Economics Committee calls for legislation to improve financial market supervision

Pressmeddelande   •   Sep 11, 2008 09:56 CEST

Two formal requests for the European Commission to introduce legislation to improve the supervisory framework for financial markets were adopted in the Economics Committee on Wednesday. The first relates to specifically to hedge funds and private equity, while the second is concerned with the future architecture of market supervision in general.

Hedge funds and private equity

In a report drawn up by Poul Nyrup Rasmussen (PES, DK), the committee asks for a series of legislative measures on issues related to hedge funds and private equity.

Regarding financial stability, capital and regulatory coverage, it says, among other points, that capital requirements should apply to investment firms on the basis of risk rather than the particular type of entity. The interests of investors and loan originators should be aligned, either by obliging originators to retain a portion of securitised loans on their own books or by measures with equivalent effect. MEPs want to see principles based legislation on the valuation of illiquid financial instruments and better transparency requirements on prime brokers. They say there should be a harmonised EU-wide framework for venture capital and private equity, especially to ensure cross-border access to capital for SMEs.

Transparency requirements

Regarding transparency, the committee wants to see a European Private Placement Regime which would allow for the cross border distribution of investment products, including alternative investment vehicles, to eligible groups of sophisticated investors. This would involve disclosure of their general investment strategy, leverage, risk-management and portfolio valuation methods, the source and amount of funds raised, rules for transparency on top executives remuneration and registration of shareholders beyond a certain proportion.

Takeovers: information for employees, no "asset stripping"

Employees of companies which are taken over should always have the same rights to information and consultation under EU law, including when private equity investors or hedge funds are involved. The committee says measures should be introduced where needed to avoid unreasonable asset stripping of companies taken over by private investors. Capital rules should ensure the level of leverage is sustainable for both the private equity firms and the target company and there should be no unfair discrimination between different types of fund using similar strategies.

Conflicts of interest and market concentration

Measures are also needed to tackle conflicts of interest within financial institutions of all kinds. Credit rating agencies should separate their rating business form any other services they offer, such as advising on structuring transactions. The effects of market concentration in the financial services industry should be given a general review by the Commission's Competition Directorate General, and assess among other things, whether there is legislation favouring incumbents which needs to be removed.

Finally the committee asks the Commission to review all existing financial market legislation to identify any gaps regarding hedge funds and private equity and put forward any legislation needed for better regulation of these or other actors.

Future structure of financial market supervision

The Economic and Monetary Committee also adopted on Wednesday a report drawn up by Ieke van den Burg (PES, NL) and Daniel Dăianu (ALDE, RO) on the future structure of financial supervision. The report formally calls on the Commission to come up with significant proposals to improve the supervisory architecture for financial services in Europe.

The report, whose main provisions received broad support in the committee, includes recommendations on the structure "Level 3" Committees of national financial regulators (CESR for securities, CEIOPS for pensions and insurance, and CEBS for banking) and on the present mechanism for managing systemic risk.

Solid legal basis for supervision

MEPs in the committee argue that voluntary arrangements are insufficient to streamline the fragmented structure of European supervisors that need to guarantee the stability of the financial markets and protect the real economy against excessive risks. The structure of supervision needs to have a solid legal basis in line with the increased complexity and dynamics of the market.

The committee says that colleges of supervisors dealing with cross-border institutions should become mandatory with a fairly fixed division of competences and a system of qualified majority voting between the supervisors which enables them to make decisions.

MEPs in the committee encourage the Level 3 Committees to work towards better cross-sector and cross-border integration and coordination.

Role of the ECSB and international representation

Micro- and macro-prudential and market supervisors should combine their knowledge of developments in the market. The European System of Central Banks would get a central position to coordinate and to take leadership if necessary.

The division of information and tasks should also be streamlined to improve the voice of the European Union at international level, says the report. The EU should have a clearvoice in the G8 and the Financial Stability Forum, which would avoid it being outstripped by the United States within, for example, the Banking Committee in Basel.

The two reports were adopted under Rule 39 of Parliament's Rules of Procedure, whereby Parliament can use its right formally to request that the Commission draw up legislation on a particular subject (Article 192 of the Treaty). To be adopted by the plenary, an absolute majority of MEPs must support the measures (i.e. at least 393 votes in favour).

Procedure: Legislative initiative (Rule 39 - Article 192) -- Plenary vote: September II (Rasmussen), October I (Van den Burg/Dăianu)