05 July 2011

Keynote speech by Steven Maijoor given at the IFRS Conference

Maijoor spoke about five main priorities for ESMA: contributing to safeguarding financial stability, focusing on investor protection, creating a level playing field in financial supervision, the supervision of credit rating agencies and, finally, establishing a single rulebook for financial markets.

This year is not only a pivotal year for the international financial reporting community with the appointment of a new chairman for the IASB, the completion of the memorandum of understanding between the IASB and the FASB, and a potential US SEC decision on the use of IFRS for its domestic issuers. It is also an important year for European financial supervision with the creation of the new European System of Financial Supervision of which ESMA – the European Securities and Market Authority – forms a very important part.

Financial stability

How could financial reporting best contribute to financial stability? Let us not forget that there is no unambiguous definition of financial stability. Nevertheless there seems to be a broad consensus that financial stability refers to the smooth functioning of the key elements that make up the financial system.

In fact I believe that accounting standards do contribute to financial stability by providing clear principles on how to account for complex transactions, such as financial instruments, and by favouring transparency: transparency being key for good market functioning, and good market functioning being an essential component of financial stability. Or, as Hans Hoogervorst said at a conference of the European Commission in Brussels: “Without transparency, there can be no enduring stability”. This not only holds for financial reporting, but also more broadly for securities markets supervision. Hence, ESMA will continue to focus on transparency, but understands that in the end it needs to serve the stability of European financial markets.

Investor protection

It is fair to say that channelling the views of European users into the standard-setting process could be substantially improved. ESMA therefore aims to strengthen its contacts with user organisations to understand investors’ needs better. It is my experience that investors do have opinions on the type of information they need but that they are not always familiar with how this fits within the technical accounting framework. It is our and the IASB’s task to assist them in that.

I acknowledge that the IASB has made significant steps in developing its outreach programme. However, I also believe that we have now arrived at a point in time where having a comprehensive look at the different steps of the IASB’s standard-setting process would have significant merit. This would include looking at how the various steps of the due process link together in the cycle, as well as looking at better defining when the Board should re-expose. A full and transparent due process giving due consideration to market participants' comments is the best guarantee for a smooth adoption of IFRSs. The IASB could consider here more systematic use of effects analyses and clearer communication on the reasons for changing accounting standards at an earlier stage of the standard-setting process, in order to achieve greater transparency about its technical choices.

Level-playing field in financial supervision

I immediately think about the work ESMA is doing to promote consistency in enforcement of IFRS. Ensuring consistent application enables fair and efficient functioning of markets and the availability of price information within those markets: both are important for the protection of investors. CESR started already in 2003 with organising sessions devoted to discussing decisions taken by independent national enforcers of the European Economic Area in respect of financial statements published by issuers with securities traded on a regulated market, and who prepare their financial statements in accordance with IFRS. The purpose of these sessions was (and still is) to increase consistency amongst enforcers’ activities across the EU by discussing enforcement cases before and after the decision is taken at the national level. These discussions gradually became formalised into the European Enforcement Co-ordination Sessions (EECS). These sessions have proven to be very valuable for national enforcers, and more and more cases are discussed at the European level before a decision is taken at national level. As such, ESMA represents the widest community of enforcers of IFRS across the world.

It is my belief that we should further improve the existing coordination between national enforcers to ensure consistent application of IFRSs and a level-playing field in the actions that are taken in the EU. The European regulation setting up ESMA has an interesting tool that we might further develop in this respect. To build a common supervisory culture and consistent approaches throughout the EU, the regulation allows ESMA to provide opinions to competent authorities on the application of existing European legislations, such as the endorsed IFRSs. By issuing such an opinion, ESMA expresses its view to a national competent authority on the particular application (or non-application) of an IFRS. Also, the Regulation provides ESMA with a more powerful so-called Breach of Union law procedure. While we have no specific plans yet, it is clear that ESMA needs to think how it can use its new tools to contribute to a level-playing field, and consistency, in the application of IFRS.

Supervision of Credit Rating Agencies

Let me move to the fourth priority of ESMA and where we have been granted direct supervisory powers: the supervision of credit rating agencies. Since 1st July, ESMA took over the supervision of CRAs from the national authorities. While most CRAs, including the largest ones, are still in the registration phase, I expect that we will conduct the first inspection visits of the large CRAs before the end of this year.

At the beginning of the crisis, CRAs were heavily criticised for being far too optimistic: this is related to their role regarding structured products. Now they are criticised for being too pessimistic: this is related to their role in rating sovereign debt. I will not now further discuss the performance and supervision of CRAs.

ESMA is carefully planning its supervisory activities of CRAs. One of the key points that ESMA will address is to verify that CRAs base their assessments on full and high-quality financial information. It goes without saying that IFRS has contributed considerably to the transparency of companies. It is important for ESMA that CRAs can and do base their ratings on high-quality information. For rating sovereign debt, CRAs obviously cannot rely on IFRS reporting, as governments typically base their reporting on other accounting systems.

Looking at the financial reporting systems used by governments, I think it is fair to say that they are not at the same level as the ones used by listed companies, like IFRS. Investors have been taken by surprise by the level of debt, or other long-term commitments, of countries. These events raise the question whether we should expect the same level of transparency for sovereign debt holders as for corporate debt holders. I think the answer is a clear yes.

Both the IASB and ESMA have always had a strong focus on capital markets and corporate reporting, and have given limited attention to governmental accounting. However, the role of governments in securities markets has changed fundamentally and governments have become more and more relevant to financial markets. With the importance of sovereign debt increasing for the functioning of capital markets, and governments being more active on capital markets, I think we need to reconsider how we include the accounting and transparency of governments in our work.

Single rule book

The fifth priority is ESMA’s major role in contributing to a European single rule book. ESMA will be entrusted to draft technical standards in many areas of its remit, and we are committed to deliver standards of the highest quality while respecting the sometimes extremely challenging deadlines.

I think remarkable progress has been made so far. More than 100 countries have already adopted IFRS, and other countries have clear plans to adopt IFRS in the near future. It is a fact that the US and Japan are not yet there. The US authorities are undeniably committed to achieving a single set of high-quality accounting standards. I am fully respectful of the ongoing reflections in the US on the implications of IFRS adoption, and we appreciate the complex combination of political and economic interests that have to be taken into account. The consultation paper our American counterparts published recently is a good sign of that. Such consultation papers have the benefit of gathering views and to educate market participants on the various possibilities. I am convinced that the US SEC will look closer at other options to implement IFRS as well.

Full speech

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