EU regulation and supervision of securities business: a critical analysis of the challenges faced by the National Competent Authorities of small EU and EEA EFTA Member States

Abstract

The paper aims at identifying the main challenges faced by the National Competent Authorities responsible for securities regulation and supervision of small EU and EEA EFTA Member States (SNCAs), within the context of the existing EU regulatory and supervisory framework. The central argument of the paper is that SNCAs face human, technical and financial resource limitations, which have an impact on their level of participation in the discussion at the European Securities andMarkets Authority (ESMA) and with regard to supervision when compared to their larger peers. The paper also makes the point that the likelihood of regulatory capture is another challenge faced by SCNAs, which may also have an impact on their level and quality of supervisory engagement. These structural disadvantages may be addressed by SNCAs if they form alliances and pool resources for this purpose. The paper makes a number of proposals in this regard. The research question this paper aims at addressing is: What are the challenges faced by the NCAs responsible for securities regulation of small EU and EEA EFTA Member States in the context of the evolving European framework for financial regulation and supervision? The hypothesis of this paper is that the challenges faced by SNCAs that result from the lack of resources and the likelihood of regulatory capture may be alleviated or resolved if SNCAs are willing to form alliances and pool resources to: [a] set up a network of SNCAs to discuss the challenges faced and come to common positions; [b] invest in supervisory technology; [c] establish an academy for financial supervisors to train their staff; [d] put proportionality back in Europe’s regulatory and supervisory agenda; and [e] discuss the possible implementation of robust governance measures to mitigate the risk of regulatory capture. In terms of methodology, the author identified the main challenges of SNCAs and the possible solutions in this regard. This exercise was based on the author’s eighteen years of experience as a financial regulator/ supervisor in Malta, EU’s smallest Member State by population, and twelve years representing the Malta Financial Services Authority in EU related fora, including the Committee of European Securities Regulators and ESMA. The identified challenges were discussed with the former deputy-governor of the Central Bank of Malta and two former experienced financial regulators, who provided their views in this regard. These challenges and the proposed solutions formed the basis of a questionnaire which was sent to high officials of SNCAs of eleven EU Member States and three EEA EFTA States. A copy of the questionnaire sent to SNCAs has been included as annex 1 to this paper. The selected jurisdictions have a population below 5.5 million and are considered as Europe’s small states. Thirteen SNCAs replied to the questionnaire which represent 93% of the sampled population. The replies to the questionnaire, which have been analysed to identify general trends, are presented on an anonymous basis as this was one of the conditions agreed with the participants. The value of the paper is that it examines the challenges faced by SNCAs in the context of the European framework for securities regulation and supervision. These challenges are a specific field of the governance of financial regulation and supervision that has not been the subject of any sufficient degree of academic consideration and research. The rest of the paper is divided into four additional sections. Section 2 briefly examines the current European regulatory framework and supervisory regime, including the proposals for the review of ESMA. Section 3 identifies the challenges faced by SNCAs. Section 4 analyses the replies received to the questionnaire. Some concluding remarks are made in the final section of this paper.