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Financing of the EU economy - Reducing fragmentation in the EU funds market

Achieving an effective internal market passport: A proposal for mutual supervisory trust

By Bannister Joe - Chairman, Board of governors, Malta Financial Services Authority


The financial crisis and the failure of companies operating on a cross-border basis have created a sense of mutual distrust between financial supervisors in the EU. As a result, supervisors have been more inclined to raise barriers to cross border business. This situation has, in certain instances, been taken to the extreme where financial supervisors have been tilting at windmills to find reasons to put a passporting process to a halt. This state of affairs has in effect been stalling the further development of the internal market.

Strengthening mutual trust between financial supervisors in the EU is the key to eliminate the existing barriers to cross-border business and thereby creating a more robust internal market passport. Strengthening mutual trust between financial supervisors is also the key to solve the supervisory fragmentation conundrum, which creates unnecessary risks within the financial system as a result of the insufficient cooperation and coordination between financial supervisors in the EU.

To achieve a proper mutual trust objective, the following is completed:
a) The EU single rulebook for financial services must be completed. The impact of options and discretions should be minimized by strengthen regulatory convergence and finding a common approach to the implementation of regulation particularly national marketing rules for funds and requirements on substance applicable to fund managers.
b) Strengthening the process for supervisory convergence through more peer reviews to identify best practices on horizontal topics such as the governance of licensed entities and their compliance function and risk management function. Encouraging the application of best practices in the field of supervision, while leaving space for the further development of better supervisory practices at national level. This will result in keeping the debate on best practices alive and therefore open to further development. This process of debate increases and strengthens mutual understanding and trust between financial supervisors.
c) Mutual trust between supervisors will remain weak as long as financial supervisors are perceived by their peers as pursuing national agenda, Therefore, it is logical to propose that the independence of financial supervisors at national level should be strengthened through European regulation for this purpose. This development should go as far as initiating a process of convergence of the institutional architecture and governance of national supervision. This is important for supervisors to better understand each other’s system and as a result trust each other more.

Finally, a higher degree of mutual trust between financial supervisors would promote further the application of the mechanisms for the strengthening of supervisory cooperation in Europe, such as delegation of supervision and the application of colleges of supervisors, which address issues of fragmentation of supervision, in instances where multiple regulators are involved in the supervision of a cross border structure. This is also important for a more effective internal market passport in the field of financial services.