COMMISSION STAFF WORKING PAPER SUMMARY OF THE IMPACT ASSESSMENT   Accompanying document to the   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS  Reinforcing sanctioning regimes in the financial services sector   {COM(2010) 716 final} {SEC(2010) 1496 final}
Date: 2010-12-08
Institutions: European Commission
Subjects: banking policy, financial control, financial market, monetary crisis, sanction (EU)

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EUROPEAN COMMISSION 

Brussels, 8.12.2010 
SEC(2010) 1497 final 

COMMISSION STAFF WORKING PAPER 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

Reinforcing sanctioning regimes in the financial services sector 

{COM(2010) 716 final} 
{SEC(2010) 1496 final} 

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1. 

INTRODUCTION 

The financial crisis has put into question whether financial market rules are always respected 
and applied as they should be.  

Following  the  political  mandate  received  from  the  ECOFIN  Council  in  2007,  the 
Commission, along with the Committees of Supervisors conducted a review of the coherence, 
equivalence  and  actual  use  of  sanctioning  powers  among  Member  States  (MS),  in  the 
European financial services sector.  

2. 

PROBLEM DEFINITION  

The  preliminary  analysis  carried  out  on  the  basis  of  the  information  provided  by  the 
Committees  of  Supervisors  shows  certain  divergences  and  weaknesses  in  national 
sanctioning regimes, which do not seem to always ensure sanctions are sufficiently effective, 
proportionate and dissuasive.  

The levels of administrative pecuniary sanctions vary widely across MS and seem too small in 
some  MS,  including  for  the  same  type  of  infringement.  In  the  financial  sector,  where  a 
number of potential offenders are financial institutions with considerable turnovers, fines of a 
few thousand Euros do not seem to be sufficiently dissuasive.  

Some  MS  do  not  have  at  their  disposal  important  types  of  sanctioning  powers  (e.g. 
withdrawal of authorisation) for certain infringement, which may be necessary to effectively 
sanction violations.  

Divergences exist as to the type of persons who may be sanctioned: in some MS sanctions are 
not  applicable  to  natural  persons  or  to  legal  persons.  Therefore,  they  will  be  treated  in 
different ways as regards a specific violation, depending on the MS where it is committed.  

The  criteria  taken  into  account  to  determine  the  level  of  the  sanctions  imposed  vary 
substantially and do not always include factors (e.g. the benefits derived from the violation) 
which are important to ensure proportionality and dissuasiveness of sanctions. 

Some  MS  provide  for  criminal  sanctions  for  certain  violations  while  other  MS  provide  for 
administrative sanctions only. Criminal sanctions send out a strong message of disapproval to 
individual offenders and could have an important dissuasive effect. 

A certain divergence exists in the level of application of sanctions in different MS, including 
those having banking and insurance sectors of similar size.  

Problems identified  

The divergences and the weaknesses described above may:  

1.  render  the  sanctions  for  breaches  of  EU  financial  services  legislation  insufficiently 
effective, proportionate and dissuasive;  

2. create distortions of competition in the Internal Market; and  

3. have a negative impact on financial supervision.  

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These problems can result in a lack of compliance with EU financial services rules, which 
can increase the risk of market manipulation and lack of transparency, and can ultimately be 
detrimental to the proper functioning of financial markets.  

This situation risks seriously undermining consumer protection and market integrity, and 
can negatively affect the whole economy.  

This situation also risks undermining confidence in the financial sector.  

3. 

ANALYSIS OF SUBSIDIARITY  

Convergence  of  national  sanctioning  regimes  seems  necessary  to  promote  dissuasiveness  of 
sanctions  thereby  ensuring  level  playing  field,  uniform  application  of  EU  financial  services 
legislation, and full cooperation between national supervisors across the EU. These objectives 
can be better achieved through EU action rather than by different national initiatives. Better 
application  of  the  existing  sanctioning  powers  by  competent  authorities  at  national  level 
would not be sufficient to achieve sufficient convergence.  

4. 

OBJECTIVES OF EU INITIATIVE 

EU action could satisfy the following general policy objectives:  

•  Restored confidence in the financial sector 

•  Better protection of users of financial services 

•  Safety, stability and integrity of financial markets 

•  Compliance  with  EU  financial  rules  contributing  to  a  proper  functioning  of  financial 

markets. 

Reaching these objectives requires the realisation of the following specific objectives: 

•  The effectiveness, proportionality and dissuasiveness of sanctions 

•  The development of a level playing field reducing the opportunities for regulatory arbitrage 

•  The effective supervision of financial institutions. 

5. 

POLICY OPTIONS, IMPACT ANALYSIS AND COMPARISON 

The  analysis  is  at  this  stage  limited  to  a  general  assessment  of  the  possible  options  to 
approximate  and  reinforce  national  sanctioning  regimes.  Policy  options  considered  do  not 
deal  with  specific  measures  needed  in  the  specific  sectors  concerned  (banking,  insurance, 
securities), which will be assessed when the Commission makes firm proposals.  

5.1. 

Policy options relating to the content of the measures 

Five  issues  for  potential  EU  action  have  been  identified.  For  each  issue,  different  policy 
options have been analysed and compared. 

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ISSUE 1: Type of administrative sanction and level of administrative pecuniary 
sanctions  

The  issue  concerns  the  type  and  the  level  of  administrative  sanctions  envisaged  in  national 
legislation. 

Options 

1: no EU action 

2: minimum common provisions on type of administrative sanctions and level of pecuniary sanctions for key violations 

3: uniform type of administrative sanctions and level of pecuniary sanctions for key violations 

4: uniform type of administrative sanctions and level of pecuniary sanctions across EU for all violations 

Under  Option  1,  MS  would  hardly  be  willing  to  compare  type  of  sanctions  and  level  of 
pecuniary  sanctions  they  envisage  with  those  envisaged  in  other  MS,  and  to  question  the 
effectiveness of their own regime. Divergences would persist. 

Option 2 would help to ensure that violations are dealt with in a similar way in all MS, which 
reinforces the development of a level playing field in European financial markets. This would 
increase consumer confidence and may lead to more cross border selling of financial services 
products.  Providing  competent  authorities  with  equivalent  minimum  sanctioning  powers 
would improve cross-border supervision. Dissuasiveness of sanctions would increase at least 
in  the  MS  which  currently  have  too  low  levels  of  sanctions.  Risks  of  violations  of  EU 
legislation  would  be  reduced,  to  the  benefit  of  consumer  protection,  competition  between 
financial  institutions,  safety  and  integrity  of  financial  markets.  MS  would  be  allowed  to  go 
beyond  the  EU  minimum  criteria  and  to  adapt  sanctions  to  the  specificities  of  the  different 
national legal systems. Changes in national legislations would be required only in certain MS. 
Compliance costs for MS are expected to be limited.  

Option 3 would be effective in ensuring a level playing field as it would reduce the potential 
for  financial  services  providers  to  engage  in  regulatory  arbitrage  between  the  sanctioning 
regimes  in  place  in  different  Member  States.  It  would  increase  the  dissuasive  effect  of 
sanctions and consequently reduce risks of violations of EU law, which would be beneficial to 
consumer  protection,  competition,  safety  and  integrity  of  financial  markets.  However, 
Member States would not be able to provide for further types of sanctions or higher levels of 
fines  than  those  provided  for  in  the  uniform  EU  framework.  This  option  would  probably 
require significant changes in all national legislations. 

Option 4 would be the most effective in terms of ensuring level playing field and increasing 
trust between supervisors, as it would eliminate any divergence. However, it would probably 
require  major  changes  in  all  national  legislations  and  would  eliminate  any  flexibility  in 
dealing  with  violations  of  EU  law.  Compliance  costs  could  be  significant  and  the  uniform 
regime could not fit national legal system and culture in different MS.  

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ISSUE 2: Addressees of administrative sanctions 

This  issue  deals  with  the  possibility  to  apply  sanctions  to  natural  persons  and/or  to  legal 
persons, responsible for a violation of EU financial services rules. 

Options 

1: no EU action 

2: sanctions applicable to both natural and legal persons 

Under Option 1, MS would probably not extend the personal scope of sanctions as currently 
provided in their legislations, which would probably not ensure optimal dissuasiveness.  

On  the  contrary,  Option  2  would  significantly  increase  dissuasiveness  of  sanctions,  which 
would  ensure  better  compliance  with  EU  legislation,  with  positive  impacts  on  consumer 
protection, fair competition, safety and integrity of financial markets. This option would have 
a  positive  impact  on  the  level  playing  field  in  the  European  financial  market,  and  would 
increase  consumer  confidence  and  mutual  trust  between  supervisors.  Legislative  measures 
would be required only in MS where the scope of sanctions does not cover both natural and 
legal persons.  

ISSUE 3: Factors taken into account when determining the sanctions  

This issue concerns the elements considered by competent authorities when deciding the type 
of administrative sanctions and/or the amount of the administrative pecuniary sanction to be 
applied to the author of a specific violation. 

Options 

1: no EU action 

2: some key factors to be taken into account by all authorities 

3: list of exhaustive and identical factors to be taken into account by all national authorities 

Under  Option  1,  while  all  MS  take  into  account  the  gravity  of  the  violation,  other  factors 
would be taken into account only in some MS or for certain violations. This would probably 
be insufficient to ensure optimal dissuasiveness.  

Option  2  would  permit  to  better  adapt the  sanctions  imposed  to  the  impact  of  the  violation 
and the personal conditions of the offenders, which would help ensuring their effectiveness, 
proportionality  and  dissuasiveness.  Increased  convergence  in  the  way  sanctions  are  applied 
across Europe would ease the cooperation between competent authorities. Proportionality of 
sanctions  would  be  better  ensured  and  dissuasiveness  of  sanctions  will  be  increased,  which 
would reduce risks of violations of EU. Taking into account the cooperative behaviour of the 
offender  would  help  in  detecting  violations.  Compliance  costs  for  MS  are  expected  to  be 
limited. 

Under Option 3 uniformity in the way sanctions are applied would ensure better cross border 
supervision.  Uniform  application  of  the  factors  foreseen  in  option  2  would  have  the  same 
impacts  as  option  2,  in  terms  of  proportionality  and  dissuasiveness  of  sanctions  and  better 
detection of infringements. However, the list would include only factors that can be applied in 

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the same way in all national legal systems, which would preclude the possibility to take also 
into account other factors possibly relevant in some legal systems. Compliance costs may be 
significant, as this option implies a revision of all provisions concerning the way sanctions are 
applied.  

ISSUE 4: criminal sanctions  

This issue concerns the application of criminal sanctions to violations of EU financial services 
legislation.  

Options 

1: no EU action 

2: introduction of criminal sanctions for the most serious violations 

Under Option 1, it is unlikely that MS would revise their criminal laws in order to achieve 
further convergence in that area.  

Option 2 would send out a strong message of disapproval that could increase dissuasiveness 
of  sanctions  and  have  a  positive  impact  on  the  public  perception  of  the  appropriateness  of 
sanctions. Not all violations would be subject to criminal penalties but only the most serious 
ones,  for  which  criminal  sanctions  are  the  most  efficient,  effective,  and  dissuasive  tool  to 
achieve the proper enforcement of EU financial services rules. Criminal sanctions would be 
provided for only in areas where this is strictly necessary.  

ISSUE 5 EU action to support effective application of sanctions 

This issue concerns the mechanisms that MS may put in place to improve the application of 
sanctions,  particularly  detection  of  violations.  EU  action  envisaged  would  focus  on  (1)  key 
powers  and  investigatory  tools  provided  to  all  competent  authorities,  and  (2)  cooperation 
between national authorities.  

Options 

1: Coordination by ESAs - no additional EU action 

2: additional EU action to ensure all MS provide for key investigatory powers and tools,  

Under Option 1, while certain MS would continue to provide for rules on whistleblowing, the 
large  majority  of  them  would  probably  not  put  in  place  consistent  and  predictable 
programmes  to  protect  whistleblowers  and  to  exempt  them  from  sanctions  when  they  are 
involved  in  the  infringement  (leniency  programmes).  The  objective  of  reinforcing  national 
sanctioning regimes could be achieved to a certain extent through the coordination activity of 
the new European Supervisory Authorities.  

Option  2  would  be  more  effective  in  terms  of  better  enforcement  of  sanctions,  as  new 
instruments  would  be  available  to  detect  violations.  When  violations  are  regularly  detected 
and  punished,  dissuasiveness  and  effectiveness  of  sanctions  would  be  increased.  The 
perception that the authors of infringements are usually discovered and effectively punished 
would also restore confidence in the financial sector.  

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5.1.1.  Preferred policy options package 

The following options have been selected for the five issues addressed:  

•  ISSUE  1:  introducing  minimum  common  criteria  on  type  and  level  of  administrative 

sanctions. 

•  ISSUE 2: sanctions applicable to both natural and legal persons. 

•  ISSUE 3: some key factors taken into account by all national authorities.  

•  ISSUE 4: introduction of criminal sanctions for the most serious violations. 

•  ISSUE 5: reinforcement of mechanisms facilitating detection of infringements/enforcement 

sanctions. 

5.2. 

Options relating to the nature of the measures 

Four  options  have  been  considered  as  to  the  nature  of  the  measures  that  may  be  taken  to 
implement the set of policy options identified in section 5.1.  

•  Option 1: non binding measures facilitating approximation of sanctioning regimes  

In  the  absence  of  any  obligation,  it  would  not  be  ensured  that  all  MS  take  all  measures 
required, and the relevant issues would be probably dealt with differently by each MS.  

•  Option 2: minimum approximation of sanctioning regimes - sectoral approach 

This option appear to be very effective, as it would permit to introduce the provisions which 
are  the  most  appropriate  in  the  specific  sector,  and  for  the  specific  EU  legal  act  concerned. 
MS  would  still  enjoy  discretion  in  the  choice  and  application  of  sanctions  and  would  be 
allowed to provide for rules more stringent than the minimum standards. This option would 
not necessarily require important changes in national sanctioning regimes. 

•  Option 3: minimum approximation of sanctioning regimes – cross-sectoral approach 

This option would allow for the implementation of the policy options selected for all issues 
except  for  the  issue  4,  as  a  sectoral  approach  seem  essential  to  identify  the  most  serious 
violations for which criminal sanctions are necessary. As the EU framework could cover very 
general issues only, MS would maintain considerable discretion in implementing the common 
rules, which would reduce the effectiveness of this option.  

•  Option 4: full approximation of sanctioning regimes – sectoral approach 

This option is in any case excluded for issue 4, given that the European legislator has not the 
power  to  fully  harmonise  criminal  sanctions.  Full  approximation  of  sanctioning  regimes 
would not be suitable for the implementation of the policy measures selected for the issues 1 
and 3, which exclude the introduction of uniform rules.  

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5.2.1.  Preferred policy instruments  

The  most  appropriate  option  is  considered  to  be  a  legislative  action  aiming  at  minimum 
approximation  of  national  sanctioning  regimes,  covering  potentially  all  the  issues  to  be 
addressed.  

The  most  effective  approach  is  considered  to  be  the  sectoral  approach,  which  could  be 
combined with the cross-sectoral approach by establishing some basic principles common to 
all sectors. 

6. 

MONITORING AND EVALUATION 

The  policy  options  selected  will  be  presented  in  the  Communication  in  order  to  allow  all 
stakeholders to comment on the actions proposed. The Commission will evaluate the feedback 
received and take it into account when coming forward with firm proposals.  

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