EUROPEAN COMMISSION Brussels, 20.9.2017 SWD(2017) 308 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document 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) 2016/2011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, 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



CRAs Credit Rating Agencies CRD IV Capital Requirements Directive CRR Capital Requirements Regulation CSD Directive on Central Securities Depositories CSDR Regulation on Central Securities Depositories CTPs Consolidated Tape Providers DA Delegated Acts DGSD Deposit Guarantee Schemes Directive DRSPs Data Reporting Service Providers EBA European Banking Authority ECA European Court of Auditors ECB European Central Bank ECOFIN Economic and Financial Affairs Council ECON Committee on Economic and Monetary Affairs EFRAG European Financial Reporting Advisory Group EIOPA European Insurance and Occupational Pensions Authority ELTIF European Long-Term Investment Funds EMD Electronic Money Directive EMU Economic and Monetary Union EMIR European Market Infrastructure Regulation

ESAs European Supervisory Authorities ESFS European System of Financial Supervision ESMA European Securities and Markets Authority ESRB European Systemic Risk Board ESRC European Systemic Risk Council EuSEF European Social Entrepreneurship Funds EuVECA European Venture Capital Funds FFR Framework Financial Regulation FICOD Financial Conglomerates Directive FTE Full Time Equivalent IFR Interchange Fee Regulation IORPs Institutions for Occupational Retirement Provision ITS Implementing Technical Standards MCD Mortgage Credit Directive MFF Multiannual Financial Framework MiFID Directive on Markets in Financial Instruments NACE Statistical classification of economic activities in the European Community OLAF European Anti-Fraud Office Omnibus II New European Supervisory Framework for Insurers OTC Over the counter

PAD Payment Accounts Directive PRIIPs Regulation on Packaged Retail and Insurance-Based Investment Products PSD2 Revised Directive on Payment Services QMV Qualified Majority Voting RSB Regulatory Scrutiny Board RTS Regulatory Technical Standards SMEs Small and Medium-Sized Enterprises SRB Single Resolution Board SSM Single Supervisory Mechanism TFEU Treaty on the Functioning of the European Union TRs Trade Repositories UCITS Undertakings for Collective Investment in Transferable Securities Glossary APAs An APA is a system that requires firms executing transactions to publish trade reports through a body that ensures timely and secure consolidation and publication of such data. ARMs An ARM is a platform that reports transactions on behalf of firms. This can also be done via the multilateral trading facility or regulated market on which the transaction was performed. Benchmarks Any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument is determined or is used to measure the performance of an investment fund. CCP A legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. CTPs A consolidated tape provider is a person authorised under MiFID II to provide the service of collecting trade reports for financial instruments from exchanges and consolidating them into a consolidated tape. A consolidated tape is an electronic system which combines sales volume and price data from different exchanges and certain broker-dealers. It consolidates these into a continuous electronic live data stream, providing summarised price and volume data by security across all markets. DRSPs DRSPs is a term used to refer to APAs, ARMs and CTPs collectively. OTC The phrase OTC can be used to refer to stocks that trade via a dealer network as opposed to on a regulated market. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

Prospectuses Prospectuses are public disclosure documents prepared by companies in the context of an offer of securities to the public and/or an admission of such securities to trading on a regulated market. Prospectuses contain all relevant information concerning the company and the securities to be offered to the public or admitted to trading. They are approved by a competent authority and their content is harmonised at EU level. TRs TRs are entities that centrally collect and maintain the records of derivatives. 1Introduction and policy context In response to the financial crisis of 2007/8, the EU reinforced its regulatory framework in line with global commitments. Furthermore, efforts to reduce differences in the implementation of the regulatory framework across Member States were stepped up via the development of a Single Rulebook for financial regulation in the EU. The European Supervisory Authorities ("ESAs") were established to ensure consistent application of the Single Rulebook and thereby promote both regulatory and supervisory convergence. In this way, the ESAs have contributed to a smother functioning Single Market for financial services as well as helping to deepen the Economic and Monetary Union ("EMU"). Despite the post-crisis measures, there remains significant potential to enhance regulatory and supervisory convergence in the Single Market. Integrated financial markets require more integrated supervisory arrangements to function effectively, while more centralised supervisory arrangements can, in turn, foster market integration. The ESAs can play a key role in this symbiotic relationship between market integration and supervisory convergence and can assume more direct responsibility for supervision in targeted areas. In assuming such enhanced responsibility for supervision, the ESAs must be adequately equipped in terms of powers, governance and funding. The case in favour of targeted reinforcement of EU supervision is predicated on the need to address two main challenges: ·First, following the establishment of the Banking Union ("BU"), the EU has committed to 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 Single Market in capital. In this context, the Five Presidents' Report 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 EMU suggests that a review of the ESAs should deliver the first steps towards such a single supervisor by 2019. ·Second, the financial crisis of 2007/8 revealed the risks linked to the interconnectedness of global financial markets and resulted in major international efforts to improve the consistency of regulation and supervision, notably among G20 countries. It is essential that EU supervisory arrangements develop in a manner which ensures that cross-border risks between the EU and the rest of the world can be monitored and managed most effectively. The ESAs have a key role to play in this regard. 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 largest financial centre means that EU27 supervisory arrangements must be strengthened to ensure that financial markets continue to support the economy on an adequate and sound basis. In addition, the EU27 supervisory arrangements must take account of the fact that financial services providers based in the United Kingdom will relocate activities to the EU27, which will require enhanced monitoring and management from a financial-stability perspective. The ESAs again have a key role to play in addressing this specific challenge. The upcoming ESAs review – which will cover powers, governance and funding - provides a very timely opportunity to consider the necessary targeted reinforcement of EU supervisory arrangements. Article 81 of the ESA Regulations provides for a review of the ESAs' operations in 2017, and the Commission's 2017 Work Programme announced a review of the European System of Financial Supervisors ("ESFS") (which comprises the three ESAs and the European Systemic Risk Board). In preparing the review, the Commission services have carried out an evaluation of the operations of the ESAs which highlighted several important shortcomings. These include: (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 between the EU and the rest of the world; (c) a governance framework that leads to a misalignment of incentives between the EU and national levels within decision-making processes; and (d) a funding framework that is not ensuring sufficiency in relation to the tasks allocated to the ESAs. (See Annex 11.5) These shortcomings limit the capacity of ESAs to deliver on their mandates in terms of financial stability and market functioning. A stakeholder consultation on the functioning of the ESAs, undertaken in the spring of 2017, highlighted similar shortcomings (see Annex 11.2). The scope of this impact assessment covers 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 and to undertake the responsibility for direct supervision in targeted areas. The impact assessment accompanies the Commission proposals to amend the following legal acts: 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 2015/760 on European long-term investment funds; 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) 2016/2011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; 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, Directive 2014/65/EU on markets in financial instruments and the Commission's proposal for a Regulation amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012.. Neither the proposals nor the impact assessment cover macro-prudential aspects. 2Evaluation and stakeholder consultation In accordance with Article 81 of the ESA Regulations an evaluation was carried out in combination with this impact assessment during the spring of 2017 (see Annex 11.5). This evaluation concludes that the ESAs have broadly delivered on their current objectives and that the current sectoral supervisory architecture of the ESAs is appropriate. However, targeted improvements are needed to face future challenges. In particular the evaluation concludes that: ·powers could be enhanced in some areas so as to ensure better regulatory and supervisory outcomes for all market participants and to ensure effective and efficient handling of cross border risk; ·the current governance framework seems conducive to conflicts of interests between the EU and national levels, which complicates the decision-making process and creates an apparent bias against using certain tools and powers; ·the current funding arrangements do not seem sustainable and commensurate with the tasks which the ESAs perform and will be expected to perform in the future. This inadequacy of funding risks becoming acute going forward, as the tasks to be carried out by the ESAs expand significantly. The current funding arrangements also reflect unjustified differences in contributions among Member States. As a complement to the evaluation, the Commission service conducted an extensive public consultation in the spring of 2017. The consultation attracted almost 230 responses. Feedback was also gathered through targeted consultations with the ESAs and in exchanges with Member States and industry representatives. A summary of stakeholders' views is in Annex 11.2. 3Background to the ESAs

3.1Brief history of the ESAs The financial crisis of 2007/8 brought weaknesses in the EU financial supervisory arrangements sharply into focus. These supervisory arrangements were primarily national based arrangements, implying a patchwork of regulatory and supervisory requirements and insufficient cooperation and information exchange among national supervisors. In response, the Commission established a High Level Group on financial supervision in the EU, which came forward with recommendations based on the creation of a two pillar supervisory system as follows: ·a European System of Financial Supervisors ("ESFS"), for the supervision of individual financial institutions ("micro-prudential supervision") consisting of new European Supervisory Authorities working in tandem with the national financial supervisors, and ·a European Systemic Risk Council ("ESRC") to oversee the stability of the financial system as a whole ("macro-prudential supervision") and provide early warning of systemic risks and recommendations where necessary (today's European Systemic Risk Board). Building on those recommendations, the Commission put forward legislative proposals to strengthen EU level financial supervision in October 2009, which were adopted by the co-legislators in November 2010. The three ESAs – the European Banking Authority ("EBA"), the European Insurance and Occupational Pensions Authority ("EIOPA") and the European Securities and Markets Authority (ESMA) – became operational in January 2011. These new authorities were a reinforcement of the existing EU “committees of supervisors” – the Committee of European Banking Supervisors ("CEBS"), the Committee of European Insurance and Occupational Pensions Supervisors ("CEIOPS") and the Committee of European Securities Regulators ("CESR"), which had more limited powers and operated on a consensus-basis only. 3.2What the ESAs do The over-arching objective of the ESAs is to sustainably reinforce the stability and effectiveness of the EU financial system and enhance consumer and investor protection. More specifically they should contribute to: a)improving the functioning of the internal market, including, in particular, a sound, effective and consistent level of regulation and supervision; b)ensuring the integrity, transparency, efficiency and orderly functioning of financial markets; c)strengthening international supervisory coordination; d)preventing regulatory arbitrage and promoting equal conditions of competition; e)ensuring that risks in their respective sectors are appropriately regulated and supervised; and f) enhancing customer protection. The ESAs contribute to the Single Rulebook - regulatory activities The ESAs may, in areas specified in the relevant sectoral legislation (primary level, "level 1"), develop draft technical standards (secondary level, "level 2") that are endorsed by the Commission (i.e., Articles 10 to 15). The ESAs may also issue guidelines and recommendations with a view to establishing consistent, efficient and effective supervisory practices within the ESFS and to ensuring the common, uniform and consistent application of Union law (Article 16 of the ESA Regulations). The ESAs may also provide opinions to the European Parliament ("Parliament"), the Council and the Commission on all issues related to their area of competence such as, for instance, technical advice. (Article 34 ESA Regulations). The common framework developed by the EBA on the basis of EU legislation creates the conditions for all institutions operating in the EU single market to efficiently and safely fulfil their role of financial intermediaries. The ESAs contribute to and promote a common supervisory culture/convergence of supervisory practices The ESAs have a key role in promoting and monitoring the efficient, effective and consistent functioning of the colleges of supervisors. For this purpose they can participate in the activities of the supervisory colleges (Article 21(1) of the ESA Regulations). The ESA Regulations also empower the ESAs to carry out various activities in view of building a common EU supervisory culture and consistent supervisory practices, as well as to ensuring uniform procedures and consistent approaches throughout the Union (Article 29 of the ESA Regulations). In order to strengthen consistency in supervisory outcomes the ESAs shall periodically organise and conduct peer reviews (Article 30(1) of the ESA Regulations). To carry out these duties the ESAs may request competent authorities ("CA") to provide them with all the necessary information including at recurring intervals and in specified formats (Article 35 of the ESA Regulations). The ESAs ensure the consistent application of legally binding Union acts

The ESA Regulations enable the ESAs to assist CAs at the request of one or more CAs in reaching a common approach or settling the matter. The ESAs also have direct decision making powers to require financial institution to comply with the obligations under Union law (Article 19 of the ESA Regulations). Similarly the ESAs are entitled to address recommendations to CAs when a CA appears to be in breach of Union law and, following a predefined procedure and as a last resort, to directly address decisions to financial institutions to ensure respect of Union law which is directly applicable to them (Article 17 of the ESA Regulations). The ESAs can take emergency actions The ESA Regulations set out that the ESAs must fulfil an active coordination role between CAs, in particular, in case of adverse developments which potentially jeopardise the orderly functioning and integrity of financial markets or the stability of the EU financial system. Following the determination of an emergency situation by the Council the ESAs may, as a last resort, adopt individual decisions directly to financial institutions/insurers requiring the necessary action including the cessation of any practice (Article 18 of the ESA Regulations). The ESAs have a coordination function Beyond their coordination role in emergency situations the ESAs are required to promote a coordinated Union response particularly in adverse market conditions by e.g., facilitating information exchange between authorities, determining the scope/reliability of information to be made available by CAs and centralising information received, carrying out non-binding mediation, notifying to the ESRB potential emergency situations; taking all appropriate action to facilitate action by CAs (Article 31 of the ESA Regulations). The ESAs have tasks related to consumer protection and financial activities The ESA Regulations require the ESAs to take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services. The ESAs may also issue warnings in the event that a financial activity poses a serious threat to the ESAs' objectives and may, under specific circumstances, even "temporarily prohibit or restrict certain financial activities" which threaten the integrity of financial markets or the stability of the financial system (Article 9 ESA Regulations). A more comprehensive outline of the background to the ESAs and what they do is developed in the evaluation report. See Annex 11.5. Decision-making of the ESAs The main decision-making body of the ESAs is the Board of Supervisors where representatives from national competent authorities from each Member State are the only representatives with voting powers. Decisions by the Board of Supervisors are generally taken by simple majority. However, qualified majority voting ("QMV") is used in the case of "regulatory decisions" under the ESA Regulations. The voting system within the EBA was modified after the creation of the Single Supervisory Mechanism ("SSM") to better take into account the position of Member States which do not participate in the Banking Union ("BU"). For instance, some EBA decisions require, in addition to the general majority requirements, a simple majority of national CAs participating in the SSM and a simple majority of national CAs not participating in the SSM, respectively ("double simple majority"). Other decisions require a simple majority from both participating and non-participating Member States and for those the EBA Regulation also foresees a mechanism to ensure that this system remains workable when the number of non-participating Member States decreases until the date when four or fewer voting members are from CAs of non-participating Member States. Decisions will then be adopted by a simple majority of the voting members of the Board of Supervisors, which shall include at least one vote from members from CAs of non-participating Member States. Chapter 7 on governance analyses in more detail the decision-making process within the ESAs. 4General problem definition and General Baseline The overall objective of the ESAs is to sustainably reinforce the stability and effectiveness of the financial system throughout the EU and to enhance consumer and investor protection. After six years of operation, the evaluation and the public consultations undertaken by the European Commission services indicate that the ESAs are increasingly constrained in their capacity to meet this objective in the context of further integration of markets both within the EU and between the EU and the rest of the world. The constraints on the ESAs' functioning can be summarised in the form of two general problems: 1.General problem I is the constraints on the ESAs to fully fulfil their existing mandates. The ESAs are already stretched in their ability to meet existing tasks in full, i.e., in terms of delivering the right regulatory outputs and supervisory convergence actions, and will be under even greater pressure as the process of financial integration continues. 2.General problem II is the inadequate scope of existing mandates going forward. This problem concerns the absence or limited scope of certain powers and tasks over large EU-wide cross-border firms, products or market infrastructures, as well as over third-country instruments and aspects. The constraints implied by these two general problems, described in more detail in the following sections, will become increasingly acute as the integration of EU financial markets deepens in future years, notably with the creation of the CMU and the growing interconnection between global financial markets, as well as a result of the United Kingdom's departure from the EU. The extent to which these problems have an impact on the three ESAs can largely vary. General problem I affects the ESA functioning in the same way across the three agencies. General problem II, instead, emerges more forcefully as an issue for ESMA and only in selected areas for the other two agencies. The 2017 ESA review provides an opportunity to address the underlying problems at the earliest opportunity. 4.1General problem I

As illustrated in the evaluation, the ESAs are facing increasing responsibilities and an increasing workload which have an important impact on their ability to meet their mandates in full especially from a forward looking perspective. Section 8.2.1.2 reviews evidence from different sources of this growing problem and illustrates the significant increase in Level 2 legislation compared to the situation when the ESAs were established in 2011. This scale of workload was not foreseen in 2010, when the ESAs were established. Meanwhile, feedback from stakeholders is critical of the ESAs for the failure to fully use their powers in some respects, e.g., fulfilling the mandate for regulatory convergence and supervisory convergence (see Annex 11.2). Constraints on the ESAs to fully fulfil their mandates come from various sources: 1.The ESAs are constrained in fulfilling their objectives by insufficient and unclearly defined powers, e.g., when ensuring consistent application of EU law, drafting technical advice or providing ongoing support to equivalence decisions. 2.The constraints preventing the ESAs from fully fulfilling existing mandates is also attributable to the governance of the ESAs. Notably, the incentive structure in the decision-making process leads to a lack of decisions in particular in the area of regulatory convergence and supervisory convergence, or decisions that are overly oriented towards national instead of broader EU interests. This reflects 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. For instance, due to the need for approval by the Board of Supervisors, the ESAs have made limited use of peer reviews, of their powers to settle disputes and pursue breaches of Union law. A greater role for the ESAs in deepening financial integration or strengthening the stability of the Single Market will also require effective convergence powers. 3.Insufficient funding reduces the ESAs' ability to allocate resources in relation to their needs to fully meet their mandates. Current budget arrangements are and will be constraining the ESAs' activities, as pressure to consolidate public spending remains. Uneven contributions from Member States could also hamper the ESAs in managing their evolving funding needs, to the extent that Member States currently making a disproportionately large contribution (relative to the size of their financial sector) would be unwilling to increase their contributions further. 4.2General problem II The current scope of the ESAs' mandates must be reconsidered in the context of efforts to further integrate financial markets within the EU. In order to deepen market integration, and ensure more consistent supervisory practices and implementation of EU rules a more integrated supervision should be achieved in targeted areas. For example, a more integrated supervisory framework ensuring common implementation of the rules for the financial sector and more centralised supervisory enforcement has been identified as key to the completion of the CMU. The feasibility of more common supervision has already been showed in the case of trade repositories and credit rating agencies, directly supervised by ESMA. While there is no majority of stakeholders suggesting changes to the current toolkit available to the ESAs, recognition of the problem in some areas and support for targeted increases in centralised supervision is also part of the stakeholders' feedback to the ESAs review, particularly with respect to cross-border activities. Also the evaluation illustrates areas where the current toolkit is not sufficient. In light of the policy objectives of the CMU, more common direct supervision in targeted areas will mainly affect ESMA over the other two ESAs. For instance, the recent Commission proposal to amend the European Market Infrastructure Regulation ("EMIR") strengthens ESMA's role in the supervision of Central Counterparty Clearing ("CCPs") to support the development of deeper and better integrated capital markets. Figure 4.1 General Problem Tree The general problems outlined above can be traced to issues relating to the powers, governance and funding of the ESAs. The following sections will discuss in detail the policy actions proposed in respect of these three drivers so as to ensure a proper assessment in terms of efficiency, coherence and effectiveness. 4.3General baseline The ESAs' framework currently relies on a combination of powers, governance rules and funding structure that are aimed at ensuring a certain balance between national, EU and shared competences in matters related to banking, capital markets, pensions and insurance. Current ESAs' powers aim at ensuring a proper and convergent application of EU law and contributing to the Single Rulebook by preparing draft Level 2 legislation for adoption by the Commission. Over time, ESMA has also received specific powers to be the only supervisor that authorises and supervises credit rating agencies ("CRAs") and trade repositories ("TRs"). In general terms, the ESAs function according to a similar set of rules that determine their governance, powers and funding. For governance, rules relating to the appointment and powers of the Chairpersons and the Management Boards, the powers of the Boards of Supervisors as decision-making body, the allocation of voting powers among national competent authorities and the decision-making powers on operational matters are the same with the notable exception of EBA in relation to certain decisions (see Sections 3.2 and 7). All three ESAs are funded through public budgets distributed in fixed proportions between the EU and national competent authorities' budgets. In addition, ESMA collects fees directly from market participants in the areas where it is directly supervising entities (CRAs and TRs). The current toolkit of powers for the three ESAs is also very similar and includes a key role in contributing to the Single Rulebook via selected tools to promote greater regulatory and supervisory convergence. In addition, ESMA currently has direct supervisory powers in relation to TRs and CRAs. Without action, the baseline scenario would evolve towards an unsustainable situation for the ESAs and a worsening of the two general problems described in Section 4, i.e., the constraints to meet mandates in full and the inadequacy of the current scope of mandates. For instance, the ESAs would increasingly fall short in meeting their expected funding needs and so would be forced to reallocate resources and reprioritise actions while keeping the same mandates. Carrying on with the current ESA framework may also result in slow progress in supervisory convergence across the Single Market, as markets become more integrated and a growing number of entities and activities are conducted on a cross-border basis both within the EU and between the EU and the rest of the world, so increasing risks of major supervisory gaps. For instance, the current incentive structure in the decision making process may not ensure the needed regulatory and supervisory convergence stemming from more integrated markets, as well as an adequate response to issues in the implementation and enforcement of EU law. Moreover, the lack of direct supervisory powers in specific areas (such as data providers and EU-labelled funds) may increasingly create conflicts between national supervisory practices and cross-border activities in those markets, failing to reach the underlying objectives of the Single Rulebook. The current ESAs' framework would thus be unable to deal with more integrated financial markets on a sound and stable basis and to ensure coherence with key European financial policies, like the CMU and the BU. 5The EU's right to act and justification The legal basis for the establishment of the ESAs is Article 114 of the Treaty on the Functioning of the European Union ("TFEU"). The objectives of the ESAs are set out in the ESA Regulations. It is to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses. The impact assessment accompanying the Commission's proposal on setting up the ESAs has demonstrated that these objectives are better achieved at Union level. Article 81 of the ESA Regulations provides for an obligation for the Commission to publish a general report on the experience acquired as a result of the operation of the ESAs by 2 January 2014, and every three years thereafter. Article 81(4) calls for an evaluation report and, if appropriate, a legislative proposal to accompany it should any change of the legal framework be necessary to allow the ESAs to fulfil their mandate and to ensure stability and effectiveness of the financial system. The first Commission report on the functioning of the ESAs was published in 2014. The report highlighted several areas that merited improvements, including through legislative changes. However, it was considered premature to propose legislative changes to the ESA Regulations after only three years of operations and with the regulatory and supervisory framework still in development. The 2017 evaluation report (see Annex 11.5) also identifies several areas which merit improvements. The evaluation demonstrates that EU action is justified and necessary to address identified problems in the area of powers available to the ESAs, their governance framework and their funding framework. Any actions in this respect will require amendments to the ESA Regulations. Furthermore, the results of the public consultation launched by the Commission in March 2017 provide further support to the conclusions made in the evaluation. With regards to the adjustment of the powers of the ESAs the present impact assessment (see Chapter 6) demonstrates that certain powers of the ESAs can be improved and that amendments to the ESA Regulations will allow more consistent application of EU law, stronger supervisory convergence and will improve the functioning of the internal market, as foreseen in Article 114 TFEU. In some areas it has been not clear whether the ESAs have genuine powers to be involved and to assist the Commission on their own initiative. In all these cases the specific nature of these powers and the impact of the potential ESAs actions justify an initiative at EU level and amendment of the ESA Regulations. Adaptations of the governance model of the ESAs would change their functioning, considered as means to improve harmonisation, and would therefore also be covered by Article 114 TFEU. The present impact assessment explores options for a more effective and efficient governance model which would serve better the protection of the EU interests in the ESFS.

Moreover, as regards funding, Article 114 TFEU allows amendments of the funding framework to include funding through contributions from the industry. This is because the funding regime can be considered an integral part of the establishment of the ESAs themselves. Furthermore, where the industry's activity is considered potentially risky and where the tasks and the powers of the ESAs are intended to contribute to the containment of such risk, it is justified for the same industry to bear the costs arising out of the nature of its activity. Finally, the ESAs are Union bodies whose powers and operation can only be amended by the Union legislator – in this case on the basis of Article 114 TFEU. The choice of legal instrument The proposed legislative amendments that will follow on this impact assessment aim in particular at reinforcing the ESAs' framework. To this end the legislative measures will amend the current ESA Regulations to reinforce current powers of the ESAs, to create a more effective and efficient governance structure of the ESAs in line with other EU supervisory bodies such as the Single Resolution Board ("SRB") and the ECB/SSM, and to stipulate the general criteria for changing the current funding contribution. The latter will eventually also have to be implemented through a separate legal instrument detailing the implementation of the change in the contribution to the ESAs' funding. There will also be amendments to various pieces of sectoral financial legislation to strengthen the ESAs' powers in areas such as e.g., third country equivalence and to centralize certain areas of supervision. As many of the necessary amendments would be minor changes to existing legal texts they could be summarised in an Omnibus Directive/Regulation. The legal basis for the ESA Regulations is Article 114(1) TFEU. Any amending regulation will have the same legal basis. 5.1General objectives The overall objective of the ESAs is to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system for the EU economy, its citizens and businesses. More specifically ESAs should contribute to: ·improving the functioning of the internal market, including, in particular, a sound, effective and consistent level of regulation and supervision; ·ensuring the integrity, transparency, efficiency and orderly functioning of financial markets; ·preventing regulatory arbitrage and promoting equal conditions of competition; ·ensuring that risks in their respective sectors are appropriately regulated and supervised; and ·enhancing consumer protection. General objectives can be broken down in the following specific objectives: ·ensuring greater regulatory and supervisory convergence and more effective supervision with better defined powers for the ESAs (S-1); ·ensuring that ESAs' powers are coherent with other EU policies (e.g. CMU) and developments in EU financial integration (S-2). ·ensuring that ESAs have the proper incentives to effectively apply their powers and carry out their tasks in line with their mandates, and to take swift decisions in the EU interest (S-3). ·ensuring that the ESAs' annual funding is sufficient to meet their objectives in a sustainable way and in a way proportionate to the costs that all contributing parties generate (S-4) Clear and fit for purpose powers, appropriate governance and sufficient funding for ESAs to meet their objectives are closely intertwined. Without appropriate governance and sufficient funding the ESAs will not be in the position to properly use their powers; at the same time broad powers alone might not be sufficient to achieve the ESAs' objectives if they do not avail of sufficient funding or if they are not governed in an effective and efficient manner. 6Powers

6.1State of play One of the objectives of the ESFS (the ESAs, the national CAs and the ESRB) is to ensure that supervision of financial services and entities takes place at the appropriate level (national or EU level) and that the respective CAs are equipped with the necessary powers to execute their tasks. The powers of the ESAs derive from the ESA Regulations. Sectoral legislation further specifies when some of these powers can be used. The ESAs' have three broad sets of powers: ·powers in relation to regulatory tasks, in the form of drafting Regulatory Technical Standards ("RTS") and Implementing Technical Standards ("ITS") and issuing non-binding guidelines, recommendations and opinions; ·powers to foster regulatory and supervisory convergence, where different competent authorities across the EU are in charge of direct supervision (including the possibility for the ESAs to ensure the consistent and proper application of EU legislation through, for example, dispute settlement powers and breach of Union law investigation and to conduct peer reviews); ·ESMA also has direct supervisory powers (including authorisation and ongoing supervision) over credit rating agencies under Regulation (EU) No 462/2013 and trade repositories under Regulation (EU) No 648/2012 (EMIR). Beyond the example of CRAs and TRs, supervisory powers of the ESAs directly applicable to market participants are limited and restricted to dispute settlements with a binding outcome, decisions taken as a result of a breach of Union law, and specific situations where certain financial activities have the potential to threaten the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union and in cases of emergency identified by Council (Article 18 of the ESA Regulations). 6.2Problem definition The predecessors of the ESAs, the former Committees of Supervisors (i.e., the Committee of European Banking Supervisors, Committee of Insurance and Occupational Pension Supervisors and the Committee of European Securities Regulators) had only an advisory role towards the Commission and coordination tasks in respect of the CAs. The ESA Regulations, therefore, represented a major strengthening of EU level supervision, in performing regulatory tasks and ensuring consistency in supervisory outcomes and in the application of EU law. Nevertheless, the regulatory and economic context has developed significantly since the powers of the ESAs were defined in 2010. Financial integration has progressed further and there has been a very substantial amount of new legislation, notably: ·Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories ("EMIR"), effective since August 2012 ·Short-selling Regulation (EU) No 236/2012, effective since November 2012 ·Directive 2011/89/EU on financial conglomerates, effective since June 2013 ·Single Rule Book of prudential requirements for banks capital, liquidity & leverage and stricter rules on remuneration and improved transparency ("CRD IV / CRR"), effective since December 2013 and January 2014, respectively ·New European supervisory framework for insurers ("Omnibus II") effective, since March 2015 ·Directive 2014/49/EU on Deposit Guarantee Schemes, effective since July 2015 ·Mortgage Credit Directive 2014/17/EU, effective since March 2016 ·Strengthened regime on anti-money laundering, effective May 2017 ·Enhanced framework for securities markets ("MIFID II/MIFIR"), effective as of January 2018 ·Directive (EU) 2015/2366 on payment services in the internal market (cards, internet & mobile payments), effective as of January 2018

·Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, applicable from January 2018 ·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, applicable from 21 July 2019 These various pieces of sector legislation confer powers on the relevant ESAs, building on the respective ESA Regulation. In this context, it should be noted that, as a consequence of Article 1(2) of the ESAs Regulations, all the powers provided for those Regulations become applicable in respect of any Union act "which confers tasks on the Authority". Thus, the responsibilities of the ESAs have significantly expanded since their establishment in 2011 and are set to expand further including in the area of retail markets, in years to come as indicated notably in the Communication on the mid-term review of the CMU Action plan and the Reflection paper on the EMU. In view of this expected expansion in responsibilities, the 2017 evaluation addressed the question whether the tasks and powers attributed to the ESAs have been appropriate. The evaluation concluded that the system has overall functioned quite well to date. However, there are concerns about whether the current framework is still appropriate in the perspective of the further intra-EU integration implied by the CMU, the completion of the Banking Union (BU) and the likely further integration between EU financial markets and the rest of the world as well as the fact that the currently by far most important financial market in the Union will become a third country soon. They are discussed as "Problem 1" below. In particular, the evaluation suggests a need for more common direct supervision by the ESAs in a few targeted areas as the most effective and efficient means to meet their objectives. This issue is discussed as "Problem 2" below. Such concerns about the definition and allocation of powers in the ESA powers are closely intertwined with two other issues: governance and their funding. Without appropriate governance and funding the ESAs will not be in the position to properly exercise any additional powers. However, it should be noted that the situation of each ESA has evolved differently amid the broader changes to the EU supervisory and regulatory framework so not all aspects of the two problems apply or will apply equally to the three ESAs. 6.2.1Problem 1: ESAs cannot make proper use of some powers The evaluation suggests that the ESAs have not always been in a position to fully reach their objectives in respect of financial stability, market integrity and investor protection, partially because efforts to integrate EU financial markets have intensified in recent years. An important driver behind this problem is that some of the powers of the ESAs are not sufficiently well defined or are not sufficiently comprehensive. As an illustrative example, when investigating an alleged breach of Union law, the ESAs can obtain information only from the competent authority under investigation and not from a wider range interested parties; this restriction limits the ESAs ability to build a case and effectively pursue their investigations. Similarly, the current dispute settlement provision has been criticised for not being sufficiently clear on when the ESAs can settle disagreements and that the effect of the current language goes too far in restricting the ESAs right to initiate or trigger dispute settlements with a binding outcome. In relation to accessing information, the ESAs have mandates to foster transparency and consumer protection and one of the CMU commitments is to develop performance indicators on retail investment products. In this context, it is important that ESMA particular EIOPA can secure access to information from national CAs, which is not always the case. The preferred Option in relation to funding will also depend on the ESAs being able to can secure access to information that is needed to invoice relevant market participants. Also in the area of internal models, inconsistencies remain between approved internal models of different (re)insurance (groups) despite the ongoing work on convergence within the current framework. A stronger role for EIOPA in this processes and ensuring it can have access to the necessary information on applications could foster further supervisory convergence in this area. Yet another example is to be found in the area of equivalence. While sectoral legislation empowers the Commission to adopt equivalence decisions, it does not always indicate necessary follow-up action (for example, ex post monitoring of the regulatory and supervisory arrangements in third countries) after the equivalence decision has been taken. In consequence, situations could emerge where a deterioration in regulatory and supervisory rules and standards in relevant third countries go unnoticed and create risks for investors, consumers and markets in the EU. While adverse situations may vary in recurrence, gravity or risk potential, the ESAs were initially established to deal effectively with them at EU-level. Therefore, solutions are needed to address the fact that ESAs are not able to exert powers they have due to insufficient means or otherwise and that their powers are not sufficiently well defined. 6.2.2Problem 2: Absence of legal arrangements allowing for EU-wide supervision in some areas The current allocation of powers reflects an accumulation of sector specific decisions of the past years. In each case, new powers and tasks have typically been allocated to national CAs. This has created inefficiencies and will create further inefficiencies as market integration progresses, not least because of the CMU. These inefficiencies stem partly from different interpretation and implementation of rules by national CAs, but also from a lack of information and experience to assess cross-border situations and highly complex practices. Moreover, market participants will find it difficult to reap the benefits of scale economies across borders when they are confronted with different implementations and interpretations in different Member States. This is sub-optimal in light of the need for greater convergence and to anticipate great market integration. Problem 2 reflects an increasing imbalance in supervisory competences between the national and EU level in view of EU's objective to further the integration of the financial markets through initiatives such as the CMU and the mid-term review thereof. The drivers behind this imbalance are the growth in cross-border financial services and the increase in EU financial services legislation described above. The balance between the national and the EU level has shifted considerably in favour of the latter both with respect to economic activity and with respect to the level at which financial services and capital market participants are regulated. At the same time the balance of supervisory powers between the national and the EU level has hardly changed. The notable exception is the BU, which established the European Central Bank ("ECB") as the single supervisor of the euro area banking system and of the banking system of Member States that are not part of the euro area joining the SSM and the SRB as the single resolution authority. Although financial market participants operate increasingly across the Single Market and a growing part of EU law is directly applicable, the powers of the ESAs in supervision are still almost exclusively indirect: the ESAs coordinate among CAs in supervisory colleges and try to enhance regulatory and supervisory convergence through dispute settlements, training, technical assistance, Supervisory Handbooks, peer reviews, and the like. Furthermore, a significant share of cross-border activities in the integrated market is performed by a relatively small number of large financial actors like investment firms and many specialised asset managers. Especially for those actors and activities supervision at the national level seems sub-optimal. There is a risk that these actors would exploit differences not only in supervisory approaches but also in how the EU legislation is interpreted and applied. For example, there are concerns that home CAs might be less strict in enforcing rules, in particular on consumer and investor protection, in relation to activities carried out in Member States other than the home Member State. This might be due to constraints in (financial) resources or (language) skills or due to a lack of incentive or simply due to consumers or investors having problems to identify and to address the competent authority in another Member State. A number of specific examples illustrate the fact that the current or envisaged supervisory approach (supervision at national level) risks creating problems (for further details, see Annex 11.6): The business of data reporting service providers is predominantly of a cross-border nature. Registration and supervision by national CAs risks being not fully effective as national CAs might not have the necessary capacity to detect, assess and monitor potential problems which might emerge in other Member States in relation to the activities of such data service providers. In particular, consolidated tape providers ("CTPs") and approved reporting mechanisms ("APAs") will gather trading data from providers across the EU (from trading venues where the trades take place and firms carrying out over the counter ("OTC") execution) and put it in consolidated streams to overcome market fragmentation/lack of transparency. As these activities themselves are meant to overcome market fragmentation it would not be consistent to supervise them in a fragmented way at national level. There current discretion and divergent administrative practices among national CA in the authorisation and supervision of European long-term investment funds ("ELTIF") as well as in relation to the registration and supervision of collective investment undertakings, or managers (e.g., European social entrepreneurship funds ("EuSEF") and European venture capital funds ("EuVECA")), maintains certain barriers for the cross-border marketing of funds and does not ensure a full level playing field among fund managers in different Member States. Furthermore, as for specialist issuers' prospectuses, in light of the limited number of these fund types their supervision at national level is not very efficient. The Benchmark Regulation envisages the creation of colleges of supervisors for the supervision of critical benchmarks to assist the relevant national CA of the benchmark administrator in the supervision. Creating and running such colleges is a relatively time-consuming task, which is problematic in an emergency situation. It is unlikely that the national CA will have sufficient time to consult the other college members but will rather have to act quickly to avoid a disruption in the provision of the benchmark. In addition, it is likely that there will be several national CAs having to organise colleges. This organisational set-up therefore is suboptimal in terms of efficiency and effectiveness. The approval of prospectuses for specialist issuers by national CAs risks complicating the cross-border use of prospectuses and risks being inefficient as many national CAs would have to hire prospectus readers with the skills to deal with these relatively rare types of prospectuses. There is also a risk of supervisory arbitrage as issuers might target national CAs which they consider less demanding in order to get approval for prospectuses. The non-financial information items specialist issuers must disclose in their prospectuses is set out in an ESMA recommendation, not in the implementing measures of the Prospectus Directive. In practise, this can allow for diverging applications by national CAs. There is a similar risk of supervisory arbitrage with regard to the approval of prospectuses for wholesale non-equity securities, asset-backed securities by national CAs as issuers would in most cases be able to choose the competent authority relatively freely.

Finally and in a similar vein, the approval of prospectuses drawn up by non-EU entities in accordance with Regulation (EU) 2017/1129 by ESMA (Articles 32 and 33 of Regulation (EU) 2016/1011) by potentially 28/27 different national CAs carries the risk of supervisory arbitrage and is not very efficient in view of the duplication of resources in different national CAs for a few cases only. Problem 2 has potentially similar consequences as Problem 1. It increases risks for consumers and investors, for market integrity and financial stability. These adverse impacts would become increasingly severe over time when and if markets integrate further and regulatory harmonisation of financial services progresses. 6.3Objectives The overall objective of the ESAs is to promote an effective and efficient supervision of the EU financial system, in particular with regard to cross-border activities and entities, which ensures financial stability and an appropriate protection of consumers and investors and the proper functioning of financial markets in the EU. If these objectives are to be delivered effectively amid an increasingly integrated financial-market environment within the EU, it will be necessary to ensure: ·greater regulatory and supervisory convergence and more effective supervision with better defined powers for the ESAs (S-1); ·that ESAs' powers are coherent with other EU policies (e.g., the CMU) and developments in EU financial integration (S-2) Given that the regulatory framework and institutional architecture have evolved differently in various financial sectors, the nature of the changes in powers will differ among the three ESAs. For example, the creation of the CMU suggests the need for both enhanced powers to drive convergence and more direct supervisory responsibilities for ESMA, while the creation of the SSM and SRM within the BU imply less need for direct supervisory responsibilities for the EBA. Meanwhile, the level of progress in integration and in the insurance/pensions sector is different to that in banking and securities markets and hence the balance of powers between EIOPA and relevant national CAs is also different. Notwithstanding this, the advantages and disadvantages of various options for enhancing powers are otherwise basically the same in the case of the three ESAs. Problems Problem drivers Specific objective 1 Specific objective 2 ESAs cannot make proper use of some powers Some powers are not sufficiently well defined √ √ ESAs powers are inadequate to implement Single Rulebook and support market integration Limited powers to complement national supervisory frameworks √ √ It is important to note that the achievement of these objectives will be closely linked to the problems related to the governance and the funding of the ESAs which are discussed in the following sections. 6.4Policy options and impact analysis Policy option Description 1. No policy action The baseline scenario applies – no change in the current powers of the ESAs. 2. Clarify certain existing powers and strengthen oversight over national CAs Re-define current ESA powers that are not sufficiently clear and broad to allow the ESAs to fulfil their tasks and to achieve their objectives, in particular the promotion of supervisory convergence 3. Option 2 + provide ESMA with additional direct supervisory powers in targeted areas Attribute new powers to ESMA, reflecting the importance of cross-border activities and the growing acquis of Union law in financial services 4. The ESAs as single supervisors in the Union Centralise supervision in the area of financial services at Union level. Option 1 - No policy action. Current powers in relation to regulatory and supervisory convergence tasks remain unchanged; as well as ESMA's direct supervisory responsibilities (baseline scenario). Impacts: If the ESAs cannot have powers to make more progress in regulatory and supervisory convergence in all areas of financial services, participants in highly integrated markets might face a non-level playing field where rules are interpreted and applied differently in different Member States. This could result in higher costs for some market participants and distorted cross-border competition. Investors might be confronted with differences in protection, potentially without noticing this. If the ESAs cannot ensure efficient collection of relevant data, costs would be higher for data contributors and users. CAs might detect problems belatedly or not at all. Problems with access to data were highlighted in the financial crisis in the aftermath of the collapse of Lehman Brothers investment bank. This could create or increase risks in financial markets and, in particular, for retail investors who do not have the possibility to monitor markets themselves but have to rely on the authorities. If cross-border supervision does not keep up with the increase in cross-border activities, it might not be as effective as necessary to protect consumers and investors, as well as market integrity and financial stability. While colleges of supervisors help the exchange of information and should further convergence, their scope and efficiency is limited. The problems regarding data gathering and analysis might be aggravated. This would not only have adverse impacts for consumers and investors directly involved but would undermine trust in the Single Market. In the extreme, undetected risks might endanger market integrity or financial stability. This Option would therefore not help achieving the objectives. It is also not coherent with the Union's objectives to promote market integration and to protect consumers and investors effectively. Option 2 – Clarify certain existing powers and strengthen oversight: The ESA Regulations and/or sectoral legislation could be amended in certain parts in order to ensure that the ESAs can perform their tasks efficiently and effectively. In particular, the ESAs' ability to ensure coherence in supervisory actions and in the application of EU law would be strengthened, by directing the legislator to conferring dispute settlement powers, including powers to take binding decisions, in a broader set of situations, not only upon request by a CA as is the case in many sectoral laws and by making sure that they can access information to investigate alleged breaches of Union law. Enhancing the ESAs powers to ensure that they can access information necessary to pursue their tasks should also be done. Furthermore, the ESAs would be attributed the task of defining and steering supervisory actions of CAs regarding Union law. The ESAs would steer the focus of supervision in financial markets. They would agree on annual working programmes with the CAs and monitor their implementation and compliance with EU level strategic goals and standards. EIOPA's role in supervisory colleges should be strengthened to promote convergence in the assessment and approval of group internal models.

In addition, the ESAs will be tasked to help the Commission in the monitoring of compliance of third countries with equivalence requirements in sectoral legislation after Commission decisions on equivalence under sectoral legislation. This Option would require legislative proposals amending the ESA Regulations and potentially some of the relevant sectoral legislation. Impacts: These targeted changes could be implemented in a transparent and predictable manner based on updates to relevant legislation agreed by co-legislators. These changes would also result in noticeable improvements of the efficiency and effectiveness of the ESAs' work compared to the baseline scenario. They would help ensuring that going ahead with the creation of the CMU and the BU does not result in the "proliferation" of the supervisory gaps or shortcomings identified in the baseline. Closing these gaps by empowering the ESAs to address them would also be consistent and coherent with the Commission's various flagship projects. It would help to ensure consistent application of Union law and avoid the risk of regulatory arbitrage. Clarifications would encourage ESAs to pay more attention to the respective areas and they would probably be more inclined to take action instead of having to lose time in discussions with CAs and/or the Commission to find out if the ESAs are actually empowered to take a certain action. This would close potential loop-holes in EU supervision which exist in the baseline scenario to the benefit of all supervisors and market participants as well as tax payers. Generally the clarifications and redefinitions of certain powers should not result in higher costs for the ESFS as a whole. In some cases there might be a shift of costs from national CAs to the ESAs if the changes were to trigger more activities by the ESAs and thereby reduce the work load of CAs. Overall, such shifts would be expected to result in a reduction of total costs as tasks would not have to be executed by several national CAs but by one of the ESA. An increased role of EIOPA in relation to internal models would ensure a level-playing field among insurance groups as diverging SCRs can result in very different costs for the entities concerned. At the same time it would be much less disruptive than installing EIOPA as the sole authority looking into group internal models. The latter would also risk that approaches in the approval of group internal models and of other internal models might deviate. More consistent approaches to group internal models would also address wider macro-prudential concerns. Insurance policy holders would also benefit from fair competition, undistorted by differences in SCRs. Closer oversight of the supervisory work of national CAs by ESMA would be an important step towards harmonised supervision of capital market participants subject to Union law. While national CAs would still be in charge of, and best placed for, the actual supervision, ESMA could promote best practices and a common implementation of Union law much more effectively. Divergences in the interpretation of Union law could be detected much earlier. However, this would require considerable additional resources for ESMA to gather the necessary high level of technical expertise and appropriate IT tools to manage the exchange of data and information between ESMA and national CAs. Member States would have to agree to a considerable reduction of the autonomy of their national CAs. In comparison with the baseline scenario, Option 2 should lead to greater supervisory convergence and better application and compliance with EU law. As this would also reduce the scope for regulatory/supervisory arbitrage, supervision in the Union would become more effective. Option 3 – Provide ESMA with additional direct supervisory powers in targeted areas. This Option adds upon Option 2, which comprises of horizontal measures concerning all ESAs, by empowering ESMA with the direct supervision over specific products, activities or actors in securities markets, which are already regulated at Union level but are still supervised at national level. As the following areas are characterised by a large share of cross-border activity within the EU, as discussed in the problem description, supervision at national level cannot (always) ensure effectiveness and efficiency, in particular with respect to the impacts the respective activities might have in other Member States than the one of the national CA, the following task could be transferred to ESMA: 1.Authorisation and supervision of data reporting service providers (DRSPs) and a mechanism for trading data compilation from market participants and distribution to competent authorities 2.Authorisation and supervision of European long-term investment funds (ELTIF) and registration and supervision of collective investment undertakings or managers, as appropriate, referred to in the EuSEF Regulation and in the EuVECA Regulation 3.Supervision of administrators of critical benchmarks 4.Approval of prospectuses for wholesale non-equity securities admitted to trading on a regulated market or its specific segment to which only qualified investors can have access, asset-backed securities and specialist issuers, and control of all related marketing materials disseminated in the Member States where such prospectuses are used 5.Approval of EU prospectuses drawn up by non-EU entities in accordance with Regulation (EU) 2017/1129 and control of all related marketing materials disseminated in the Member States where such prospectuses are used 6.Recognition and approval of endorsement of third country benchmarks Impacts: The impacts described for Option 2 would apply here as well. In addition, the following general impacts are expected: Generally, the centralisation of certain tasks and powers, in particular those related to areas with a high degree of cross-border activities within the EU would lead to considerable gains in efficiency and effectiveness of supervision across the EU compared to the baseline scenario: In these more integrated parts of the financial services sector, centralisation of supervisory activity would promote market integration by reducing the costs of compliance for market participants as they would only have to deal with one supervisor while they currently often have to deal with national CAs in all Member States in which they want to market their products or services. Costs of supervision for national CAs would also be reduced as the number of entities, products or activities they have to supervise would be reduced. ESMA's costs would increase less than the significant savings from economies of scale and specialisation. Also, when defining a response to prudential risk, a national CA might not take the EU-wide impacts fully into account or might not avail itself of all the necessary information and data this would render supervision less effective. By attributing the supervision of certain actors or activities of a primarily or almost exclusively cross-border nature to ESMA similar effects would also be achieved within the EU. Similar to the case of credit rating agencies and trade repositories, ESMA would be charged with the supervision of certain activities which are almost exclusively provided across borders. This would reduce compliance costs and administrative barriers while enhancing the quality of supervision and contribute to the well-functioning of capital markets in general, to the opening up of new opportunities in the single market for investors, and to an improved access to finance.

Supervision would be improved as ESMA would have all relevant information about supervised entities or financial products at hand for the entire EU. It would be much better placed to identify risks building up in the EU. This should increase confidence in the CMU by market participants and preserve financial stability. The specific impacts of the proposed changes can be described as follows: 1. Authorisation and supervision of data reporting service providers (DRSPs) and enhanced data gathering powers Direct supervision of these data providers would spare national CAs from having to supervise a small number of entities across Member States. As the data is typically used by market participants and CAs across the EU and not only in individual Member States there is no important need for the supervisor to be close to the data provider. As many APAs are likely to be entities set up by trading venues which are as such supervised nationally, a possible drawback of this option is that there is a risk that supervisory disputes might arise in this specific case as parts of a group might be supervised for some activities by the national supervisor and for others by ESMA. However, since trading and data provision activities are expected to be kept in in different entities, it should be easy for the supervisors involved to develop appropriate working arrangements. At the same time, the risk of having data stored in different formats in different Member States would be prevented. ESMA as central supervisor could better compare business practices and work towards best practices. Users of data across the EU (and beyond) could rely on fully harmonised approaches to supervision. In summary, supervision should be more efficient and effective if data providers were supervised by ESMA than if they were supervised nationally. Finally, by conferring powers to collect trading data directly from market operators, ESMA would be a more efficient hub for compiling and processing and distribute trading data from across the EU necessary to design and apply technical rules and to monitor compliance with various transparency and reporting obligations. Market operators, end users and competent authorities would greatly benefit from such efficiencies since the current system of data distribution from multiple points (market operators) to multiple points (competent authorities) would be changed to a single flow of data via ESMA. 2. Authorisation and supervision of ELTIF and registration and supervision of EuSEF and EuVECA The objective of the EuVECA/EuSEF and ELTIF Regulations is to boost jobs and growth, SME financing, social and long-term investments but also to promote an EU investment culture. An appointment of a single EU supervisor would be fully in line with this objective and would further facilitate the integration and marketing of such funds across borders. Beyond this, single supervision would also address concerns regarding alleged differences in supervisory cultures and performance of different national competent authorities. The three funds are governed by EU sectoral regulations with no room for Member States' implementation gold plating. As a potential drawback, some managers could manage next to EuVECAs, EuSEFs or ELTIFs other funds such as UCITS. Thus, they would need to be involved not only with ESMA but also with national CAs. However, already now managers may launch funds in different Member States, thus, are obliged to deal with different national CAs. 3. Supervision of administrators of critical benchmarks Having ESMA as the single supervisor of administrators of critical benchmarks would allow it to pool experience and to immediately trace potential adverse developments in the evolution of these benchmarks which are crucial for the EU economy and financial stability. All administrators of critical benchmarks would face the same approach of supervision. Users of critical benchmarks across the EU and beyond could rely on consistent and coherent supervision of such benchmarks. 4. Approval of prospectuses for wholesale non-equity securities, asset-backed securities, specialist issuers Specialist issuers (e.g., property companies, mineral companies, shipping companies) are a rare category where the relevant "sector" expertise could be consolidated with ESMA. As there are only relatively few prospectuses of specialist issuers, centralising the scrutiny of such prospectuses would allow building up expertise within ESMA. National CAs would not have to provision such expertise which is then hardly used and might therefore not always be developed in an optimal way. These types of issuers are typically required to disclose non-financial information items of a very specific nature (e.g. valuation of real-estate portfolio, details of mineral resources and reserves, anticipated mine life, details of patents and progression of product testing), which in turn requires skilled prospectus readers to scrutinise this information efficiently. In view of their low number, the scrutiny of prospectuses of specialist issuers would not represent a major shift in terms of resources from national CAs to ESMA. Issuers would benefit as the ESMA prospectus readers would have a greater expertise, which would result in a swifter approval of prospectuses and in a more uniform level of quality of the scrutiny. This would facilitate cross-border use and ensure a level playing field among issuers. Investors would also benefit if a persistently high level of supervisory quality could be ensured. National CAs could free up resources which they otherwise would have to invest in these specific prospectus approvals. At the same time, some of them might consider this loss of competences as an adverse impact. Charging ESMA with the approval of certain wholesale prospectuses (admitted to trading on a regulated market or its specific segment to which only qualified investors can have access) and of ABS prospectuses could result in a significant streamlining of approval procedures, a reduction of the timeline for approvals and a welcome concentration of strategic expertise with ESMA as in particular ABS is a complex type of securities. While the personnel implications of a move toward central ESMA approvals of certain wholesale and ABS prospectuses could be considerable, such a move would represent a unique opportunity to establish ESMA as a centre of expertise in the approval of CMU strategic prospectuses. The impacts on issuers and investors would be similar to those for the other 'smaller' types of prospectuses. The impact on national CAs, however, would be bigger as their workload would be reduced. Here as well the loss of competence could be seen as an adverse impact. ESMA would require additional resources in terms of personnel, office and IT equipment and office space. When offering securities to the public or requesting admission of securities to trading on a regulated market, issuers usually disseminate advertisements to the public in the form of marketing materials, in addition to the prospectus. The Prospectus Regulation requires the contents of such advertisements to be accurate, not misleading and consistent with the corresponding prospectus, and competent authorities are empowered by Regulation (EU) 2017/1129 to control the compliance of advertisements with this principle. As the supervision of advertisements related to prospectuses is currently an integral part of the role of competent authorities under Regulation (EU) 2017/1129, it is also logical to transfer to ESMA such a task in relation to all the aforementioned prospectuses whose approval is conferred to ESMA. To perform such a task, ESMA will need adequate staff resources with sufficient knowledge of the relevant national rules on consumer protection. Concentrating at ESMA level the control of advertisements for those prospectuses will ensure a level playing field and a consistent approach irrespective of where the advertisements are disseminated, and thus a high level of consumer protection. 5. Approval of prospectuses drawn up by non-EU entities in accordance with Regulation (EU) 2017/1129 and recognition and approval of endorsement of third country benchmarks As the BMR is only applicable as of 1 January 2018 and as third country benchmarks can be used in the EU until 1 January /2020 without authorisation or registration, only a few CAs in the EU will have experience with the supervision of such benchmarks in the next years. The endorsement or recognition of third country benchmarks by ESMA would therefore avoid that national CAs have to develop and maintain capacities for these tasks. Such capacities would instead be pooled in one authority which would allow to benefit from economies of scale and to exploit learning curves. This would ensure a harmonised approach vis-à-vis administrators of third country benchmarks, their contributors and their users in the EU. The risk of regulatory arbitrage, e.g., by influencing the determination of the Member State of reference through the choice of the entity requesting endorsement, would be eliminated. In its role of CA for third country benchmarks ESMA could deepen its relationships with third country supervisors. This would make cross-border cooperation more efficient and effective. ESMA would gather valuable experience which would allow it to better represent the EU's interests in international fora. Also, in view of the United Kingdom leaving the EU, a smooth but reliable third country regime would be crucial to ensure that the use of third country benchmarks by supervised entities in the EU is not unnecessarily disrupted once the transitional period of the BMR expires. The approval of prospectuses drawn up by third country issuers entities in accordance with Regulation (EU) 2017/1129 by ESMA, and the control by ESMA of the corresponding advertisements disseminated in the Union by such third country issuers, would ensure a fully harmonised approach vis-à-vis third country issuers, would avoid cumbersome procedures to identify the relevant 'home Member State' and therefore would prevent forum-shopping. Third country issuers would have a single point of contact in the EU and would not need to deal with several national CAs if they offer different securities in different Member States.

For both tasks ESMA would require considerable additional resources. However, as this transfer of tasks would reduce the workload of national CAs, the total costs for supervision are not expected to go up by the full amount needed by ESMA. Yet, ESMA and national CAs would have to provision resources for the same tasks (but different issuers) in parallel. This might eliminate some of the savings which might result from a specialisation at ESMA in the respective regulatory and supervisory regimes in third countries and potentially smoother working arrangements with CAs in these countries. Overall, this Option would obviously have strong direct impacts on ESMA. Its role in the supervision of market participants in financial services would increase considerably. To fill this role it would require considerable additional human and financial resources and would have to build up expertise in the respective areas. As some of the areas covered are not regulated to date or are being reformed currently, it is not possible to provide precise estimates of these resource needs. Based on experience of national CAs, it can be estimated that the tasks in relation to prospectuses would require about 15-20 FTE prospectus readers. While there is no reliable evidence regarding European investment funds per se data on the relation between the number of supervisors and the number of supervised funds in various national CAs suggests that 5 to 10 FTE would be necessary to supervise about 130 European investment funds. These very rough estimates suggest that ESMA would require probably around 100 FTE for the specific task of direct supervision. To this one would have to add the related overhead share and specialist support in the form of lawyers, accountants, etc. Such an increase in head count would at the same time require a considerable extension of ESMA's office space and office and IT equipment. But given the rapid growth of ESMA in the last years and that it is already the supervisor of credit rating agencies and trade repositories in the Union, it can be assumed that it could build on experience gained when it had to deal with these additional tasks. It has to be stressed, however, that resulting financial needs of ESMA do not represent an equal increase in the costs of supervision of the respective activities but rather a partial shift of costs from national CAs to ESMA. In many cases, it can be assumed that the centralisation of supervision should lead to efficiency gains and therefore net cost reductions. Given that most national CAs are currently financed by the financial industry and provided that the direct supervision by ESMA would also be financed through fees as was the case of CRAs and TRs, costs to industry should not increase. For more detail on the various funding sources of the ESAs see chapter 8. An advantage of this Option would be that it could be implemented incrementally. The transfer of powers in certain areas from national CAs to the ESAs would reflect the progress in market integration in the respective sector. If the ESAs were granted new direct supervisory powers within the EU, this option would require a substantial increase in the budgetary and human resources of the ESAs in light of the extent to which supervisory powers would be transferred to them. This would potentially require a transitional period to allow the ESAs to equip themselves with the necessary skills and expertise. As they would potentially supervise entities in all Member States they would also have to enlarge their pool of language skills to be in the position to communicate with citizens and retail investors in all Member States. They might, at least in some areas, also have to acquire a certain degree of competence with regard to related national law, e.g., company law. A disadvantage of this Option when compared with the baseline scenario would be that some actors might be supervised by an ESA for some of their activities and by national CAs for others. This could create additional costs especially for smaller market participants which are active only in one or a few Member States and require additional coordination between these supervisors. Smaller market participants, and in particular citizens, might consider dealing with a central supervisor in a location potentially far away from their home Member State and not as familiar with the local language and context as the national CA as less convenient than the status quo (baseline scenario). Larger and internationally active entities, on the other hand, would most likely benefit from such centralisation and prefer this option over the baseline scenario. Stakeholder views on this option are split. Respondents to the ESA public consultation have explicitly supported the direct supervision at EU level of CCPs and of DRSPs which service the whole EU rather than specific national markets. Some also responded to the idea to put European investment funds under supervision by ESMA and partially supported it. Many respondents did not reply to the question on direct supervision. Replies to the question as to whether ESMA should be entrusted with direct supervision of pan-European collective investment funds mostly do not distinguish the different types of funds as proposed in this impact assessment report. Views expressed against consolidation of ESMA supervision mainly refer to the following arguments: national based supervision was considered best suited to deal with the different market structures of Member States. Supervision by ESMA would 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 were 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 were: some respondents recognised potential merits in ESMA supervision over entities or instruments with a pan-European dimension which would allow coordination of supervisory practices, taking into account different market structures and thus, reflecting the principles of subsidiarity and proportionality. They considered that such solutions were appropriate to address the problem of fragmentation and inefficiencies of current regime as well as regulatory arbitrage and divergent application of EU rules. Finally, this option would be subject to the limits imposed by primary law, as interpreted by the Courts, on the delegation of powers to EU bodies, as opposed to EU institutions. Whether these limits are complied with in the present context must be judged notably in light of the breadth of discretion the substantive rules imply, as regards action by supervisory authorities. Option 4 – Turn ESAs into single supervisors in the EU: The supervision of financial services, banking and insurance would be centralised in the three ESAs. This option has already been discussed in the 2009 impact assessment and discarded at that time. However, with the creation of the SSM in 2013, a step in this direction has already been taken in the field of banking where the ECB has been installed as the single supervisor of banks in the euro area and in Member States which have joined the SSM. In light of the developments discussed under Problem 2, it seems appropriate to reconsider this assessment. The single supervisors could be organised as strictly central units or partially decentralised with offices or branches in all Member States either serving as contact points for (retail) investors and potential complainants as well as the supervised entities, or (partially) performing the supervision on the spot. Also the model of the SSM could be envisaged, where supervisory competence is centralised but the national CAs continue to exist and contribute to the functioning of the supervisory mechanism in different degrees depending on whether the supervised entity is more or less significant. This option would require legislative proposals amending the ESA Regulations as well as all relevant sectoral legislation. Impacts: This Option would reduce costs of supervision considerably because it would no longer be required that competencies for all supervisory tasks in all areas are ensured separately in all Member States and because of a reduction of costs of coordination among CAs and with ESAs. It would exploit economies of scale to the full and avoid the duplication of tasks. However, transition costs could be considerable as ESAs would have to build up human capacities and would need much more office space. Depending on the funding of the regime (see section 8) the absolute expenditure for the EU Budget could increase considerably while total costs for Member States would most likely be reduced in comparison with the baseline scenario. For legal reasons, these advantages would not in fact be available in full. As mentioned above, delegation of powers to an EU body is subject to the limits imposed by primary law. The greater the number of sectors covered, the higher the likelihood that, among the substantive rules concerned, there are some at least that could not be subject to direct supervision by an EU body (as opposed to an institution). At this point in time, difficulties would also result from the degree of harmonisation of the material regulatory requirements in some sectors. To illustrate, the SSM as a single superviory mechanism was created in an area where material requirements are largely fully harmonised in directly applicable regulations; nevertheless, reamining areas where material requirements are still implemented through national law or where directly applicable Regulations entail national options and discretion have led to inefficiencies in the SSM's operations. Even if legally possible, this Option would imply that the pros and cons of Option 3 would be extended to all sectors and actors: major international actors would probably be the main beneficiaries while smaller financial actors and retail investors might suffer from a lack of proximity of the supervisor to the market. Member States and their CAs would have less direct influence on the financial sector in their jurisdictions. Overall, this option seems to go beyond the optimal degree of centralisation required as some supervisory tasks are better performed by a supervisor close to the idiosyncracies of the regulatory framework at national level and close to the local market itself. This holds true for example for a local investment firm or bank serving only clients in a local market. Full centralisation seems inappropriate in such a scenario. A "hub and spokes" system like the SSM could, while achieving full coherence in the supervisory work, mitigate the problem of remoteness from the market but would find it difficult to overcome a lack of regulatory harmonisation. Some stakeholders also raised the questions of accountability and liability of single supervisors. Comparing the options Table 61. Comparison of policy options against effectiveness and efficiency criteria Objectives Policy

options EFFECTIVENESS EFFICIENCY (cost-effectiveness) Objective 1: supervisory convergence and more effective supervision Objective 2:

enhanced investigations and control of compliance Option 1:

No policy change 0 0 0 Option 2 + + + Option 3 ++ ++ ++ Option 4 + ++ + Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable In comparison to Option 1 (baseline scenario), Option 2 would not significantly improve the allocation of powers between CAs and ESAs. It would nevertheless be helpful as it would avoid supervisory gaps and allow ESAs to achieve their objectives. This in turn would make their work more efficient and effective. This Option, while in principle coherent with the overall objectives of the EU's policy in the area of financial services, is reaching its limits in view of the full harmonisation of capital markets. As for the Banking Union, sheer coordination at Union level seems no longer sufficient to ensure an efficient and effective supervision of international players and products in the CMU. Option 3, additional direct supervisory powers for the ESAs, would achieve both objectives much better than Option 1 and also than Option 2. It would therefore also be more efficient and effective, in particular when introduced incrementally in areas showing clear benefits of central supervision. It is more effective than Option 2 as it avoids the increasing risks of adverse cross-border impacts going unnoticed by national CAs and more efficient as it exploits economies of scale. This Option would also be coherent with the overall objectives of the EU's policy in the area of financial services but would have to be carefully calibrated in its interactions with the SSM. Option 4, single supervisors, would most likely have significant positive and adverse impacts which might net out to a large extent. While, for example, the centralisation of all supervisory powers would shift the supervision of relevant cross-border and non-EU activities to a more appropriate level, it might at the same time move the supervision of smaller actors and purely national activities too far away from the optimal level. This could compromise the effectiveness of supervision. Similarly, there would efficiency gains in some areas, e.g., data collection and analysis and supervision of major actors, but there would also be risks of losses in efficiency if tasks were first centralised but had then to be delegated back to local offices. In the current context, this Option might therefore not be fully coherent with the overall objectives of the EU's policy in the area of financial services. For the current situation, Option 3 is therefore the preferred option. It could, however, be envisaged that in the long term Option 3 would pave the way for a single European capital markets supervisor.

7Governance 7.1State of play The three ESAs currently have an identical governance structure which comprises: (i) a Board of Supervisors; (ii) a Management Board; (iii) a Chairperson; and (iv) an Executive Director. The Board of Supervisors is the main decision-making body of each ESA. It consists of the Chairperson, the head of the national CA in each Member State, and one representative each from the Commission, the ESRB, the other two ESAs, the EEA-EFTA States and the EFTA Surveillance Authority. Only the representative of the national CAs can vote. National CAs, which are integrated supervisors, participate in more than one ESA. Decisions by the Board of Supervisors are generally taken by simple majority. However, QMV is used in the case of "regulatory decisions" under the founding regulations (Articles 10 to 16 of the ESA Regulations), such as decisions relating to RTSs and ITSs, guidelines (Article 16) and recommendations, budget matters, and in cases of a decision to prohibit or restrict certain financial activities. The rationale for using QMV in the case of regulatory tasks is their similarity to legislative tasks, for which decisions are taken in the Council with QMV. For decisions taken in relation to "non-regulatory" tasks (e.g. Breach of Union law processes, dispute-settlement, peer reviews) simple majority voting applies. Where ESMA has direct supervision powers (currently CRAs and TRs), simple majority voting applies. The voting system within the EBA was modified after the creation of the SSM to better take into account Member States which do not participate in the BU. For instance, some EBA decisions require, in addition to the general majority requirements, a simple majority of national CAs participating in the SSM and a simple majority of national CAs not participating in the SSM, respectively ("double simple majority"). The regulation also foresees a mechanism to ensure that this system remains workable when the number of non-participating Member States decreases, as would be the case if more Member States join the Banking Union, or as the UK leaves the EU. In addition, the Regulation foresees that the Commission should review the voting arrangements when there are less than 4 non-Banking Union countries. The Management Board is composed of the Chairperson and six members of the Board of Supervisors. It is mainly in charge of the ESA's work programme but also plays a central role in the adoption of the budget. An Executive Director and a representative of the Commission participate as observers and the Commission has a right to vote on budget matters. The Chairpersons of the ESAs' Boards of Supervisors are appointed by the Board of Supervisors following an open selection process and a hearing before Parliament. The Chairpersons' formal tasks comprise the preparation of the work of the Boards and chairing the Board meetings. They do not have voting rights. 7.2Problem definition The analysis has been treating the ESAs symmetrically in terms of problem definition and policy options. This is justified by the fact the ESAs have a symmetric governance structure. However, there exist some specificities among the ESAs, notably the differing tasks that ESAs have (i.e. the governance of direct supervision of certain market segments for ESMA), or specific governance features (e.g. the voting system that was introduced in the EBA to reflect the creation of the SSM). Some further differentiation may therefore be warranted, to better take into account the different mandates and tasks of the three ESAs. This will be highlighted throughout the text. An optimal governance structure should allow the decision-making bodies of the ESAs to fully achieve their objectives by making full and appropriate use of their powers with a view to ensuring that financial supervision in the EU is consistent and coherent. Under such a structure, the ESAs should first of all have a sufficiently broad and EU-wide perspective to be in a position to identify shortcomings and, secondly, be willing to address them by using their powers. The objectives of the ESA Regulations can only be achieved if both conditions are met. The main issue with the current governance structure of the ESAs is that there is an inherent misalignment of incentives within the decision-making bodies of the ESAs, which may lead to conflicts of interests and limits the development of an EU perspective in favour of a national one. The scope for such conflicts of interest is set to increase as progress in integration proceeds across all financial sectors and notably in securities market in the context of the CMU. When the ESAs were established, it was decided to maintain a key role for national CAs within their governance structure, while specifying in the legislation that members of the Board of Supervisors and of the Management Board should act independently and in the sole interest of the Union as a whole. This would prevent conflicts of interests. For example when voting on dispute settlement issues, the representatives of CAs involved would be expected to vote in different directions, thus eliminating each other. However, the initial governance structure of the ESAs did not provide for other safeguards to ensure that this would be achieved in practice. In particular it did not include specific structural provisions to preclude risks of conflicts of interest. This is an issue because decisions are exclusively taken by national representatives on the Boards of Supervisors, who have to combine their mandate within the ESA with their national mandate as heads of national CAs. As a result of this double mandate they may have conflicting interests, notably as regards dec