The establishment of this new body in charge of macro-prudential oversight is expected to bring significant improvements to the EU institutional framework for financial stability. The participation of the European Supervisory Authorities (with voting rights) and all the EU national supervisory authorities (without voting rights) will allow enhancing the capacity of the ESRB to identify systemic risks and to define areas for recommendations for policy action. Indeed, it is expected that the recommendations of the ESRB would primarily concern the supervisory and regulatory field. It is important to note that macro-prudential oversight should not be regarded as a substitute for the responsibilities of other authorities, namely supervisors. It should instead facilitate and complement where required the conduct of micro-prudential supervision by the competent authorities. The effectiveness of the ESRB warnings and recommendations will rely on their quality, the act or explain mechanism between the ESRB and the addressees, the possibility of the ESRB to publish its warnings and recommendations, and also the possible role of the  4  BIS Review 125/2010  Council of Ministers and the European Supervisory Authorities in supporting the implementation of the warnings and recommendations. The combination of these elements should provide an adequate framework of incentives and mechanisms, which will greatly benefit the compliance with risk warnings and recommendations. In this context, it has been considered not necessary to provide a legallybinding nature to the ESRB risk warnings and recommendations, as this would lead to a certain overlap of responsibilities and tasks, particularly with micro-prudential supervisors.

2  BIS Review 6/2007  The SEC regulates the investment companies, merchant banks, venture capital companies, unit trusts and the rating agencies. Under the provisions of the Act, the SEC issues financial regulations to ensure that companies listed in the Stock Exchange operate in an orderly manner preserving the stability of the capital markets and, as a whole, the financial system. The registered insurance companies, the insurance broking companies and ancillary service providers are regulated by the IBSL to safeguard public interest. The insurance policies consist of long-term savings of the public and, therefore, the sustainability of insurance companies is important for longterm savers. All financial institutions operating in Sri Lanka are required to comply with the recently enacted Money Laundering Legislation, Countering the Terrorist Financing Legislation and the Financial Transaction Reporting Act. Relevant regulations will be issued shortly. The recently introduced Payments and Settlements Act provides wide powers to the Central Bank to regulate the national payments system. Despite these legislation and financial regulations, there are many operations by the financial intermediaries which cannot be captured by one or more financial regulation. One such category is financial conglomerates, which engage in banking and finance, insurance and stock market transactions. They still have a leeway to take advantage over others. Regulating these conglomerates is a real challenge. There is a limit to impose rules on all aspects of operations which will lead to overregulation and that should be avoided. Improved understanding of potential risks may bring in better results.