2.3 Lamfalussy procedure

One of the imperative reasons recognised by the Commission to achieve the single financial market is the adoption of a legislative structure capable of an efficient and quick response to new regulatory challenges.1 The Lamfalussy Committee noted that the inadequate EU regulatory system makes 'the chances of delivering the FSAP on time close to zero'.2 According to Moloney, the fmdings of the Lamfalussy Committee were a `searing indictment of the inadequacy of the harmonized structure, its inability to cope with market developments and support of greater integration [of the EU financial markets], and the failure of EC legislative procedures to deliver regulation quickly and effectively'.3

In order to solve the shortcomings in the legislative framework, the Lamfalussy Committee proposed the adoption of a multi-level legislative and regulatory process.4 At the first level, principles are adopted by the democratic bodies: the Council and the European Parliament. These institutions take the basic political choices and formulate the framework rules in Directives and Regulations as broadly as possible provided that these rules are as sufficiently precise as required for democratic accountability. At the second level, measures are adopted by the Commission after prior consultation of Committees consisting of representatives of the Member States and representatives of the national competent authorities.5 The exact substantive content of these delegated powers are agreed by the Council and the European Parliament so as to provide adequate democratie control.6 If adaptation of these technical measures is required by changes in the financial market, this delegation allows for a timely updating without a simultaneous change in the framework legislation adopted at the first level. The adoption of these level 2 measures by the Commission ensures the participation by national regulators via the Comitology-procedure.7

The Commission acts as co-ordinator in the Comitology-network of national and European regulators.8 In order to make the decision making process more time-efficient, the national regulators designate high-level representatives to sector-specific EU Committees.9 One of these Committees was the Committee of European Securities Regulators ("CESR"). Upon request by the Commission, CESR starts an extensive and transparent consultation with the market participants, consumers and end-users before it gives advice to the Commission about the technical measures to be taken by the Commission. On the basis of this technical advice, the Commission draws up a proposal.10 This proposal will be forwarded to the European Securities Committee (ESC) for advice. The ESC consists of high-level representatives of the Member States so as to ensure political backing of the proposal by the govemments of the Members States. The ESC acts in both advisory and regulatory capacities.11 At the second level, the ESC functions as an advisory committee that advises the Commission on its draft legislative proposals in the field of securities.

If the first level legislative act takes the form of a Directive, a common and uniform implementation by the Member States is necessary. In order to ensure uniform implementation in the Member States, the ESC was designated as a regulatory committee in accordance with article 5 of the 1999 Decision on Comitology to assist the Commission when it takes decisions on implementing measures under Article 202 of the EC Treaty.12 However, the national financial supervisors are the public authorities with the primary responsibility for correct implementation of EU legislation.13 Therefore, the role of CESR as a cooperative network of national securities regulators is critically important: CESR has to ensure a consistent interpretation and implementation by the different national regulators.14

Its tanks at the third level are the following:

A review of the adherence by the national competent authorities to the guidelines and recommendations will be carried out regularly by CESR in order to ensure the continuous consistent application of EU legislation in all Member States. These level 3 recommendations not only facilitate the exchange of knowledge acquired by the national regulators. The prior public consultation process in which market participants can express their views on the most adequate manner of application with respect to the level 2 regulations, also attempts to enhance the confidence of the market in the EU legislative development.16

The fourth level is concerned with enforcement of EU capital market legislation. While all actors, Member States, national regulators as well as the private sector, have to ensure strict enforcement, the Commission, however, as `guardian of the European treaties'17 bears the major responsibility in the monitoring process.18

In short, the following structure was adopted to prepare for legislation and co-operation between national financial supervisors at the EU-level:

At the third level, the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the Committee of European Securities Regulators (CESR) ("Committees") were, among others, created.20 With respect to financial institutions operating cross-border, national supervisors have to co-operate in colleges of supervisors so as to provide for the supervision on a consolidated basis required by the Capital Requirements Directive (CRD).21

In its report, the Lamfalussy Committee took the future adoption of the Prospectus Directive as an example how the proposed multi-layered legislation structure should work in practice. The Committee prioritised the legislation to be adopted as part of the FSAP: a single prospectus for issuers, a modernisation of admission to listing requirements and a generalisation of the home state principle, including a clear definition of the exempted professional investor, were considered the most urgently required legislation that should be brought into effect before the end of 2003.22 In accordance with the multi-layered legislation process, the level 1 Prospectus Directive encompasses the type of issuers that are required to publish a prospectus, the exceptions and exemptions to this obligation, the definition of a public offer, the powers of the competent authority to review the draft prospectus and finally mutual recognition of an approved prospectus.23 Level 2 detailed requirements regarding the specific content requirements in regard to each specific financial instrument that is offered to the public are delegated to the Commission.24 In accordance with the Lamfalussy approach for level 2 legislation, CESR gave technical advice to the Commission concerning the adoption of technical measures.25 These CESR reports assisted the Commission in its development of the implementing measures as laid down in the draft proposal of a Commission Regulation on 20 January 2004. Even though the level 2 regulations are very detailed with respect to the minimum information requirements for different types of issuers, market participants expressed the need for a consistent approach to be adopted by competent authorities in the different jurisdictions when implementing the Prospectus Regulation.26

In response to these market demands, CESR provided level 3 recommendations to the national competent authorities as to how they are expected to apply the provisions set at level 2.27 The aim of these recommendations was to promote better insight for issuing companies with respect to the exact consequences of the provisions in the Prospectus Regulation 2004 in regard to their disclosure duties. Even more, CESR, as representative body of the national regulators, wanted to provide greater transparency regarding the way in which supervisors will apply the Prospectus Regulation. However, CESR was not allowed to impose obligations or exemptions on issuers that are not in conformity with the Prospectus Regulation: the CESR recommendations were not (EU) legislation, but a voluntary adherence by national regulators on how they would deal with the Regulation in day-to-day regulatory practice.28 Furthermore, CESR provided common positions on frequently asked questions by market participants.

Concluding, it can be observed that the Commission, the European Parliament and the Council met the deadline set by the Lamfalussy Committee in its final report. The level 1 Prospectus Directive was adopted on 4 November 2003. In April 2004 the Commission adopted the level 2 Prospectus Regulation 2004. At level 3, CESR published in February 2005, its recommendations concerning the Level 2 implementation by the respective national competent authorities.