5.

New areas of activities and focus Article 1 of the ESA Regulations list acts that fall within the remit of the ESAs. Article 1 is constructed in a way which implies that only acts adopted prior to the establishment of the ESAs and acts that do not foresee tasks for the ESAs need to be listed. All acts adopted subsequent to the ESA Regulations, including amendments and acts based on legal instruments falling within the remit of the ESAs, as well as acts that foresee tasks for the ESAs, fall automatically within the remit of the ESAs and do not have to be listed in Article 1 to fall within the remit of the ESAs. Amendments proposed in respect of Article 1 of each of the ESA Regulations are as follows: it is proposed to bring within the scope of the EBA Regulation the consumer credit directive 2008/48 and the payment accounts Directive 2014/92/; to bring within the scope of the EIOPA Regulation the motor insurance directive 2009/103; and to bring the Accounting Directive 2013/34 within the scope of the ESMA Regulation. Amendments to Article 4 of the EBA Regulation complement the list of definitions to be used for the purpose of the application of the Regulations. More specifically, it changes the definition of "financial institution" to ensure that all entities covered by relevant sector legislation come under EBA's remit. The new definition of "competent authorities" proposed ensures that all relevant supervisors and authorities are covered, even if not defined as "competent authorities," in the applicable legislation. It is proposed to amend Article 8 of the EIOPA and ESMA Regulations to include the task to develop and maintain up to date a Union supervisory handbook on the supervision of financial institutions in the Union as a whole. This aligns the two Regulations with the EBA Regulation. Moreover, as regards the EBA, it is proposed that it will be tasked with developing and maintaining up to date a Union resolution handbook on the resolution of financial institutions in the Union as a whole. Amendments to Articles 8 and 9 of the ESA Regulations specify that the ESAs should contribute to foster consumer protection. All three ESAs will also be under an obligation to take account of technological innovation and environmental, social and governance related factors when carrying out their tasks. In the case of EIOPA and ESMA it has moreover been specified that when carrying out their tasks, the Better Regulation principles should apply. This aligns those Regulations with that of the EBA Regulation. Finally, it has been added that tasks should include undertaking in-depth thematic reviews of market conduct, building a common understanding of markets practices, identifying potential problems and analysing their impact, as well as developing retail risk indicators for the timely identification of potential causes of consumer detriment. Technological innovation Article 8(1a) explicitly requires the ESAs, when carrying out their tasks under the ESA Regulations, to take account of technological innovation while carrying out their tasks in accordance with this Regulation. Technological innovation contributes to better access and more convenience. It lowers operational costs and barriers to entry and such innovations should be supported by the ESAs. Realising the potential of technological innovation requires also that integrity is assured in terms of data use, orderly and fair markets, avoiding the use of the financial system for illicit purposes and cybersecurity. Moreover, amendments to Article 29 of the ESA Regulations reinforce the coordination role of the ESAs regarding the entry into the market of innovative firms and services, in particular through the exchange of information between national supervisors and ESAs. Environmental, social and governance factors All the three ESAs will be under an obligation to take account of risks related to environmental, social and governance factors when carrying out their tasks. This will also enable the ESAs to monitor how financial institutions identify, report, and address risks that environmental, social and governance factors may pose to financial stability, thereby rendering financial market activities more consistent with sustainable objectives. The ESAs can also provide guidance on how sustainability considerations can be effectively embodied in relevant EU financial legislation, and promote coherent implementation of these provisions upon adoption. Guidelines and Recommendations While the power to develop guidelines and recommendations has proven an important and successful tool of supervisory convergence, stakeholders have highlighted the need to remain within the remit of competence of the ESAs and to ensure a full assessment of costs and benefits when developing such instruments. Amendments to Article 16 of the ESA Regulations imply that the carrying out of cost-benefit-analyses must be considered the rule. The amendments also aim at ensuring that if a majority of the members of the relevant ESA Stakeholder Groups consider that the ESAs have exceeded their competences when issuing guidelines or recommendations to issue an opinion to the Commission. In such a case the Commission shall assess the scope of the guidelines and may require the relevant ESA to withdraw the guidelines concerned. In addition, the amendments in these Articles foresee the possibility for the ESAs to address guidelines to the authorities that are not defined as competent authorities under the ESA Regulations but that are empowered to ensure the application of the legislation under ESAs' remit in order to establish consistent, efficient and effective supervisory practices within the ESFS. Breach of Union law The Commission also proposes amendments to Article 17 of the ESA Regulations in relation to breaches of Union law. For the power of the ESAs to pursue breaches of law to be effective, it has proven essential that the ESAs have access to all relevant information. The amendments ensure that in the context of breach of EU law investigations the ESAs will be able to address a duly justified and reasoned request for information directly to other competent authorities or relevant financial institutions/financial market participants. In the event the ESAs decide to request information directly from the relevant financial institution/financial market participant, the national competent authority shall be informed and assist the ESAs in collecting the requested information. Moreover, it should be emphasised that the Executive Board will be responsible for breaches of law (see below), which will further enhance the effectiveness of this tool. Settlement of disagreements

Amendments are proposed to Article 19 of the ESA Regulations in relation to the settlement of disagreements between competent authorities. The objective is to ensure that, when such disagreements exist, the ESAs may act and intervene decisively. The amendments clarify that settlements of disagreements between the competent authorities in cross-border situations can be triggered also on the ESAs' own initiative where on the basis of objective criteria a disagreement can be determined between competent authorities. In the latter case, a disagreement shall be presumed if legislation under the remit of the ESA requires a joint decision to be taken but such a decision is not taken within the time limit prescribed in the relevant legislation. In this context, the amendments also introduce an obligation for competent authorities to notify the ESAs when an agreement has not been reached. Moreover, the Executive Board will be responsible for dispute settlement (see below) which will enhance the effectiveness of this tool. Supervisory convergence and coordination Amendments to Article 29 of the EIOPA and ESMA Regulations specify that those two ESAs should develop and maintain an up to date supervisory handbook to further develop a common supervisory culture across supervisory authorities. This is based on the powers already existing for the EBA. In the area of banking, amendments specify that the EBA should develop a similar handbook in the area of resolution. Under the proposed new Article 29a the ESAs are given increased general coordination powers to promote convergence of day-to-day supervision by all competent authorities much more significantly and efficiently across the EU. The ESAs will be required to set EU-wide priorities for supervision in the form of a 'Strategic Supervisory Plan' against which all competent authorities will be assessed. Competent authorities will be required to draw up annual work programs in line with the Strategic Plan. This will permit all three ESAs to ensure convergence with respect to the prudential supervision of financial institutions which are primarily active in Member States other than those where they are established and supervised; this will be particularly important for EIOPA. This proposal also amends the current Article 30 of the ESA Regulations in relation to peer reviews. To enhance the value added of these reviews and to insure impartiality the reviews will no longer be "peer" reviews but "independent" reviews under the responsibility of the new Executive Board. The ESAs shall produce a report setting out the results of the review and the competent authorities shall make every effort to comply with any guidelines and recommendations that the ESAs may take as follow-up measures of the peer review. This proposal contains a new Article 31a which aims at strengthening the coordination function of the ESAs to ensure that the competent authorities effectively supervise outsourcing, delegation and risk transfer arrangements in third countries. Supervisory practices vary from one Member States to another. The ESAs shall monitor those arrangements both ex ante and on an on-going basis. Coordination role for ESMA in relation to market abuse investigations Where operators conduct activities that fall under ESMA's remit and that have a strong cross-border element, ESMA may be best placed to initiate and coordinate investigations. A proposed new Article 31b entrusts ESMA with an enhanced coordination role in recommending the competent authorities to initiate investigations and facilitating the exchange of information relevant for those investigations, where ESMA has reasonable grounds to suspect that activity with significant cross-border effects is taking place that threatens the orderly functioning and integrity of financial markets or the financial stability in the Union. For this purpose, ESMA shall maintain a data storage facility to collect from, and disseminate between, competent authorities, all relevant information. Stress testing Amendments to Article 32 of the ESA Regulations achieve two things. First, they align the EIOPA and the ESMA Regulation with the EBA Regulation on stress testing. Second, to ensure transparency on the stress tests, this proposal allows for the publication of the results of the individual financial institutions or financial market participants. It also clarifies that professional secrecy obligations of competent authorities shall not prevent them from transmitting stress test outcomes to the ESAs for the purpose of publication. The second amendment applies to all three ESAs. In addition, in order to contribute to decisions regarding stress tests being taken in a perspective that takes full account of the single market, such decisions, including the methodologies and approaches to communication of outcomes of stress tests, are proposed to be conferred upon the new Executive Board in all three ESAs. Third-country equivalence Third country equivalence is an important tool to allow international market integration while ensuring effective supervision (see the Commission's staff working document on equivalence decisions in financial services policy). Amendments to Article 33 of the ESA Regulations confirm that the ESAs shall assist the Commission in preparing equivalence decision when requested by the Commission. Once such decisions have been taken, it is important to ensure that they are adjusted to new developments. The amendments therefore also entrust the ESAs with the responsibility for monitoring on an on-going basis the regulatory and supervisory developments as well as enforcement practices in third countries on which the Commission has taken an equivalence decision and submit a confidential report on their findings to the Commission on an annual basis. For this purpose, the ESAs shall also develop administrative arrangements with third countries. Collection of information Access to all relevant information is the basis for the ESAs to carry out their activities in an effective way. Information is normally provided by the national supervisory authorities which are closest to the financial markets and institutions but as a last resort, the ESAs can address requests for information directly to a financial institution or a market participant. For example, where a national competent authority does not or cannot provide such information in a timely fashion. It is appropriate to ensure that the ESAs can get access to information that it needs for its tasks. Therefore this proposal creates a mechanism to strengthen the effective enforcement of the ESA's right to collect information (see new Articles 35 to 35h of the ESA Regulations). The ESAs will have at their disposal the necessary means to ensure compliance with a request or decision to submit information. The amendments entrust the ESAs with the power to impose fines and penalty payments of an administrative nature, under the review by the Court of Justice, and subject to the right for the entity to be heard, when a financial institution and/or financial market participant fail to provide adequate information. Internal models in the insurance sector A new, proposed Article 21a of the EIOPA Regulation reinforces EIOPA's role to ensure supervisory convergence on internal models. Divergence in the supervision and approval of internal models may lead to inconsistencies, and creates an un-level playing field. EIOPA will be able to obtain in a timely way all relevant information upon its request and issue opinions to the relevant competent authorities. Where there are disagreements between competent authorities with respect to group internal models, EIOPA will also be able to assist the authorities in reaching an agreement under Article 19 of the Founding Regulation, either at its own initiative, on the request of one or more of the competent authorities, or in certain circumstances on the request of the group concerned. Other provisions Amendments to Article 37 of the ESA Regulations reinforce the consultative role of ESA's Stakeholder Groups whose opinions and advice are essential to the day-to-day work of ESAs. Where the members of the Stakeholder Group cannot reach a common opinion or advice, the members representing one group of stakeholders can submit a separate opinion or advice. Amendments to Article 39 of the ESA Regulation specify that the decisions of the ESAs, save for the investigatory decisions taken for failure to transmit adequate information in relation to a request for information, shall be made public together with a summary of the decision outlining the reasons of the decision. (b)Governance

This proposal envisages a more effective governance structure for the ESAs by introducing an independent Executive Board with full-time members, replacing the current Management Board (Articles 45 and 47 of the ESA Regulations) and to adjust the composition of the Board of Supervisor (Articles 40 of the ESA Regulations). This proposal clarifies the respective competences of these two boards (Articles 43 and 47). In addition, the standing and powers of the Chairperson will be enhanced (Article 48). The Executive Board The main function of the Executive Board will be to prepare decisions to be taken by the Board of Supervisors. This should ensure that the decision making within the Board of Supervisors is quicker and more streamlined. This will also contribute to a more EU oriented approach in the decision making. In order to reflect the specific situation in the banking sector, where a majority of Member States participates in the Banking Union, it is explicitly required that the EBA Executive Board shall be balanced and proportionate and shall reflect the Union as a whole. The Executive Board will consist of the Chairperson and a number of full-time members. The number will differ between ESMA on the one hand and EBA and EIOPA on the other hand as the proposal is entrusting ESMA with a significant number of additional tasks in different areas compared to the other two ESAs. The full-time members shall be appointed on the basis of an open call for candidates organised by the Commission. The Commission will shortlist the candidates and submit it the European Parliament for approval. Following the approval of the shortlist, the Council shall appoint the full time members by way of a decision. The procedure of dismissal mirrors the one on appointment and leaves the final decision to the Council. One of the permanent members will assume the tasks of the current Executive Director whose specific position will be eliminated. The Executive Board will retain the role of the Management Board in relation to the preparation of the ESAs work programs and budget. The Executive Board will be attributed decision making powers in a number of areas. For example, vis-a-vis individual, competent authorities in relation to certain matters of a non-regulatory nature such as in relation to, dispute settlements, breach of Union law matters and independent reviews. This should ensure effective, impartial and EU-oriented decisions. The Executive Board will also be in charge of setting out supervisory priorities for competent authorities in a new "Strategic Supervisory plan". They will check the consistency of the work programmes of competent authorities with EU priorities and review their implementation. The Executive Board will furthermore be in charge of monitoring delegation, outsourcing and risk transfer arrangements to non-EU countries to ensure that inherent risks are addressed. It will decide on stress tests and approaches to communication on the outcomes of stress tests. Finally, the Executive Board will also be in charge of decisions in relation to requests for information. The members of the Executive Board will have one vote each and the Chairperson a casting vote. The proposed version of Article 47 sets out the tasks of the Executive Board. The amendments also replace the reference to the Management Board with the Executive Board. In addition, the position of the Executive Director will be deleted. His/her responsibilities will be assumed by one of the full time members of the Executive. The Board of Supervisors The Board of Supervisors remains as the main body of the ESAs in charge of its overall guidance and decision making. However, proposed amendments to Article 40 change the composition of the Board of Supervisors to include the full time members of the Executive Board but without voting rights. The amendments also ensure the presence of consumer protection authorities where relevant. Each voting member in the Board of Supervisors shall have one vote. Because decisions on certain tasks of a non-regulatory nature (dispute settlements, breach of Union law and independent reviews) will be taken by the Executive Board the current rules on decision making are amended. Despite the fact that with the future departure of the United Kingdom, the number and weight of Member States not participating in the Banking Union will go down, and further Member States may join the Banking Union, it is proposed to keep the double majority voting system for measures and decisions adopted by EBA Board of Supervisors that was introduced in 2013 as part of the "Banking Union" package as a safeguard to ensure that EBA decisions reflect the specific situation both of Member States participating in the Banking Union and other Member States. The Board of Supervisor will therefore continue to take decisions on the basis of a qualified majority of its members, which should include at least a simple majority of the national competent authorities participating in the Banking Union and a simple majority of national competent authorities that are not participating in the Banking Union. However, the current system makes decision-making in the EBA excessively burdensome as decisions cannot be taken even in cases where no majority of non-participating Member States considers the vote sufficiently important to be present. To ensure that the EBA can continue to take decisions in an effective manner while fully upholding the safeguards for non-participating Member States as long as they are present in the vote, current voting rules should be modified to ensure that votes would not have to be postponed in case of absences. This will also create clear incentives for national competent authorities to be present at EBA meetings and thereby provide a greater legitimacy for decisions taken in the meetings. The amendment therefore clarifies that a decision would need to be supported by a simple majority of national competent authorities from non-participating Member States present at the vote and of national competent authorities from participating Member States present at the vote. Division of competences between the two Boards Amendments to Articles 43 and 47 of the ESA Regulations clarify the basic principle of division of competences between the Board of Supervisors and the Executive Board. The Board of Supervisors is in charge of every decision, referred to in the Regulation, save as otherwise foreseen (see above in relation to the Executive Board). In situations where ESMA will exercise powers related to direct supervision, its Board of Supervisors will only be able to reject a proposal for a decision from the Executive Board by a majority of thirds. In such a case the draft must be reviewed by the Executive Board (amendments to Article 44 of the ESMA Regulation). The Board of Supervisors shall be released of its disciplinary authority over the Chairperson because the former will not be competent to appoint him (see below). Amendments to Article 41 and a new Article 45b allow both the Board of Supervisors and the Executive Board to establish internal committees for specific tasks. The setting up of panels is abolished. The Chairperson The Chairperson is a key representative of the ESA. The standing and powers of the Chairperson will therefore be enhanced to increase his/her statutory authority. Amendments to Article 48 of the ESA Regulations clarify the appointment procedure for the Chairperson. He/she shall be appointed on the basis of an open call for candidates organised by the Commission. The Commission will shortlist the candidates and submit it the European Parliament for approval. Following the approval of the shortlist by the European Parliament, the Council shall appoint the full time members with a decision taken by qualified majority. The procedure of dismissal mirrors the one on appointment and leaves the final decision to the Council. This should raise the legitimacy and authority of the Chairperson. The Chairperson will also get a casting vote in the Executive Board. Other provisions

The remit of action of the Joint Committee has been extended to include consumer and investor protection issues through amendments to Article 54 of the ESA Regulations. (c)Financial provisions To ensure that the ESAs' funding system is sustainable and commensurate with the tasks they perform and are expected to perform in the future, and to ensure that the funding system links fees and contributions to the ESAs' activities in a proportionate way, it is proposed to revise the current funding system. The proposed system retains the public funding element currently provided by the EU and combines it with contributions from domestic industry and other market participants, replacing current contributions from the national competent authorities. The legal basis for setting up the ESAs (Article 114 TFEU) allows amending the funding system and collecting contributions from the industry. The current fixed distribution between contributions from the EU General Budget and contributions from national competent authorities (40%/60%) would be been eliminated. The amendments provide that the revenue of the ESAs will now stem from three main sources: The amendments to Article 62 define a balancing contribution from the Union. The proposed maximum EU annual contribution, as set in advance in the Multiannual Financial Framework (MFF), will cover up to 40% of the ESAs' annual budget. This will respect constraints of the EU Budget. This will also remove the currently applied fixed distribution (40%/60%) that can limit the ability of the ESAs to increase their other sources of revenues. To this extent, for each subsequent MFF preparation, the ESAs should provide the Commission with a medium-term projection (covering at least 5 years) of their anticipated budgetary needs according to the methodologies they apply for preparing their annual budgetary proposals. Second, a new source of revenue from the private sector has been added: annual contributions from financial institutions. This source of revenue will replace current mandatory contributions from the national competent authorities to the ESAs budget. The annual contributions will be paid by the financial institutions that are indirectly supervised by the ESAs and falling into the scope of Article 1(2) of the Founding Regulations. The amendments provide that the amount of the annual contributions from financial institutions should be based on the estimated workload that the Authority is planning to carry out for each category of market participants under the Founding Regulations and the sectoral legislation. The amendments indicate that those annual contributions will be collected by national authorities designated by Member States. The amendments also provides for a delegated act that will establish how the total amount of annual contributions are shared among the different categories of financial institutions, based on the activity required by each category of them. For each category of financial institutions, the delegated act will also establish appropriate and objective criteria to calculate the actual annual contribution to be paid. Those criteria should be based on the size of the financial institutions in order to reflect their importance in the market. Finally, the delegated act will establish de minimis thresholds under which small financial institutions do not pay financial contributions or it will set minimum contributions. Third, the three Regulations keep unchanged the current provisions that allow the three ESAs to receive fees from entities that are subject to direct supervision. This provision is currently particularly important for ESMA. Under this new funding mechanism, the entities will not be charged twice for the same service. While the entities that are directly supervised by the ESAs will pay supervisory fees as foreseen by sectoral legislation, other financial institutions (directly supervised by national competent authorities and indirectly supervised by the ESAs) will pay a financial contribution. The amendments also provides for two complementary sources of revenues. The amendments introduce a possibility for any voluntary financial contributions from Member States and observers, on the condition that such a contribution does not compromise the independence and impartiality of the ESAs. For instance, those voluntary contributions can finance delegations of tasks and responsibilities from national competent authorities to the ESAs. The amendments also introduce a possibility for ESAs to collect charges for publications, training and for any other services requested by national competent authorities. (d)General Provisions Amendments to Article 70 of the ESA Regulations extend the obligation of professional secrecy to non-staff of the Authorities (i.e., individuals who provide any service, directly or indirectly, permanently or occasionally, relating to the tasks of the Authority, including officials and other persons authorised by the Executive Board and the Board of Supervisors or appointed by the competent authorities for that purpose). The same requirements for professional secrecy shall also apply to observers who attend the meetings of the Executive Board and the Board of Supervisors who take part in the activities of the Authority. This amendment should ensure that persons that are currently not covered by the obligations of professional secrecy set out in Article 70 of the ESA's Regulations and that participate in board meetings, working groups, sub-committees, panels and expert networks are covered by rules on professional secrecy and confidentiality. Regulations (EC) 1093/2010, 1094/2010 and 1095/2010 as well as sectoral financial services legislation require the ESAs to seek effective administrative arrangements, involving the exchange of information with third-country supervisors. The need for effective cooperation and information exchange should become all the more important when, pursuant to this amending Regulation, some of the ESAs assume additional, broader responsibilities in relation to the supervision of non-EU entities and activities. Where, in this context, the ESAs process personal data, including by transferring such data outside the Union, they are bound by the requirements of Regulation (EU) No 2018/XXX (Data Protection Regulation for EU institutions and Bodies). In the absence of an adequacy decision or of appropriate safeguards, for example provided for in administrative arrangements within the meaning of Article 49(3) of the Data Protection Regulation for EU institutions and Bodies, the ESAs may exchange personal data with third-country authorities in accordance with and under the conditions of the public interest derogation as set out in Article 51(1)(d) thereof, which notably applies to cases of international data exchange between financial supervisory authorities. (2)Article 4, Article 5 and Article 7 respectively deal with changes to Regulation (EU) No 345/2013 (EuVECA) and Regulation (EU) 346/2013 (EuSEF) and Regulation (EU) 2015/760 (ELTIF). Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (EuVECA) and Regulation (EU) 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (EuSEF) introduced specialised fund structures to make it easier for market participants to raise and invest capital in innovative small and medium-sized enterprises ("SMEs") and social undertakings throughout Europe. Uniform requirements and conditions were laid down for managers of collective investment undertakings that wish to use the designations ‘EuVECA’ or ‘EuSEF’ in relation to the marketing of qualifying venture capital or social entrepreneurship funds. Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds introduced another fund vehicle 'ELTIF' which targets investments in real economy, such as infrastructure project, with an enhanced focus on longer term investing. Regulation (EU) 2015/760 lays down uniform requirements that long-term funds must comply with in order to be authorised as an ‘ELTIF’. EuVECA, EuSEF and ELTIF are harmonised collective investment funds. Regulation (EU) No 345/2013, Regulation (EU) 346/2013 and Regulation (EU) 2015/760 govern qualifying investments, qualifying portfolio undertakings, concentration rules, and eligible investors. The rules define also the supervisory powers, including requirements for registrations and authorizations, ongoing supervision and withdrawals of registrations or authorisations. The main objectives of Regulation (EU) No 345/2013, Regulation (EU) No 346/2013 and Regulation (EU) 2015/760 are boosting jobs and growth, SME financing, social and long-term investments, as well as promoting an EU investment culture. However, the divergent use by national competent authorities of their discretion, their divergent administrative practices, and the differences in supervisory cultures and performance remain despite the harmonisation achieved by the three Regulations. Those divergences hinder the necessary level playing field among managers of qualifying venture capital funds, qualifying social entrepreneurship funds and long-term investment funds in different Member States increasing, at the same time, the transaction and operational costs of those managers. The appointment of a single EU supervisor will support the objectives of those Regulations as it will further facilitate the integration, the development and marketing of such fund structures across borders. This proposal aims at further streamlining the administrative process governing authorisation/registration of these EU label funds in the Union as well as to strengthen level playing field by centralising their supervision regardless of where a fund is established or marketed. A uniform application of the rules would allow managers to lower transaction and operational costs and strengthen investor choice. ESMA is entrusted with the functions of authorisation/registration and supervision of these EU funds and their managers, thus increasing efficiency of these administrative processes. Managers of such funds will be required to apply for authorisation/registration to a single competent authority – ESMA – which will also be responsible for ensuring that the rules laid down in those Regulations are consistently applied. Therefore, targeted changes are introduced to transfer the powers of the national competent authorities to ESMA. These EU funds are governed by directly applicable regulations that already offer a set of rules that ESMA will enforce.

As regards EuVECA and EuSEF funds which exceed thresholds referred to in point (b) of Article 3(2) of the AIFMD Directive 2011/61/EU and are therefore managed by alternative investment fund managers authorised under this Directive, ESMA will also be the competent authority. ESMA will ensure that these managers comply, next to sector specific provisions of the EuVECA or EuSEF Regulations enumerated in their Articles 2(2), with the national law implementing the AIFMD in the Member State of the managers' establishment. This approach aims at ensuring supervisory consistency and at alleviating the administrative burden that would result if those entities were to be supervised simultaneously by ESMA and national competent authorities with respect to the same fund. This proposal, where necessary, lays down several empowerments specifying the requirements under the three Regulations, so that the content of certain legal obligations and the scope of ESMA's discretion are sufficiently precise to ensure the degree of harmonisation sought. Regulation (EU) No 345/2013 and Regulation (EU) 346/2013 have been recently reviewed with respect to, in particular, specific fund rules, changes to the scope or eligible investments. Supervisory aspects were not subject to that review. The proposal for a Regulation amending the two Regulations was agreed by the co-legislators and approved by the European Parliament. While the final adoption of that Proposal by the Council and its publication in the Official Journal of the European Union are still pending, it is appropriate to take the texts of the two Regulations with the amendments agreed by the co-legislators as a reference point for the purposes of this Proposal. Should any changes to the agreed amendments to the two Regulations occur in the course of the adoption process due to be finalised over the coming days, the Commission stands ready to modify this Proposal to ensure its alignment with such changes. In accordance with Article 11, Articles 4 to 6 enter into application 36 months after the Regulation's entry into force so that there is sufficient time to develop and adopt the delegated and implementing acts envisaged therein. The proposal also lays down transitional measures for the transfer of competencies and duties from national competent authorities to ESMA. (3)Amendments to Regulation (EU) No 600/2014 (MIFIR – data reporting service providers) Article 6 introduces the following amendments: ·adds the authorisation and supervision of data reporting service providers to the scope of Regulation (EU) No 600/2014 (MiFIR) together with direct data gathering powers for the purposes of reporting and transparency calculations; ·add the three different types of data reporting service providers to the definitions in MiFIR; ·empowers ESMA to request information it requires for its supervisory tasks; ·establishes ESMA as the supervisor of data reporting service providers; ·defines the powers and competences ESMA should have in exercising its role as competent authority; ·imposes reporting requirements for the Commission on the functioning of the consolidated tape; ·specifies the transfer of competences from national competent authorities to ESMA. This Proposal also makes it explicit that MiFIR intervention powers also cover the managers of UCITS and Alternative Investment Funds (AIFs) where that activity is carried out directly by their managers. More specifically, Article 40 of MiFIR already grants ESMA with temporary intervention powers, which allow ESMA under certain conditions, to temporarily prohibit or restrict in the Union the marketing, distribution or sale of certain financial instruments or financial instruments with certain specified features, or a type of financial activity or practice. These product intervention powers apply to investment firms and credit institutions involved in marketing, distribution or sale of financial instruments, including units in collective investment undertakings. Since units in collective investment undertakings may also be directly marketed, distributed or sold by management companies of undertakings for collective investment in transferable securities (UCITS) and UCITS investment companies authorised in accordance with Directive 2009/65/EC and managers of alternative investment funds (AIFMs) authorised in accordance with Directive 2011/61/EU, it is necessary to make it explicit that the above-mentioned product intervention powers under MiFIR also apply to management companies of UCITS and UCITS investment companies, as well as to AIFMs under specific circumstances. A proposal for a Directive amending Directive 2014/65/EU (MiFID II) aims to eliminate data reporting service providers from the scope of Directive 2014/65/EU. (4)Amendments to Regulation (EU) 2016/1011 (Benchmarks). Article 8 of this Regulation amends Regulation (EU) 2016/1011 (BMR). Paragraph 11 establishes ESMA as competent authority for administrators of critical benchmarks and of all benchmarks that are used in the Union but administered outside. Paragraphs 4, 5, 12, 13, 14, 15, 16, 17 and 19 are technical adjustments reflecting this designation, with paragraph 4 providing for the Commission to designate benchmarks which serve as reference for a volume over EUR 500 billion as critical. Paragraph 18 defines the powers and competences ESMA should have in exercising its role as competent authority. Paragraph 10 determines that ESMA should authorise administrators of critical benchmarks. Paragraph 16 abolishes the colleges of supervisors for critical benchmarks as ESMA as the new supervisor for these benchmarks will have a Union-wide perspective in the assessment of risks etc. Paragraphs 8 and 9 establish ESMA as the competent authority for the recognition and the approval of endorsements of third country administrators and benchmarks, respectively.

Paragraphs 1, 2, 3 and 6 empower the Commission to further specify certain provisions of Regulation (EU) 2016/1011 to ensure that ESMA can directly apply the respective provisions. Finally, the amendments to Article 30 of the Regulation (EU) 2016/1011 ensure that equivalence with Regulation (EU) 2016/1011 by third countries is monitored on an ongoing basis. For the purpose of appropriate exchange of information and cooperation in the supervision of benchmark administrators in third-countries, ESMA will need to conclude cooperation agreements with third country supervisors. However, where a third country is included on the list of jurisdictions which are declared as having strategic deficiencies in their national anti-money laundering and countering the financing of terrorism regimes that pose significant threats to the financial system of the Union, ESMA will not be permitted to conclude such a cooperation agreement with the supervisors of that third country. (5)Amendments to Regulation (EU) 2017/1129 (Prospectus) Article 9 of this Regulation amends Regulation (EU) 2017/1129 so that the supervision of certain types of prospectuses is transferred to ESMA. The key amendment is featured in Paragraph 10 which confers on ESMA the role of "competent authority of the home Member State" for four categories of prospectuses. For these prospectuses, the tasks of scrutiny and approval, as well as the processing of passport notifications, are conferred on ESMA. A "reading rule" is established to apply the provisions of the Prospectus Regulation to the situations where ESMA assumes direct supervision. Paragraph 1 introduces a number of definitions as regards specialist issuers. Paragraph 4 also transfers to ESMA the power to supervise the advertisements related to those prospectuses subject to its approval, in lieu of the competent authorities of host Member States. While the actual exercise by ESMA of a control over the compliance of those advertisements remains optional, it will become mandatory should a competent authority formally request ESMA to make use of such controlling power when prospectuses approved by ESMA are used for an offer or admission to trading in its jurisdiction. Paragraphs 2, 3, 4, 6, 8, 11 and 12 introduce drafting clarifications to account for the new role of ESMA, in those situations where the "reading rule" of Paragraph 10 might be insufficient to achieve legal clarity (language regime, cooperation agreements, notifications). Paragraph 7 clarifies and enhances the functioning of the equivalence regime for prospectuses drawn up according to the national rules of a third country. Where such rules are declared equivalent by the Commission in an implementing decision, a third country prospectus which is already approved by the third country supervisor will only be filed with ESMA and ESMA will send a certificate of filing (instead of a certificate of approval, cf. point (b) of paragraph 5) to the competent authority of each host Member State where such "equivalent" third country prospectus is notified. For the purpose of supervising prospectuses from third-country issuers, ESMA will need to conclude cooperation agreements with third country supervisors. However, where a third country is included in the list of jurisdictions which are declared as having strategic deficiencies in their national anti-money laundering and countering the financing of terrorism regimes that pose significant threats to the financial system of the Union, ESMA will not be permitted to conclude such a cooperation agreement with the supervisors of that third country (cf. point (a) of paragraph 9). Point (a) of paragraph 5 corrects an omission in Article 25(4) of Regulation (EU) 2017/1129 by clarifying that ESMA must also be communicated electronically by competent authorities all final terms of base prospectuses after those final terms are filed, even where the base prospectus concerned is not passported to any host Member State, in line with what was required under Directive 2003/71/EC. Paragraph 13 corrects an error in Regulation (EU) 2017/1129 by aligning the date by which Member States are required to notify their sanctioning rules to the Commission and to ESMA, with the date, set out in Article 49(3) of the Regulation, by which they are required to comply with Chapter VIII of the Regulation Paragraph 14 introduces a new chapter setting out the powers and competences of ESMA which are necessary for the supervision and enforcement of the Prospectus Regulation, including powers to impose pecuniary fines and periodic penalty payments 2017/0230 (COD) Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) No 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) No 345/2013 on European venture capital funds; Regulation (EU) No 346/2013 on European social entrepreneurship funds; Regulation (EU) No 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof, Having regard to the proposal from the European Commission, After transmission of the draft legislative act to the national parliaments, Having regard to the opinion of the European Central Bank, Having regard to the opinion of the European Economic and Social Committee,

Acting in accordance with the ordinary legislative procedure, Whereas: (1)Following the financial crisis and the recommendations of a group of high level experts led by Jacques de Larosière, the the Union has made important progress in creating not only stronger, but also more harmonised rules for the financial markets in the form of the Single Rule Book. The Union has also set up the European System of Financial