‘Rating’ ESMA’s accountability for its enforcement powers: ‘AAA’ status

The European Securities and Markets Authority (ESMA) is exclusively competent for the direct supervision of credit rating agencies (CRAs) and trade repositories (TRs). ESMA is in fact the only EU agency that can exercise monitoring, investigating and sanctioning powers by itself. However, the question rises whether ESMA also renders accountability for such powers. The delegation of enforcement powers to ESMA appears to have been coupled with the establishment of sufficient political and judicial accountability mechanisms. The accountability framework may thus be assigned ‘AAA’ status. However, if changes were to happen on the basis of the ongoing revision of the operations of the European Supervisory Authorities, e.g. if ESMA’s direct supervisory powers would be extended to other areas of financial services, one important recommendation is to pair such delegation with appropriate changes to the accountability framework so that the ‘AAA’ status can be upheld.

ESMA’s enforcement process
ESMA monitors whether CRAs and TRs comply with EU law or not. If there is a suspicion that they don’t, for instance when internal control mechanisms are not sound or record-keeping is not adequate, ESMA can investigate them. If a violation of EU law is found, ESMA can sanction the CRA or TR concerned, e.g. by imposing a fine of €1,24 million in its most recent case against Moody’s.

In the monitoring stage, individual officers at ESMA’s Supervision Department are responsible for observing the registered CRAs and registered TRs on a regular basis to see that they are complying with the requirements under EMIR and the CRA Regulation. If the supervision team suspects infringements – such as transmitting information about upcoming rating actions to a parent company before it is made public – it starts to examine the matter: it may request information, carry out general investigations and conduct on-site inspections. If ESMA finds serious indications that one or more infringements possibly exist, an Independent Investigation Officer (IIO) will be appointed to investigate the matter. This is a person from within ESMA, but should act functionally independent.

In the investigation stage, the IIO examines the suspected infringements and may use the same powers as ESMA’s supervision teams, i.e. requesting information, carrying out general investigations and conducting on-site inspections. The IIO submits a complete file with its findings to the Board of Supervisors of ESMA.

In the sanctioning stage, the Board assesses whether it agrees with the IIO’s findings, for instance as to which infringements have been committed; whether there is negligence or intent; and the legal and factual grounds on which the findings are based. ESMA’s Board takes a final decision in which it decides i) whether the person under investigation did indeed commit one or more infringements and ii) whether it will impose a supervisory measure and/or a fine. Interestingly, ESMA can thus impose penalties without the involvement of the European Commission. It is in fact the only agency with a direct sanctioning power.

So far, ESMA has completed five investigations which have resulted in action by the Board of Supervisors: issue of a public notice alone or in combination with a fine (€30,000, €64,000, €1.38 million and €1,24 million). The low number of investigations could be explained by the fact that ESMA is a relatively young agency (since 2011 in operation). Its first priorities have been internal organization and the completion of a single rulebook. Supervisory convergence is among its new targets.

Cooperation with national authorities
The national supervisory authorities – like the Financial Conduct Authority in the UK – do not play a prominent role in enforcement action against CRAs or TRs. ESMA’s counterparts at the national level have a right to be informed, their assistance may be requested by ESMA and ESMA may also delegate powers to the national authorities during both the monitoring and investigation stages. The relationship between ESMA and the national supervisory authorities is therefore hierarchical rather than parallel. If a national authority is engaged, it is as an agent of ESMA, and ESMA remains responsible for the national authority’s actions.

No gaps in the accountability framework
The fact that ESMA has exclusive supervisory powers over private entities calls for the need for effective accountability mechanisms, in order to prevent the agency from misusing its discretion.

Political accountability
ESMA is under political control with regard to its enforcement powers. ESMA reports annually in its general report and supervision report about its supervisory approach and priorities as well as the use of its enforcement powers (information stage). The Chairperson is required to make a statement at hearings of the Parliament and to answer any questions put by its members (discussion stage). Both the Chairperson and Executive Director also regularly provide speeches at parliamentary meetings, but this happens in an ad hoc manner without any formal obligation. ESMA faces the consequence of not having its Chairperson reappointed (rectification stage). Save for professional secrecy, independence does not appear to pose a barrier to the accountability of ESMA.

There is no possibility to hold ESMA to account at the national level, although the Chairperson and Executive Director occasionally appear at public hearings of national parliaments on a voluntary basis.

Judicial accountability
ESMA is also accountable in the Union courts for its enforcement powers. The national judge holds the agency to account with regard to the arbitrariness of its inspection or request for records of telephone and data traffic via an ex ante judicial authorisation mechanism. The national court receives the (requested) information from ESMA, discusses it, and ESMA faces the consequence of receiving an authorisation or not. One could however criticise the fact that there is no uniform rule obliging ESMA to ask for prior judicial authorization throughout the EU, because this is not required in all the Member States.

In the case of ex post judicial control, the ESA Board of Appeal and the Court of Justice of the European Union hold ESMA to account. They may do so with regard to the legality of ESMA’s decisions to request information, to carry out a general investigation or to inspect, but also with regard to the agency’s final decisions to impose supervisory measure(s) and/or a fine. The ESA Board of Appeal reviews the written and oral observations from the parties, discusses them, and ESMA faces the consequence of having its decision remitted. In a similar vein, the CJEU receives information from both parties, discusses it, and ESMA faces the consequence of annulment of its decision.

All in all, there are no significant gaps in the political and judicial accountability framework as organized in the legislative framework. The delegation of enforcement powers to ESMA appears to have been coupled with the establishment of sufficient accountability mechanisms. It may thus be assigned ‘AAA’ status.

The way forward
ESMA has repeatedly suggested that it should be entrusted with the power to impose higher fines on supervised entities in order to ensure effective supervision. Likewise, the agency has frequently asked to be entrusted with further supervisory responsibilities of other institutions or infrastructures of pan-European reach in order to reap the full benefits of a Capital Markets Union. These issues form part of the ongoing revision of the ESMA Regulation following the Commission’s consultation on the operations of the three European Supervisory Authorities to which it received 227 responses. The consultation gathered evidence on (1) tasks and powers; (2) governance; (3) supervisory architecture; and (4) funding. The results provide a basis for concrete and coherent action by way of a legislative initiative, if required. If this were to happen, one important recommendation is to pair such action with appropriate changes to the accountability framework so that the ‘AAA’ status can be upheld.

Marloes van Rijsbergen
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Author: Marloes van Rijsbergen

Marloes van Rijsbergen is a PhD Candidate at Utrecht University. Her research focuses on the legitimacy and effectiveness of (soft) rule-making by EU agencies, with an elaborate case-study on the European Securities and Markets Authority (ESMA). She is a member of the Utrecht Centre for Regulation and Enforcement in Europe (Renforce).

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