David Worsfold
The fallout from Brexit has plunged Europe’s financial regulators into a bitter battle to maintain their independence.
Misplaced hopes among UK government ministers that key European institutions currently based in London might remain there after the United Kingdom leaves the European Union were quickly dashed in the wake of the Article 50 enactment. This means that the European Banking Authority that presides over Europe’s banks from the 46th floor of Canada Square in Canary Wharf has to find a new home.
The EBA has 170 staff from 27 of the 28 European Union countries. Brexit is "a major talking point among the staff", executive director Adam Farkas told AFP recently, "The outcome of the referendum, which will likely lead to a removal of the EBA from London, is having a major impact," said Farkas, a Hungarian who has headed the EBA since 2011.
The leading candidates for a new location for the EBA are Frankfurt and Paris. The French government officially made its bid for the EU’s banking watchdog in early May when outgoing President François Hollande announced Paris’ candidacy in a letter to European Commission President Jean-Claude Juncker.
But France faces bitter opposition from Frankfurt. The German city is already home to the European Central Bank, its Single Supervisory Mechanism and the European Insurance and Occupational Pensions Authority (EIOPA).
Officials in Frankfurt have suggested that the banking watchdog could be merged with EIOPA to create a so-called “twin peaks” model favoured by some in the Commission. This proposal has been bluntly rejected by Europe’s insurers who have fought hard against previous proposals to merge their regulator with the bank watchdog, fearing a harsher regime less sympathetic to the special needs of Europe’s complex insurance sector.
Their trade body – Insurance Europe – has come out fighting, warning a merger would reduce the effectiveness of consumer protection and prudential oversight.
It has rejected all the ideas put forward in a European Commission consultation to either transfer some conduct of business powers from EIOPA to the European Securities and Markets Authority or to merge EIOPA with the EBA, saying such moves would not lead to better EU-level supervision or increased convergence in the way national authorities supervise insurance.
Michaela Koller, director general of Insurance Europe, commented: “We need a strong, dedicated European insurance supervisor. Insurance is a complex industry that requires a focussed supervisor with a high degree of expertise overseeing all areas of supervision, including both conduct of business and prudential to avoid duplicative and contradictory regulations. To split insurance responsibilities across ESAs or merge supervisors could put this expertise at risk, and would be a bad result.”
The trade body argues that insurers require a distinct regulatory approach because they have completely different business models to the banks: “Insurers need a supervisor focused on and able to understand their distinct business model, risks and consumer needs.
“There is also no evidence that another EU supervisory structure would work better and justify the costs, risks and years of uncertainty that would accompany any significant structural changes. In particular, insurers only recently began working under Solvency II, and other significant regulation will come into force in the next few years, so the European regulatory landscape on which supervisory convergence can be built is new or not yet implemented. It is therefore too early and too risky to make structural changes”, said Insurance Europe’s recent statement.
It does admit that EIOPA is not perfect and that reforms are needed.
“While no significant changes to EIOPA’s structure, powers or responsibilities are justified, improvements to EIOPA’s governance are needed. Applying qualified majority voting for all its Board of Supervisor decisions and improving transparency could help in this respect. Other improvements, such as an independent oversight board to support the European Parliament’s oversight of EIOPA should also be considered”.
Koller added: “Significant governance improvements are key in order to safeguard EIOPA’s independence and to ensure that it always stays within its mandate and acts in the interest of the wider EU economy.”
Neither regulator has made any public comment about the possibility of merger, preferring to leave that fraught debate to their political masters.
This isn’t just an argument between France and Germany as other countries are trying to force their way in the picture, wanting the EBA – without EIOPA – for themselves.
Ireland is the “least disruptive” place in which to relocate the EBA, according to the Dublin minister responsible for financial services.
Minister of State for Financial Services Eoghan Murphy told the ACI Financial Markets Association world congress in Dublin in May that Ireland’s bid, first announced last October, to secure the EBA for Dublin will be pushed hard as the debate hots up.
“The EBA, in some shape or form, must leave the United Kingdom,” Mr Murphy said. “We strongly believe that the relocation to Dublin is the best option and the least disruptive location for its important work and for its staff.”
Luxembourg has also thrown its hat into the ring, arguing that the presence of the European Investment Bank, the European Investment Fund and the European Stability Mechanism in the Grand Duchy could provide opportunities for synergies.
"Be assured that Luxembourg's authorities are ready to offer the best possible conditions to welcome the EBA,", Prime Minister Xavier Bettel wrote in his pitch to Juncker.
The procedure for deciding the location for the EBA will be agreed in June with the aim of recommending the new base in the autumn. Like so many consequences of Brexit, this will require approval by all EU institutions, including the Parliament. The battle over relocation and the future regulatory structure could rage on well into 2018.