EPSO Finance: Prudential Rules, Markets and the Single Rulebook

Two Layers, One Word

There is no open EPSO competition for Finance. What exists is CAST Permanent, whose Finance profile stays open on a rolling basis, plus finance content examined inside Economics, Audit and Administration field-related MCQs.

The word "finance" covers two syllabuses that share almost nothing:

The EU's own money. The Financial Regulation, the Multiannual Financial Framework, own resources, budget implementation, the authorising officer, the European Court of Auditors. That layer is covered in our EU budget guide, which quotes the MFF regulation and the Own Resources Decision at length, and in our procurement guide for the contracting side of the Financial Regulation.

Everyone else's money. The prudential and markets acquis: capital requirements, supervision of credit institutions and investment firms, market conduct, and the supervisory architecture that ties it together. That is what this guide covers.

Read the question stem before deciding which layer you are in. "Authorising officer" is layer one. "Competent authority" is layer two. They are never the same body.

For how field-related MCQs are structured across specialist tracks, see our guide to the EPSO specialist competitions FRMCQ.

The Format

30 questions in 40 minutes, 15 correct to pass. Under the current EPSO model the field-related MCQ is the ranking instrument; reasoning tests are pass-or-fail gates that do not feed your final score.

The CRR / CRD IV Pair

Two instruments, same date, same Official Journal issue, different jobs.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, amending Regulation (EU) No 648/2012 — OJ L 176, 27.6.2013, p. 1. Its legal base is Article 114 TFEU, and it was adopted having regard to the opinion of the European Central Bank.

Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC — OJ L 176, 27.6.2013, p. 338.

Why One Is a Regulation

This is stated in the text, and it is a better exam question than it looks.

Shaping prudential requirements in the form of a regulation ensures they are directly applicable. That ensures uniform conditions by preventing diverging national requirements arising from the transposition of a directive. It means all institutions follow the same rules across the Union, which boosts confidence in the stability of institutions especially in times of stress. And it reduces regulatory complexity and firms' compliance costs, particularly for institutions operating cross-border.

Every clause there is a reason a distractor can invert. "Allows Member States to adapt requirements to national conditions" is the opposite of the stated purpose, and it sounds reasonable.

What Sits in the Directive

The Directive contains the provisions governing:

• authorisation of the business;
• acquisition of qualifying holdings;
• exercise of the freedom of establishment and the freedom to provide services;
• the powers of home and host Member State supervisory authorities in that regard;
• initial capital;
• the supervisory review of credit institutions and investment firms.

Its main object is to coordinate national provisions concerning access to the activity of credit institutions and investment firms. Access and supervision in the Directive; capital and prudential ratios in the Regulation.

The general prudential requirements in the Regulation are supplemented by individual arrangements decided by competent authorities as a result of their ongoing supervisory review of each individual institution. The Directive sets out the range of such arrangements, and competent authorities exercise their judgment as to which to impose — including, for liquidity, arrangements taking institution-specific factors into account. Pillar 1 is uniform; Pillar 2 is judgement.

Basel

On 26 June 2004 the Basel Committee on Banking Supervision adopted a framework agreement on the international convergence of capital measurement and capital requirements — the Basel II framework. The provisions of Directives 2006/48/EC and 2006/49/EC taken over by the Regulation are equivalent to Basel II; by incorporating the supplementary elements of Basel III, the Regulation forms an equivalent to Basel II and III.

Basel is not EU law. It is a standard the EU implements, and the Regulation says which parts correspond to which framework.

Definitions Worth Knowing Verbatim

Operational risk — the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk.

That definition is a gift to question writers because of what it includes and excludes: legal risk is in, and strategic and reputational risk are not named.

Initial capital — the amount and types of own funds specified in Article 12 of Directive 2013/36/EU for credit institutions and in Title IV of that Directive for investment firms. Note the cross-reference direction: the Regulation defines the term by pointing at the Directive.

Dilution risk is defined alongside it, and an instrument is only a financial instrument where its value derives from the price of an underlying financial instrument or another underlying item, a rate, or an index.

Remuneration

Remuneration policies that encourage excessive risk-taking can undermine sound and effective risk management. G-20 members committed to implementing the Financial Stability Board Principles for Sound Compensation Practices and Implementing Standards, which address the detrimental effect of poorly designed remuneration structures on risk control by individuals. The Directive implements those international principles at Union level.

The Supervisory Architecture

The Three Authorities and the Joint Committee

EBA is established by Regulation (EU) No 1093/2010, EIOPA by Regulation (EU) No 1094/2010, and ESMA by Regulation (EU) No 1095/2010 of 24 November 2010.

They act together through the Joint Committee referred to in Article 54 of those three regulations, where they develop guidelines aiming to converge supervisory practices and — within three years of adopting such guidelines — draft regulatory technical standards for the same purpose.

Regulatory technical standards are adopted by the Commission under Articles 10 to 14 of the ESA regulations. Implementing technical standards are adopted under Article 15. The rationale is stated: as bodies with highly specialised expertise, it is efficient to entrust the ESAs with drafting technical standards which do not involve policy choices, for submission to the Commission.

Drafted by the authority, adopted by the Commission, no policy choices. Three facts, one sentence, several possible questions.

The Systemic Layer

Regulation (EU) No 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system establishes the European Systemic Risk Board — OJ L 331, 15.12.2010. Macro-prudential oversight sits beside micro-prudential supervision, not inside it.

The Single Rulebook

The High-Level Group on Financial Supervision in the EU invited the Union to develop a more harmonised set of financial regulation. In the context of the future European supervision architecture, the European Council of 18 and 19 June 2009 stressed the need to establish a European single rulebook applicable to all financial institutions in the internal market.

That is the origin story behind the whole architecture, and it dates precisely.

Cooperation and Information Flows

Where a Member State has more than one competent authority for the prudential supervision of credit institutions, investment firms and financial institutions, it must take the requisite measures to organise coordination between them.

In exercising their duties, competent authorities take into account the convergence of supervisory tools and practices in applying the requirements adopted under the Directive and the Regulation — the cooperation obligation within the European System of Financial Supervision.

Nothing in the confidentiality chapter prevents a competent authority from transmitting information to ESCB central banks and other bodies with a similar function in their capacity as monetary authorities, where the information is relevant for their statutory tasks — including the conduct of monetary policy and related liquidity provision, oversight of payments, clearing and settlement systems, and safeguarding the stability of the financial system.

Note the qualifier: in their capacity as monetary authorities. The gateway is defined by function, not by institution.

Consolidated supervision. Authorities responsible for supervision on a consolidated basis establish lists of the financial holding companies and mixed financial holding companies referred to in Article 11 of the Regulation, and communicate them to the competent authorities of other Member States, to EBA and to the Commission. Administrative penalties or other administrative measures aiming to end observed breaches or their causes may be imposed on those holding companies.

Financial conglomerates. Where an institution applies methods 1 or 2 of Annex I to Directive 2002/87/EC, it discloses the supplementary own funds requirement and capital adequacy ratio of the conglomerate. EBA, EIOPA and ESMA develop draft regulatory technical standards through the Joint Committee to specify how.

Markets — MiFID II and MiFIR

Directive 2014/65/EU governs investment firms; Regulation (EU) No 600/2014 of 15 May 2014 is its directly applicable counterpart. Both were published in OJ L 173 of 12 June 2014. The same directive-plus-regulation pairing as CRD and CRR, for the same reason.

The Services

Investment services and activities include reception and transmission of orders in relation to one or more financial instruments; execution of orders on behalf of clients; underwriting of financial instruments and/or placing on a firm commitment basis; placing without a firm commitment basis; and the operation of multilateral trading facilities.

Ancillary services include safekeeping and administration of financial instruments for clients — including custodianship and related services such as cash and collateral management, but excluding maintaining securities accounts at the top tier level — and investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments, and services related to underwriting.

Two pairs are routinely confused: underwriting with a firm commitment against placing without one, and safekeeping excluding top-tier securities account maintenance.

The list of financial instruments includes commodity derivatives and others constituted and traded in such a manner as to give rise to regulatory issues comparable to traditional financial instruments — the anti-avoidance principle behind scope.

Product Governance and Client Information

Where an investment firm offers or recommends financial instruments which it does not manufacture, it must have adequate arrangements to obtain the relevant information and to understand the characteristics and identified target market of each instrument. Distribution carries its own obligation; it is not discharged by the manufacturer's.

Clients must be told whether the firm will provide a periodic assessment of the suitability of the instruments recommended. Information on financial instruments and proposed investment strategies must include appropriate guidance on and warnings of the risks associated with those investments or strategies.

MTF Admission

On initial admission to trading of financial instruments on an MTF, sufficient information must be published to enable investors to make an informed judgment about whether to invest — either an appropriate admission document or a prospectus, where the prospectus requirements apply in respect of a public offer made in conjunction with the initial admission. There must also be appropriate ongoing periodic financial reporting.

Five Places Candidates Lose Marks

Which layer. EU budget or financial-sector regulation. Authorising officer or competent authority. Decide before you read the options.

Regulation or directive. CRR and MiFIR are directly applicable; CRD and MiFID require transposition. The split is by subject matter — capital and transparency in the regulations, access and conduct in the directives — and it is deliberate.

RTS or ITS. Articles 10 to 14 for regulatory technical standards, Article 15 for implementing ones. Both drafted by the ESAs, both adopted by the Commission, neither involving policy choices.

Definitions are quoted. Operational risk, initial capital, financial instrument. Precise wording, precise inclusions — legal risk is inside operational risk.

Basel is not EU law. It is the standard the EU implements. The Regulation states which of its provisions correspond to Basel II and which to Basel III.

How to Study This Field

Decide which layer your track examines and go deep there rather than shallow across both. The Annex II duty descriptions in a Notice tell you which.

For this layer, read the recitals of Regulation (EU) No 575/2013 before its articles. They explain why the instrument has the form it has, and that reasoning is directly examinable.

Then read the definitions articles of the Regulation and Directive 2013/36/EU. Definitions have single correct answers, which is what you want under time pressure.

Then map the architecture on one page: EBA, EIOPA, ESMA, their founding regulations, the Joint Committee, the ESRB, and which article produces which kind of technical standard.

Then practise under time. Eighty seconds per question is the constraint that turns a read regulation into a score. You can drill the finance block on EU-now in short sessions, and ask EUgenio when two instruments seem to overlap — it answers from the same official texts cited here, and says when it has no source rather than inventing one.

References and Sources

All quotations in this article come from official EU sources:

• Regulation (EU) No 575/2013 — Capital Requirements Regulation (OJ L 176, 27.6.2013)
• Directive 2013/36/EU — Capital Requirements Directive IV (OJ L 176, 27.6.2013)
• Directive 2014/65/EU — MiFID II (OJ L 173, 12.6.2014)
• Regulation (EU) No 600/2014 — MiFIR (OJ L 173, 12.6.2014)
• Regulation (EU) No 1093/2010 — establishing the European Banking Authority
• Regulation (EU) No 1092/2010 — European Systemic Risk Board (OJ L 331, 15.12.2010)
• European Court of Auditors
• European Commission — EU Budget

Where this article describes what a question is likely to test, that is our editorial judgement based on the format of published field-related MCQs — not text from any Notice of Competition. The provisions, definitions and dates are quoted from the instruments listed above.