Monday 01 March 2021 09:32
Executive summary
The unprecedented case of Wirecard triggered the SMSG to present an own initiative report with construc-tive recommendations to ESMA and other European institutions. The magnitude of the case and its impact on a wide range of areas require forward-looking responses, embedded in a fully-fledged Capital Markets Union (CMU) where investor protection and market integrity are core objectives.
Following a documented examination of the case and building on the Fast Track Peer Review (FTPR) pub-lished by ESMA on 3 November 2020, the SMSG presents in a first part recommendations on priority topics which fall into ESMA´s remit, namely supervision/enforcement, market abuse and short selling. As a com-plement to this, the SMSG deemed relevant to also address auditing due to the importance of reliable stat-utory accounting for properly functioning capital markets. The second part of the report deals with general banking supervision, corporate governance and collective redress. Even though ESMA does not have direct competences in those areas, the SMSG is of the opinion that regulatory developments in those areas would mitigate the risk of such wrongdoings happening again.
The key recommendations of the SMSG’s are the following (Annex 1 provides a full overview). First, in case more than one national authority oversees the supervision of accounting fraud, their respective compe-tences should be clearly defined. The SMSG recommends that ESMA would develop guidelines to further harmonize how and when NCAs should use their investigative powers in case of possible accounting fraud. Further to a peer review on resources, the SMSG recommends that ESMA uses its supervisory convergence tools (i) to promote an NCA culture which avoids conflicts of interests, (ii) to standardise and make more transparent NCA’s investigations and enforcement, and (iii) to foster exchange of information between dif-ferent supervisors, criminal authorities, and also between supervisors and auditors. In the area of market abuse, the SMSG recommends that ESMA uses its supervisory convergence tools to improve several cru-cial aspects such as (i) the restriction of trading in financial instruments by NCA staff, (ii) effective scrutiny of allegations of market manipulation, and (iii) the publication of information about enforcement. With re-gards to short selling, the Wirecard case highlighted the limitations of the regime at national and EU levels. The SMSG is of the opinion that a fundamental reflection on the use of short selling bans is necessary. A dichotomy between a systemic short selling ban due to specific circumstances and a short selling ban ap-plied to a specific share (the latter being disputable), may for instance be useful. The SMSG recommends that ESMA uses its supervisory convergence tools to clarify the circumstances under which a prohibition or a restriction can be enacted. The SMSG is not convinced of the usefulness of the opinion – a mere con-sistency check – which ESMA needs to issue in regard of any short selling restriction proposed by an NCA. The SMSG recommends that ESMA issues an own initiative report to the European Commission in order to pave the way for changes to the level 1 Short Selling Regulation.
Source: SMSG advice to ESMA on initiative overview report on Wirecard case