On 7 September 2010, the European Council formally approved plans to rebuild the supervisory architecture of financial services in the European Union (EU). The plans will introduce three new supervisory authorities responsible for the stability of banking, insurance, and securities markets, as well as create a European Systemic Risk Board in a move which many believe will represent a shift towards greater centralised control over financial services in Europe.

The reforms have been introduced in response to failings identified during the financial crisis. The de Larosière report, published in February 2009, identified that a patchwork of divergent rules and gaps in regulation had left European financial markets exposed to unprecedented risk. The report recommended a series of measures to strengthen the supervisory structure in the EU. These recommendations have since been endorsed by the Commission and were formalised in proposals for reform in May 2009.

A new European Systemic Risk Board (ESRB) will monitor potential macro-economic threats to financial stability and, where necessary, make recommendations for appropriate action to be taken to reduce risks to European financial markets. The ESRB has been described by Michel Barnier, Commissioner for Internal Markets, as a "European radar screen". It is anticipated that the ESRB will be able to identify any emerging threats and act swiftly to deflate any future financial crisis.

The new supervisory authorities (ESAs) will be given powers and responsibilities to oversee the supervision of banks, insurers and securities markets. The current Level 3 Committees (CEBS, CESR and CEIOPS) will be replaced by the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). The main decision making body of each ESA will be a Board of Supervisors consisting of the heads of the relevant national supervisors from Member States, as well as a chairman.

There have been considerable negotiations on the powers of the ESAs, with member states strongly resisting too much control being handed to the new authorities. It seems, however, that agreement has now been reached on the role and responsibilities of these new bodies. The ESAs will have the power to develop various technical standards to ensure that exceptions, derogations and inconsistencies in the application of EU law are removed. At present, the Level 3 Committees can only issue non-binding guidance. Under the new regime, ESAs will be able to produce technical standards for those areas specified in relevant legislation which will then be endorsed by the Commission in order that they have direct legal effect.

The authorities will be given the power to take decisions which are directly applicable to individual financial institutions in cases of manifest breach or non-application of EU law. In addition, this power will allow each ESA to direct financial institutions where national authorities are in dispute. They will also have the power to prohibit or restrict harmful financial activities or products in "emergency situations". Following considerable negotiation, only national governments will be able to declare the existence of such emergency circumstances.

The new ESAs will have a strong role to play in the supervision of cross-border financial institutions. The ESAs will be able to settle disputes where national supervisors in a college disagree over a course of action. The Commission has stressed that this course of action will only be applied where the action of a national authority would have a serious detrimental impact on either the protection of policyholders or the financial stability of a member state.

The agreement will be put to a European Parliament plenary vote later in September. If approved, the new system is expected to be up and running by January 2011.