Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank - Regulating financial services for sustainable growth
Date: 2010-06-02
Institutions: European Commission
Subjects: consumer protection, economic recession, economic stabilisation, financial institution, financial policy, monetary crisis

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EUROPEAN COMMISSION 

Brussels, 2.6.2010 
COM(2010) 301 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE EUROPEAN CENTRAL BANK 

REGULATING FINANCIAL SERVICES FOR SUSTAINABLE GROWTH  

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE EUROPEAN CENTRAL BANK 

REGULATING FINANCIAL SERVICES FOR SUSTAINABLE GROWTH  

(Text with EEA relevance) 

1. 

CONTINUING THE REFORMS  

Since the beginning of the crisis in 2008, the Commission and EU governments  have taken 
the necessary urgent action to safeguard the stability of the financial system including through 
substantial injections of public money into the banking sector and accompanying measures to 
ensure that banks consolidate their capital positions.  

A  safer,  sounder,  more  transparent  and  more  responsible  financial  system,  working  for  the 
economy and society as a whole and able to finance the real economy, is a precondition for 
sustainable  growth.  It  is  the  essential  complement  to  the  efforts  Europe  is  undertaking  to 
consolidate  public  finances  and  undertake  the  structural  reforms  that  will  deliver  a  vibrant 
economy in the future. A healthy financial services sector should underpin the Europe 2020 
strategy,  ensuring  Europe's  businesses,  and  notably  SMEs,  can  invest  for  growth  and  its 
citizens can plan with confidence for the future. Regulation of financial services needs to be 
complemented by an ambitious reform agenda for growth, based on the internal market.  

Beyond  the  immediate  responses,  the  Commission  has  been  working  to  complete  a 
comprehensive financial reform to address short-termism, poor risk management and a lack of 
responsibility of certain actors in the financial sector and to correct the underlying weaknesses 
in  the  supervisory  and  regulatory  framework.  Significant  progress  has  already  been  made, 
allowing Europe to lead international efforts at G20-level.  

Recent  market  turbulence  has  confirmed  the  need  to  advance  swiftly  to  complete  the 
necessary  reforms  to  ensure  the  soundness  and  stability  of  the  financial  system  at  the 
European and global level. 

The next six to nine months will be critical.  

The Commission will therefore present the vast majority of the remaining regulatory reform 
proposals to the Council and European Parliament by the end of the year and the last proposal 
will be delivered within nine months from now. According to better regulation principles, the 
proposals  are  being  prepared  after  stakeholder  consultation  and  impact  assessments.  The 
cumulative  effects  of  the  various  measures  on  the  financial  sector  as  well  as  on  the  real 
economy must be fully taken into account. Such considerations will be fully reflected in the 
impact assessment and in the calibration of the various measures. In this context, the outcome 
of the  work already underway  in  the  Financial Stability Board and the Basel Committee on 
the cumulative effects of financial sector reform will be fully taken into account. 

The  Commission  will  press  for  the  rapid  adoption  of  these  measures  so  that  Europeans  can 
regain full confidence in the soundness of the financial system as one of the pillars for growth. 

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The European Union must move forward to complete the reform agenda by the end of 2011, , 
not  only  to  safeguard  financial  stability  and  investor  protection,  in  particular  through 
responding to the new challenges exposed in recent market developments, but also to preserve 
and  develop  the  single  market  and  resist  pressure  for  protectionist  responses  at  the  national 
level.  

The EU has taken a leading position in shaping the international response to the crisis. In the 
next six months, the G20 is scheduled to agree on the broad contours of a new global financial 
architecture for systemically important financial institutions, measures for crisis management 
and for a stronger capital framework. The EU is determined to shape this process and ensure 
that other key players step up to the challenge. 

Measures already adopted 

The Commission responded swiftly to the financial crisis (see Annex 2 for a complete set of 
measures taken). In November 2008 it mandated a group chaired by Jacques de Larosière to 
examine  possible  improvements  to  supervision  and  regulation.  Reacting  to  the  situation  in 
2008,  the  Directive  on  Deposit  Guarantee  Schemes1  and  the  Capital  Requirements 
Directive2 were revised swiftly. A regulation on Credit Rating Agencies3 was adopted and the 
Commission has presented two Recommendations on remuneration principles4. In a number 
of  areas,  the  EU  has  shown  international  leadership  by  proposing,  for  example,  a  macro-
prudential  risk  board  for  the  issuing  of  risk  warnings,  retention  requirements  for 
securitisation and reform of capital requirements for the trading book. The EU is committed 
to achieving convergence as far as international accounting standards are concerned. 

2. 

NEED TO COMPLETE THE WORK IN PROGRESS  

The  Commission  was  quick  to  respond  to  the  recommendations  of  the  De  Larosière  report, 
presenting a series of important legislative proposals within a matter of weeks during summer 
2009.  Several  of  these  key  proposals  presented  by  the  Commission  are  now  still  awaiting 
approval by the Council and the European Parliament.  

To  reform  the  EU's  supervisory  architecture,  the  Commission  has  proposed  a  European 
Systemic  Risk  Board5,  which  will  ensure  that  macro-prudential  and  macro-economic  risks 
are detected sufficiently early, and three European Supervisory Authorities6 responsible for 
banking, insurance and securities market, which will ensure reinforced supervision and better 
co-ordination among national supervisors.  

A well-functioning internal market for financial services presupposes stringent, efficient and 
harmonised rules for all operators, coupled with an effective supervisory framework, strong, 
dissuasive  sanctions  and  clear  enforcement  mechanisms.  The  proposed  new  supervisory 
architecture  will  provide  the  backbone  for  reinforced  cooperation  and  a  more  harmonised, 
European  supervision,  allowing  a  holistic  supervisory  view,  including  of  macro-economic 

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1994/19/EC as amended by 2009/14/EC. 
Directive 2006/48/EC. 
Regulation(EC) No 1060/2009 (OJ L 302, 17.11.2009, p. 1).  
C(2009) 3159 and C(2009) 3177, both of 30.4.2009. 
COM(2009) 499, 23.9.2009. 
European  Banking  Authority  -  COM(2009)  501  -  European  Insurance  and  Occupational  Pensions 
Authority (COM(2009) 502 final), European Securities and Markets Authority - COM(2009) 503 -, all 
dated 23.9.2009. 

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factors. Once up and running the new European Supervisory Authorities will be instrumental 
in developing technical standards, creating a real Single Rule Book.  

It is now urgent to reach agreement before the summer break so that the new authorities can 
be  up  and  running  in  2011.  The  Commission  is  actively  working  to  find  a  compromise 
between  Council  and  Parliament  which  will  respect  the  positions  of  both  institutions, 
ensuring, however, that the new Authorities have the effective powers they need.  

With  regard  to  alternative  investment  fund  (including  hedge  funds)  managers,  the 
proposed  Directive7  will  create  a  comprehensive  and  effective  regulatory  and  supervisory 
framework  at  the  European  level,  providing  robust  and  harmonised  regulatory  standards  for 
all  managers  and  enhancing  transparency  towards  investors.  It  is  important  to  reach  an 
agreement  soon,  in  particular  with  regard  to  the  treatment  of  managers  and  funds  in  third 
countries, maintaining a level playing field whilst ensuring a high level of investor protection.  

Binding rules on remuneration and enhanced capital requirements for trading book positions 
will  come  into  force  once  there  is  agreement  on  the  third  revision  of  the  Capital 
Requirements  Directive  (CRD  III)8.  As  for  the  trading  book  requirements,  a  convergent 
global  implementation  is  needed.  To  this  end,  the  Commission  is  working  in  a  constructive 
manner with the international key partners.  

The Commission is working actively with the co-legislators to reach agreement on all of these 
files before the summer break. 

3. 

FORTHCOMING PROPOSALS 

The  Commission  will  complete  its  full  financial  reform  programme  in  the  coming  months, 
articulated  around  four  main  principles:  enhanced  transparency,  effective  supervision  and 
enforcement (where substantial progress has already been made as set out above), enhanced 
resilience  and  financial  stability,  and  finally  strengthened  responsibility  and  consumer 
protection. These principles are intrinsically interlinked and the fundamental objectives of the 
reforms can only be achieved if these main principles are approached together in a coherent 
manner.  Many  of  the  proposals  listed  below  fulfil  objectives  relevant  to  several  of  the 
principles.  

The complete set of planned measures with estimated adoption dates are set out in annex 1.  

1. Enhanced transparency 

Transparency  is  indispensible  for  well-functioning  markets  and  trust  and  mutual  confidence 
between market participants. The lack of transparency regarding certain transactions, products 
and  market  participants  was  one  factor  that  contributed  to  the  recent  crisis.  Consequently, 
enhancing transparency is one of the overarching objectives of the EU's financial reform. But 
proper  and  reliable  information  for  supervisors,  the  investor  community  and  the  general 
public about the operation of financial markets and the interlinkage between different actors is 
one important means to promote a more stable and more sound financial system, which is less 
inclined to short-termism, excessive risk-taking, and pro-cyclical behaviour.  

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COM(2009) 207. 
COM (2009) 362. 

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A  first  Regulation  on  Credit  Rating  Agencies9  (CRAs)  was  adopted  in  2009  in  order  to 
respond  to  major  weaknesses  in  the  activities  of  credit  rating  agencies.  Both  regulators  and 
credit rating agencies are preparing for implementation of these rules by 7 September 2010. 
The Regulation has introduced mandatory registration for all credit rating agencies operating 
in the EU and put in place a number of rigorous requirements to ensure that proper oversight 
and regulatory standards apply, diminishing conflicts of interest.  

There is an emerging view in Europe and internationally that the deficiencies in the current 
rating processes, as exposed by the crisis, have not yet been sufficiently addressed. The lack 
of competition in the rating industry is a particular concern. Without favouring any particular 
option at this stage, the Commission is examining structural solutions including the need for 
an independent European credit rating agency or stronger involvement of independent public 
entities in the issuing of ratings. 

Specific  attention  is  needed  with  regard  to  sovereign  debt  so  as  to  ensure  that  the  methods 
used are appropriate. The lack of due diligence by banks and other financial institutions and 
the  lack  of  alternative  "benchmarks"  in  order  to  assess  investment  reliability  also  merit 
particular attention. The current regulatory structure in which credit ratings are embedded in 
financial regulation needs thorough review.  

The Commission will present its conclusions on all these issues in September.  

In  the  summer,  the  Commission  will  propose  legislation  to  improve  the  functioning  of 
Derivatives Markets. This will be instrumental in increasing transparency on a market which 
is important but currently very opaque. The proposal will strengthen the EU's financial market 
infrastructure,  promote  the  standardisation  of  derivatives  contracts  and  develop  central 
clearing parties for derivative contracts to substantially reduce risk. It will provide access to 
information in trade repositories about all kinds of transactions for all European supervisory 
authorities.  

Moreover,  the  Commission  will  propose  improvements  to  the  Markets  in  Financial 
Instruments  Directive  (MiFID)10  in  order  to  strengthen  pre-  and  post-trade  market 
transparency and bring more derivatives onto organised trading venues.  

2. Effective supervision and enforcement  

The  proposed  new  supervisory  architecture  referred  to  above  is  one  crucial  step  towards 
improved  and  more  effective  supervision.  However  supervision  must  be  ensured  through 
effective enforcement mechanisms, including where needed sanctions to promote responsible 
market behaviour and where appropriate to tackle irresponsible and excessive speculation.  

On 2 June, the Commission proposed a revision of the Credit Rating Agencies Regulation11 
to  introduce  centralised  EU  oversight  of  credit  rating  agencies,  entrusting  the  European 
Securities  and  Markets  Authority  (ESMA)  with  exclusive  supervisory  powers  over  credit 
rating agencies registered in the EU.  

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Regulation (EC) No 1060/2009 (OJ L 302, 17.11.2009, p. 1). 
Directive 2004/39/EC, (OJ L 145, 30.4.2004, p. 1), as amended by Directives 2006/31/EC 2007/44/EC 
and 2008/10/EC. 
Regulation (EC) No 1060/2009 (OJ L 302, 17.11.2009, p. 1). 

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Whilst  the  deterrent  effect  of  sanctions  is  a  necessary  part  of  the  good  functioning  of  any 
sector,  sanctions  in  the  financial  sector  are  largely  unharmonised,  leading  to  diverging 
practices  among  national  supervisors.  The  Commission  will  tackle  this  issue  through  a 
thorough  revision  of  existing  sanctioning  powers  and  their  practical  application.  As  a  first 
step, the Commission will present a Communication on sanctions in the financial services 
sector to promote convergence of sanctions across the range of supervisory activities.  

3. Enhanced resilience and stability of the financial sector 

Enhancing resilience and stability is a holistic exercise that must be done through a number of 
complementary  measures.  Improved  resilience  starts  with  higher  capital  standards  and  must 
be coupled with increased transparency rules, reinforced supervision and enforcement. It also 
requires  a  significantly  improved  risk  culture  and  corporate  governance  at  all  levels  of  a 
company.  As  a  last  piece  of  the  puzzle,  a  complete  set  of  tools  on  crisis  prevention  and 
management needs to be in place. 

Following  intensive  work  in  the  Financial  Stability  Board  (FSB),  the  G20  and  the  Basel 
Committee,  amendments  to  the  Capital  Requirements  Directive12  (CRD  IV)  will  be 
proposed by the Commission in order to improve the quality and quantity of capital held by 
banks, introduce capital buffers and ensure the build up of capital in good times which may be 
drawn  on  in  more  adverse  economic  conditions.  The  directive  will  also  address  excessive 
reliance on leverage and introduce an effective liquidity regime. The proposal for legislation 
on derivatives  referred to already will also strengthen resilience though robust requirements 
for Central Counterparties that clear OTC derivatives. 

The recent crisis has shown that crisis prevention has to start inside companies, involve more 
active  and  responsible  shareholders  and  managers  and  rely  on  reinforced  internal  control 
systems13..  

A  comprehensive  crisis  management  framework  has  to  be  in  place  when  other  lines  of 
defence have proved insufficient. In October the Commission will publish an action plan on 
crisis management leading to legislative proposals for a complete set of tools for prevention 
and  resolution  of  failing  banks.  This  will  ensure  that  public  authorities  are  able  to  resolve 
failing financial institutions whilst minimising the impact of failures on the financial system, 
limiting damage to the economy and the use of public sector resources. A Communication on 
options for bank resolution funds, in order to finance resolution of banks, was presented  by 
the Commission on 26 May14.  

Finally, the Commission will continue to work towards global convergence around one set of 
high  quality  international  accounting  standards  as  a  fundamental  building  block  for 
enhanced financial stability.  

4. Strengthened responsibility and consumer protection: 

One  major  lesson  to  be  drawn  from  recent  market  developments  is  the  need  to  restore  the 
confidence  of  consumers  and  investors  in  financial  markets  by  taking  firm  action  against 

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Directive 2006/48/EC. 
To this end, the Commission is adopting, simultaneously with this Communication, a Green Paper on 
Corporate Governance in financial institutions and remuneration policy, launching a consultation on a 
wide range of corporate governance and remuneration issues. 
COM(2010) 254. 

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those  actors  who  abuse  the  system.  The  regulatory  framework  must  provide  the  right 
incentives  to  curtail  excessive  speculative  and  risky  behaviour  and  make  sure  that  the 
financial services sector works for the benefit of citizens and the real economy. 

The  Commission  will  propose  appropriate  measures  on  short  selling  and  credit  default 
swaps  based  on  the  findings  of  the  ongoing  detailed  investigation,  which  will  provide  a 
comprehensive  insight  into  the  functioning  of  financial  markets  with  particular  reference  to 
sovereign  debt.  The  measures  will  also  address  'naked'  short  selling.  The  Commission  will 
propose  solutions  to  give  the  EU  the  means  for  a  coordinated  response  to  events  such  as 
excessive  speculative  use  of  the  CDS  market.  This  should  include  emergency  powers  for 
regulators (to be coordinated in the future by ESMA). 

In the context of enhanced market stability and integrity, the Market Abuse Directive15 will 
be revised in order to extend its rules beyond regulated markets and to include derivatives in 
its scope of application.  

As  one  fundamental  step  to  restore  consumer  confidence,  the  Commission  will  propose  a 
revision of the Deposit Guarantee Schemes Directive16, on the basis of the Report required 
by  this  Directive,  to  ensure  further  harmonisation  of  the  rules  to  ensure  effective  protection 
for  depositors  throughout  the  EU.  In  parallel,  the  Investor  Compensation  Schemes 
Directive17  will  be  revised  to  increase  protection  of  investors.  In  the  insurance  sector,  a 
White  Paper  on  Insurance  Compensation  Schemes  will  examine  the  possibility  of 
introducing European rules protecting insurance policy holders in case of a failing insurance 
company.  

Legislative proposals on packaged retail investment products will be presented to promote 
consumers'  interests  in  the  sales  process.  The  Commission  will  also  propose  changes  to  the 
legislation applicable to the UCITS depositaries function in response to the Madoff fraud, 
which revealed the need to further harmonise certain aspects of the level of protection offered 
to UCITS investors. 

4. CONCLUSIONS AND NEXT STEPS 

The  speedy  conclusion  of  the  financial  services  reform  process  is  a  key  pillar  of  building 
future  European  growth,  and  an  essential  complement  to  fiscal  consolidation  and  structural 
changes. By next spring the Commission will have proposed all the necessary elements for a 
fundamental  improvement  of  the  way  Europe's  financial  markets  are  regulated  and 
supervised.  

Implementation  of  these  measures  will  be  carefully  calibrated  in  order  to  avoid  restricting 
economic  growth,  which  is  now  returning  to  Europe,  and  to  avoid  pro-cyclical  effects. 
Appropriate impact assessments will be carried out to this end. Co-ordination with the EU's 
major international partners, some of which are also introducing fundamental reforms, will be 
key.  International  regulatory  convergence,  including  in  accounting  rules,  will  help  improve 
confidence in markets, and divergences can hinder recovery. The G20 has a key role to play 
in this respect. 

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Directive 2003/6/EC. 
Directive 94/19/EC as amended by Dir 2009/14/EC. 
Directive 1997/9/EC. 

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The Commission calls for strong political commitment from the Council and the European 
Parliament  to give top priority to agreeing on the priorities, timing and delivery  of these 
reform measures. The Commission also looks to the financial services industry to continue to 
contribute  actively  and  constructively  to  shaping  the  reforms.  The  last  piece  of  legislation 
should  be  adopted  by  the  end  of  2011  at  the  latest,  allowing  for  implementation  in 
national law by the end of 2012. 

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ANNEX  1:  FULL  LIST  OF  INITIATIVES  WITH  KEY  DATES  FOR  COMMISSION  ADOPTION  AND 
COMMISSION  PROPOSALS  FOR  ENDORSEMENT  BY  THE  COUNCIL  AND  EUROPEAN 
PARLIAMENT 

Initiatives 

Commission adoption 

Political agreement 

Measures proposed , under negotiation: 

Alternative Investment Fund Managers Directive 

April 2009 

Summer 2010 

3rd Revision of the Capital Requirements Directive (CRD3) 

July 2009 

Summer 2010  

Supervision  package  (European  Systemic  Risk  Board  and 
European Supervisory Authorities) 

September 2009 

Summer 2010 

Communication on options for bank resolution funds 

May 2010 

n/a 

Forthcoming proposals: 

UCITS – implementing measures 

Revision  of  Credit  Rating  Agencies  Regulation  (EU-level 
supervision of CRAs) 

June 2010 

June 2010 

June 2010 

By end 2011 

Green  Paper  on  Corporate  Governance 
Institutions 

in  Financial 

June 2010 

By end 2011 

Creation of a Financial Services Users Group 

Summer 2010 

n/a 

Revision of the Deposit Guarantee Schemes Directive 

July 2010 

By end 2011 

White Paper on Insurance Guarantee Schemes  

July 2010 

n/a 

Revision of the Investor Compensation Schemes Directive 

July 2010 

By end 2011 

Derivatives – legislation on market infrastructure 

Summer 2010 

By end 2011 

Revision of the Financial Conglomerate Directive 

Summer 2010 

By end 2011 

Second “Omnibus” Directive of changes to sectoral legislation 
to align it with the proposals on supervision 

Summer 2010 

By end 2010 

Directive  on 
transactions 

legal  certainty  of  securities  holding  & 

September 2010 

By end 2011 

Regulation  on  SEPA  (Single  European  Payments  Area), 
setting a deadline for transition to SEPA 

September 2010 

By end 2011 

Communication on a framework for crisis management 

October 2010 

n/a 

Measures on short selling/credit default swaps 

October 2010 

By end 2011 

Initiative on access to minimum basic banking services 

October/November 2010 

By end 2011 

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Communication on sanctions in the financial services sector 

December 2010 

n/a 

Revision of the Capital Requirements Directive (CRD4) 

December 2010 

By end 2011 

Revision of the Market Abuse Directive (securities) 

December 2010 

By end 2011 

Review of the Markets in Financial Instruments Directive 

Spring 2011 

By end 2011 

UCITS – depositories function 

Spring 2011 

By end 2011 

Implementing  measures  for  Solvency  II  Directive  on  capital 
requirements for insurance undertakings 

Spring 2011 

By end 2011 

Packaged Retail Investment Products legislative proposals 

Spring 2011 

By end 2011 

Crisis  management 
resolution funds) 

legislative  proposal  (including  bank 

Spring 2011 

By end 2011 

Insurance mediation Directive revision 

Spring 2011 

By end 2011 

Further amendments to the Credit Rating Agencies Regulation   Spring 2011 

By end 2011 

Legislation on corporate governance 

Spring 2011 

By end 2011 

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ANNEX 2: MEASURES PROPOSED/ADOPTED TO DATE 

Initiative 

Commission adoption 

Status 

Solvency  II  Directive  (capital  requirements  for  insurance 
undertakings) 

July 2007 

Adopted December 2009 

Amendment  of  the  Settlement  Finality  Directive  and  the 
financial collateral directive (securities) 

April 2008 

Adopted May 2009 

Recast of the UCITS Directive 

July 2008 

Adopted July 2009 

2nd revision of the Capital Requirements Directive for banks– 
amendments  to  securitisation  rules,  large  exposure  limits, 
supervisory colleges, liquidity risk management and quality of 
capital. 

October 2008 

Adopted May 2009 

Deposit Guarantee Schemes Directive amendment 

October 2008 

Adopted March 2009 

Credit Rating Agencies Regulation 

October 2008 

Adopted September 2009 

Communication on remuneration principles 

April 2009 

See annex 2 for next steps 

Financial  literacy  –  Dolceta  on-line  education  programme, 
new modules  

n/a 

Launched April 2010 

Communication  on  Packaged  Retail  Investment  Products 
(PRIPS) 

April 2009 

Legislative 
forthcoming 

proposals 

Alternative Investment Fund Manangers Directive 

April 2009 

Co-decision underway 

3rd revision of the Capital Requirements Directive for banks – 
capital 
re-
the 
securitisations,  disclosure  of  securitisation  exposures,  and 
remuneration policies 

trading  book  and 

requirements 

for 

July 2009 

Co-decision underway 

Supervision  package  (European  Systemic  Risk  Board  and 
European Supervisory Authorities) 

September 2009 

Co-decision underway 

Prospectus Directive amendments (securities) 

September 2009 

Co-decision underway 

Communication on Crisis Management in the Banking Sector  October 2009 

Communication on Derivatives 

July & October 2009 

Further  Communication 
in  autumn  2010  and 
legislative  proposal 
in 
Spring 2011 

Legislative 
forthcoming 

proposal 

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