This article appeared for the first time under the title ” CB-Insight: Die Aufgaben einer Finanzmarktaufsichtsbehörde” together with Bont Patrick, in: Betriebs-Berater Compliance, dfv Mediengruppe, Frankfurt am Main 2014, pp. 253-255. For the sake of good order, it should be noted that the following revised and translated article is only intended to briefly describe the factual and legal situation in 2014.
The scope of responsibilities of the financial market supervisory authorities has changed considerably in recent years. With globalisation and the technological networking of financial markets, regulation and supervision also had to be adapted to developments. Whereas in the past the focus was primarily on the individual financial intermediary, today the focus is on the overall system. The associated increasing complexity of supervisory activities and many new tasks present the financial market supervisory authorities with major challenges and are reflected in their organisation, competencies and activities.
The emergence of integrated financial market supervision
The history of regulation and supervision of the financial markets runs parallel to the history of financial crises. Serious events have led to the expansion or tightening of financial market regulation. Authorities or organisations close to the administration were created to implement them. For example, the United States Securities and Exchange Commission (SEC) was created in response to Black Thursday, the stock market crash of October 1929 and the beginning of the Great Depression of the 1930s.
It was not until the 1980s and 1990s that national, integrated financial market supervisory authorities were created in Europe and Asia. In the decades before that, supervision of the financial markets was limited to sectors or product groups in isolation and was mostly carried out by the state administration and to some extent by self-regulatory organisations. By bringing together and integrating the various competent supervisory authorities, resources and expertise were to be pooled. The aim was to be able to deal with the emerging bancassurance groups at eye level. Singapore was a pioneer in this process. The Monetary Authority of Singapore (MAS) began operating in the city-state as early as 1984.
The institution of financial market supervision is therefore relatively young in global terms. However, it is already undergoing a far-reaching transformation process. In response to the financial and economic crisis since 2008, an unprecedented number of regulatory projects have been initiated by the political authorities. The impetus for this came from the G20 at their 2009 summit in St. Petersburg, where measures to overcome the global crisis were discussed. In the final declaration, the G20 made it clear that no financial centre, no financial intermediary and no financial product should be left unregulated and unmonitored (“no more unregulated entities, products and markets”). The implementation of this strategic goal represents a challenge for financial market regulators worldwide. In addition, internationalisation and the increasing technological and economic networking of financial markets mean that supervisory activities are becoming more complex and the model of an integrated but nationally oriented supervisory authority needs to be reconsidered and further developed.
Tasks of a financial market supervisory authority
The objectives of supervisory activities are, in principle, to protect customers and investors and to ensure the stability of the financial market. The tasks of a financial market supervisory authority are derived from these objectives. A distinction is made between four areas of responsibility: Prudential supervision, market and conduct supervision, combating abuse and macro-prudential supervision:
- Prudential supervision (also known as microprudential supervision or solvency supervision) is essentially a preventive measure to ensure the solvency of individual financial intermediaries at all times. A classic example of this are risk management or capital adequacy rules that must be complied with at all times by banks, insurance companies and other financial intermediaries.
- Market and conduct supervision includes, among other things, regulations on compliance with minimum or quality standards, obligations to clarify matters (e.g. for the prevention of money laundering), corporate governance requirements or information and transparency regulations for investors.
- The aim of combating abuse is to prevent activities requiring a licence from being carried out without a corresponding authorisation. If, for example, a company acts as an asset manager towards its clients without having the corresponding licence, the Financial Market Authority will take measures. These range from a warning to the involvement of the criminal prosecution authorities.
- Finally, macro-prudential supervision comprises those activities of the supervisory authority that are intended to ensure the stability of the financial system as a whole. Typical supervisory instruments are, for example, specific capital requirements for systemically important financial institutions.
It goes without saying that the range of tasks of the financial market supervisory authority varies according to national structures and needs. For example, regulatory activities such as the preparation of legal foundations for political bodies or advising political leaders are also included in the specifications of the supervisory authorities. The allocation of the above-mentioned areas of responsibility is also handled differently. In many countries, responsibility for macro-prudential supervision lies with the respective central bank. Microprudential supervision of (large) banking institutions is also often carried out jointly by the central bank and the financial market supervisory authority.
Organisation and competences of a financial market supervisory authority
In the ideal model of a modern, integrated financial market supervisory authority, the above-mentioned tasks are performed across all sectors of the financial industry. The organisational structure is therefore often geared to this and consists of four operational units, namely banking supervision, insurance supervision, securities supervision and market supervision. Depending on the market and the mandate of the authority, these are supplemented by cross-sectional functions and staff units. The competencies and responsibilities of the bodies, organisational units and employees, internal processes, financial and personnel matters are defined according to business management principles. Corporate governance, compliance or risk management are just as important and obligatory for the “Financial Market Authority” as they are for its supervisors.
From a legal point of view, the Financial Market Authority is structured as a legally independent unit, usually in the form of an institution under public law. The independence in the exercise of supervisory activities is absolutely central. In all other matters, a reporting or approval requirement vis-à-vis superordinate political supervisory bodies is common.
In order to be able to carry out the supervision of financial intermediaries and financial markets effectively, the Financial Market Authority has a wide range of instruments at its disposal in the form of competencies. These are usually regulated in a formal law and are concretised by directives or applied in the form of orders (individually concrete legal act, specific addressee). Naturally, the name and form of these instruments vary from jurisdiction to jurisdiction. The same applies to the procedural rules to be applied.
The basis for the work of the Financial Market Authority is information and data. The ability to request or collect and process such information and data is therefore central. Usually, regularly required data are transmitted to the authority by the financial intermediaries as part of a standardized, often electronic reporting system. This is necessary, for example, to monitor ongoing compliance with minimum capital requirements. In addition, the Financial Market Authority may request comprehensive information on an ad hoc basis, either to enable it to assess a person or a situation. Other sources of information include discussions with the management of financial intermediaries or information from other authorities.
If the level of information does not suffice for a final assessment, the Financial Market Authority has the possibility to carry out an on-site inspection and obtain a precise picture of the situation. Such an inspection may also be delegated to third parties with specific expertise, e.g., auditors.
Once the Financial Market Authority has gained a picture of the situation, measures must be decided. These measures, as well as the associated scope of discretion, are in turn prescribed by law. These measures range from simple confirmations to concrete instructions or guidelines for restoring a (lawful) situation, to the appointment of an administrator with specific tasks (control activities, settlement, etc.) or the prohibition of entering into certain business relationships.
Last but not least, sanctions, i.e. penal provisions, are among the instruments of financial market supervision. In financial market supervision law, these can be divided into criminal offences that are punishable in court and administrative offences. The former are reported to the criminal prosecution authorities if there are grounds for suspicion. The latter are the responsibility of the Financial Market Authority. Normally, these are fines. However, other measures, such as publication of the financial market participants concerned and the sanction (“name and shame”), are also possible in numerous jurisdictions.
In the German-speaking area, the supervisory authorities of Germany (Federal Financial Supervisory Authority, BaFin), Switzerland (Swiss Financial Market Supervisory Authority, FINMA), Austria (Financial Market Supervisory Authority, FMA AT) and Liechtenstein (Financial Market Authority, FMA) are organized, with certain deviations, according to the principles described above. The same applies to the majority of financial market supervisory authorities in the rest of Europe and in Asia.
The example of the FMA Liechtenstein shows how country-specific conditions can also be represented. The FMA is organized in four operational divisions. In addition to Banking Supervision, Securities Supervision, and Insurance and Pension Supervision, another division, “Other Financial Intermediaries”, was established. This division is responsible for supervision of the trust business, which is typical and important for Liechtenstein. Market supervision is currently regulated on a cross-divisional basis. However, since (currently) there is no regulated market, i.e., stock exchange, in the country, many European regulations are currently in the process of implementation, but without a concrete scope of application. Since Liechtenstein does not have its own central bank (the official currency is the Swiss franc), the FMA also has sole responsibility for macro-prudential supervision.
Compared with Europe, the situation in the USA is quite different. Supervision there is carried out by almost a dozen different institutions, and organisationally it depends primarily on the type of financial market participants. For example, the central bank, the Federal Reserve (FED) is responsible for banking supervision, the SEC for the supervision of securities exchanges and the Commodity Futures Trading Commission (CFTC) for the futures exchanges. The comparatively very fragmented supervision of the financial sector has its origins in historical circumstances. This system is characterised by much greater specialisation and, in return, all the greater demands on coordination and exchange between the authorities
Main areas of activity
In addition to the “day-to-day business” of a financial market supervisory authority, there are subject areas that require special attention. The reason for this often lies in extraordinary events on the market or in new regulatory projects, i.e. in the implementation of the legislator’s orders. The following focal points of activity are currently in the focus of the Liechtenstein Financial Market Authority, but are likely to be high on the list of priorities for other financial market supervisory authorities as well. These are ensuring system stability, combating money laundering and terrorist financing, and international cooperation in supervision and regulation.
a) Ensuring system stability
The importance of a stable financial system has been dramatically demonstrated in the financial and economic crisis of recent years. It became obvious that with technological progress and the networking of financial markets, the vulnerability of the entire system has increased. In traditional, microprudential supervision, the financial system was assumed to be stable if the individual financial intermediary was solvent. This view is hardly held today. Macroprudential supervision is intended to complement microprudential supervision and have a positive impact on the stability of the system. The risk of a financial crisis and the very high economic and social costs associated with it should thus be avoided. At both international and national level, numerous organisations and authorities are currently working on improving the supervision of the financial system and creating the foundations and instruments for intervention in an emergency.
In Liechtenstein, a “Financial Stability Expert Group” was established for this purpose. Its members include representatives of the Government, the FMA, and the financial center. The Expert Group is responsible for the development and coordination of the macroprudential foundations. Macroprudential supervision is the responsibility of the FMA. Its task is to comprehensively analyze the risk and stability situation in the financial system. On this basis, warnings of risks and undesirable developments can be communicated and, at the same time, options for action to avert danger can be identified.
(b) Combating money laundering and terrorist financing
The fight against money laundering and the financing of terrorism has been a major priority in the financial industry since the 1990s. The leading international body for combating money laundering is the Financial Action Task Force on Money Laundering (FATF), based at the OECD in Paris. The FATF has issued 40 recommendations in the form of minimum standards. These are observed worldwide and are implemented by the EU in the form of the Money Laundering Directive. This Directive is also applicable in the EEA country Liechtenstein. National legislation, the Due Diligence Act (DDA), imposes comprehensive due diligence obligations on financial intermediaries. Compliance with these obligations is verified through regular inspections by the FMA.
The scope of anti-money laundering legislation was originally clearly defined. The aim was to prevent money of illegal origin from being “laundered” and introduced into the normal economic cycle. This was intended to put a stop to organised crime. This concept has been continuously expanded and today, for example, the illegal use of legally acquired funds also falls under the term money laundering (e.g. financing of terrorism). With the FATF recommendations updated in 2012 and their forthcoming implementation in the EU’s fourth money laundering directive, the catalogue of predicate offences for money laundering in particular will also be expanded. In this context, the general public is particularly aware of the discussion on the qualification of tax offences. The expansion of the fight against money laundering leads to greater complexity and additional effort in documentation and administration. This applies both to financial intermediaries and to the supervisory authorities. As a result, costs are higher and the need for resources on both sides is constantly growing.
(c) International cooperation
Financial market participants and financial markets are globally networked. Business relationships and transactions are concluded across national borders. Modern technologies make it possible to serve customers, purchase financial products and trade in the markets at any time and from any place. This development also places new demands on regulation and supervision. As a national authority, the Financial Market Authority has an area of influence limited to its own jurisdiction. The strengthening of international cooperation among supervisory authorities must therefore be seen as a response to the globalisation of financial markets. At the international level, numerous organisations have been set up whose purpose and task is, on the one hand, to draw up internationally applicable supervisory standards and, on the other, to improve cooperation and the exchange of information between supervisory authorities. One example is the International Organization of Securities Commissions (IOSCO). IOSCO is the leading standard-setter in the field of securities supervision. The organisation’s recommendations are often transposed into national or even EU law, thus ensuring uniform supervision across borders. Cross-border cooperation is also common in the supervision of international financial groups. The financial market supervisory authorities of the respective countries in which a group and its branches operate join together in Supervisory Colleges. In this way, a comprehensive picture of the situation of a financial intermediary can be obtained and the activities of the authorities are coordinated.
At European level, the supervisory system has been fundamentally overhauled. Since 2011 there are three new EU supervisory authorities (EBA for banks, EIOPA for insurance companies and ESMA for securities and market supervision) and an EU Systemic Risk Board (ESRB), which analyses systemic risks and makes recommendations to the European Supervisory Authorities (ESAs). In principle, the new European supervisory system provides for a division of tasks between national supervision and the three ESAs or the ESRB. While the national supervisory authorities will continue to exercise so-called ongoing supervision (analysis, on-site inspections, etc.), the ESAs will, in principle, have a supervisory and control function with corresponding enforcement powers. The new European Supervisory Authorities have been endowed with comprehensive supervisory, control and enforcement powers.
The international activities represent a great challenge, especially for smaller authorities such as the Liechtenstein Financial Market Authority. Participation in numerous meetings and the technical processing of complex topics require a great deal of resources. Nevertheless, it is foreseeable that the internationalization of financial market supervision will increase sharply. Supervisory authorities and regulators must keep pace with developments in order to be able to continue to perform their most important tasks, namely the protection of clients and investors and the safeguarding of system stability.
 G20 Leaders’ Declaration, 6 September, 2013
 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing