What is the ESMA?

Compliance Knowledge Base | FCA Compliance Training

Posted by: Morgan Rennie Published: Thu, 12 Dec 2019 Last Reviewed: Thu, 12 Dec 2019
What is the ESMA?

The European Securities and Markets Authority (ESMA) is an independent European Union (EU) regulatory agency and supervisory authority. The ESMA was created to protect consumers operating in the EU financial system, through promoting orderly practice in the market. Consequently, the EU financial market should be far more stable and investors will have increased confidence when investing their money and trust into financial services firms. The ESMA replaced the Committee of European Securities Regulators on 1 January 2011 and has since behaved as a financial market watchdog. Therefore, understanding the role of the ESMA and their undergoing work is of utmost importance.

What does the ESMA do?

The ESMA was created due to the recommendations from a 2009 report which stated that a European System of Financial Supervision should be established as a decentralised network. The Markets in Financial Instruments Directive (MiFID) II mandated the ESMA to provide a regulatory investigation into the standards of financial services firms and markets in the EU.

One of the vital tasks which the ESMA conducts is analysis into the conduct of financial services firms, such as credit firms. To do this, the ESMA identifies and assesses the risks which are posed to investors, markets and financial stability. The ESMA created a single rulebook for EU financial markets, to ensure the firms operating within the market were aware of how to comply with the relevant guidelines.

The ESMA rulebook promotes supervisory convergence and therefore the ESMA works closely with other European Supervisory Authorities which are experienced in banking, insurance, and occupational pensions.

The ESMA is accountable to the European Parliament, the Economic and Monetary Affairs Committee (ECON) and the Council of the European Union and European Commission. Therefore, the ESMA has to attend formal hearings when they are invited to and must provide Annual Reports to document their work.

ESMA has four important responsibilities:

  • Assessing risks to investors, markets and financial stability.
  • Completing a single rulebook for the EU financial markets.
  • Promoting supervisory convergence with other European Supervisory Authorities.
  • Directly supervising specific financial entities.
What is the ESMA?

Who is ESMA relevant to?

The ESMA applies to financial services firms and markets operating in the EU. The ESMA will investigate firms to ensure they are conducting themselves fairly and transparently when dealing with their clients and delivering their products. Therefore, if you are a financial services firm operating in the EU, you must understand the powers that the ESMA holds to investigate you.

The ESMA takes its role very seriously, and therefore when a firm demonstrates a lack of compliance, the repercussions can be severe. The ESMA fined Fitch Ratings, a rating agency, £4.4million for breaching the regulations around conflicts of interest.

According to the ESMA, the breach took place between June 2013 and April 2018, when 20% of the ratings agency's subsidiaries in the UK, France, and Spain were indirectly owned by the same individual, a Fitch Ratings Shareholder. The owner was a member of the boards of the three entities rated by these Fitch subsidiaries. Therefore, the ESMA found that this infringed on the conflict of interest regulations.

Moreover, the ESMA identified that Fitch Ratings had a lack of internal controls to highlight conflicts of interest until 2017. Therefore, the ESMA decided to fine Fitch Ratings Limited for infringing regulations surrounding conflicts of interest.

The ESMA can impose huge fines and reputational damage upon those who infringe the vital regulations set out across the EU markets. Therefore, understanding the regulations which apply to your financial services firm and the role of the ESMA in enforcing these regulations, is important.

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