Legal base	Article 95 EC; co-decision; QMV
Department	Business, Enterprise and Regulatory Reform
Basis of consideration	Minister's letter of 20 April 2009
Previous Committee Report	HC 19-ix (2008-09), chapter 3 (4 March 2009)
To be discussed in Council	Possibly late April or early May 2009
Committee's assessment	Politically important
Committee's decision	Not cleared; further information requested

Background

3.1 Any company with its securities listed on a regulated market in the Community must publish its consolidated financial accounts in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and with related interpretations by the International Financial Reporting Interpretations Committee. These are two bodies of the International Accounting Standards Committee Foundation, which is a not-for-profit corporation incorporated in Delaware, USA.[8]

3.2 The European Financial Reporting Advisory Group was set up in 2001 by organisations representing issuers of securities, investors and the accountancy profession involved in the financial reporting process. It assists the Commission in the endorsement of international accounting standards by providing advice on the technical quality of these standards and is used by stakeholders to provide technical input to the development of draft international accounting standards.[9]

3.3 The Public Interest Oversight Board[10] was created in 2005 to increase the confidence of investors and others that the public interest activities, including the setting of standards by independent boards operating under its auspices, of the International Federation of Accountants, a global private body representing the accounting profession,[11] are properly responsive to the public interest. A key role of the Board is to ensure that International Standards on Auditing are developed and adopted by the International Auditing and Assurance Standards Board,[12] a board of the International Federation of Accountants, with due process, public oversight and transparency.

3.4 The Lamfalussy Level 3 committees[13] are the Committee of European Securities Regulators,[14] the Committee of European Banking Supervisors[15] and the Committee of European Insurance and Occupational Pensions Supervisors.[16] They were set up by the Commission between 2001 and 2004 in order to provide for stronger cooperation between national supervisory authorities and the convergence of supervisory practices. They are made up of representatives from national supervisory authorities competent in the fields of securities, banking and insurance in each Member State. The committees do not receive any funding from the Community budget — they are funded by annual contributions from their members, based on the number of votes held in the Council by the Member State concerned.

3.5 With this draft Decision and the annexed staff working document the Commission proposed in January 2009 a programme of Community budget funding over four years, totalling €36.20 million (£32.50 million), for the International Accounting Standards Committee Foundation (€15.00 million (£13.47 million)), the European Financial Reporting Advisory Group (€12.00 million (£10.77 million), the Public Interest Oversight Board (€1.20 million (£1.08 million))and the three Lamfalussy Level 3 committees (€8.00 million (£7.18 million). Additionally the Commission proposed that €7.13 million (£6.40 million) over four years would be needed to provide extra staff for its Internal Markets and Services Directorate to manage the proposed funding.

3.6 When we considered this proposal in March 2009 we heard that the Government:

• agreed, in relation to the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group and the Public Interest Oversight Board, with the aim of the Commission to ensure stable, diversified, sound and adequate funding to enable these bodies to carry out their Community related or Community public interest mission in an independent, efficient and satisfactory way;
• was, however, as yet unconvinced that the Commission's proposals would achieve this aim;
• supported the provision of funding for these bodies on condition that it was to come out of a reallocation of the existing Community budget and would not cause an increase in that budget;
• supported the principle of funding the Lamfalussy Level 3 committees from the Community budget for specific projects asked of them by the Community or, for example, projects to raise supervisory standards, share best practice and enhance supervisory convergence;
• would be seeking clarification on how the proposed funding appropriations were determined;
• would be seeking clarification on a provision in the draft Decision allowing the Commission to add, through the comitology procedure, other eligible beneficiaries to the funding programme; and
• would be asking the Commission to justify the proposed administration costs and to consider options for sharing and reducing these cost implications.

3.7 We commented that clearly enhancement of these various bodies might make for better regulation of accounting and audit practices and for better supervision of financial services. But we noted the various reservations the Government had about the draft Decision and asked, before considering the document further, to hear from the Government about the clarifications it was seeking in the negotiations on the proposal. Meanwhile the document remained under scrutiny.[17]

The Minister's letter

3.8 The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Ian Pearson), tells us first about a number of significant changes to the original draft Decision:

• the recitals now contain reference to the need to converge standards between jurisdictions or develop international standards under a transparent and accountable process, making it important that the Community plays a role in the international standard setting process for financial markets, and to respecting the interests of the Community. The Government believes that this is acceptable;
• the recitals now contain a reference to the importance of International Financial Reporting Standards for the Community since, on adoption into Community law they become obligatory for listed companies, and an explanation that the International Accounting Standards Board issues standards and of the role of the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group and the Public Interest Oversight Board. The Government believes that this is acceptable;
• recitals stating that Community funding of the International Accounting Standards Committee Foundation should be conditional on its fulfilment of the governance requirements laid down by the Community, stress the need for the Foundation and the European Financial Reporting Advisory Group to accomplish their mission in a transparent and accountable manner, in particular by the creation of a Monitoring Board for the Foundation and, in this regard refer to the conclusions of the G20 meeting,[18] the de Larosière Group,[19] as well as the Commission Communication Driving European Recovery for the Spring 2009 European Council.[20] The Government believes that this is acceptable;
• a recital and a substantive provision now state that Community funding of the International Accounting Standards Committee Foundation and the Public Interest Oversight Board should continue unless, after the first two years of co-financing, they have not made substantial progress towards ensuring that neutral funding arrangements form a majority of their total funding, including from third-country parties. The Government believes that this is acceptable;
• a substantive provision now requires a Commission report on the governance reforms of the International Accounting Standards Committee Foundation. The Government believes that this is acceptable;
• the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group and the Public Interest Oversight Board will receive operating grants. But it is still subject to negotiation whether the Lamfalussy Level 3 Committees will be able to receive operating grants, or, as the Government supports, action grants only — it does not support these committees receiving operating grants, which would allow funding of their general functions;
• the European Parliament has proposed increasing the overall funding envelope for the proposal from €36.20 million (£33.70 million) for 2010-2013 to €60.00 million (£55.80 million) for 2010-2012, which the Government understands would be for additional funding likely to go to the Level 3 Committees — the relevant provision is still being negotiated; and
• the Commission will now be assisted by a comitology committee,[21] in accordance with the regulatory procedure with European Parliament scrutiny. The Government believes that this is acceptable.

3.9 The Minister then turns to progress of the negotiations of the draft Decision telling us, in relation to budgetary matters, that:

• the Government, supported by other Member States concerned with budgetary discipline, has, throughout the negotiations, said that the funding for the bodies in this proposal should come from a reallocation of the existing Community budget;
• the Presidency and Commission have advised that it is not technically possible to pre-empt the outcome of the annual budget round by making the proposed Decision contingent on this; and
• the Presidency has suggested, however, and the Government and the other concerned Member States have agreed to, a Declaration accompanying the Decision, in which the Council asks the Commission to do its utmost to finance this initiative from re-prioritisation — drafting of such a Declaration is still being negotiated.

3.10 On negotiations touching on the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group and the Public Interest Oversight Board the Minister says, referring to the Government's doubts as to whether the Commission's proposals would achieve the aim of ensuring stable, diversified, sound and adequate funding for these bodies to enable them to meet Community interests in an independent, efficient and satisfactory way, that:

• the Commission has clarified that the overall aim of its proposal is to ensure that over the long term, the International Accounting Standards Committee Foundation is funded by a fair contribution from the global jurisdictions, of which the Community is one — the proposal shows the Community leading the way in providing a share of this funding;
• if this global funding is achieved, then it is likely that contributions to the foundation budget from other current sources, such as individual Member States, the "big four" accountancy firms[22] and publication income, will no longer be required;
• the Commission, however, has no power to oblige these bodies to cease their contributions — but it is not the aim of the proposal to increase the overall budget of the foundation;
• the Commission has clarified that its intention was that funding for the European Financial Reporting Advisory Group should come from the Commission, private bodies and national standard setters and that for the Public Interest Oversight Board should come from the Commission and other international standard setters; and
• with these clarifications the Government is able to support the proposal to fund these bodies as set out in the proposal, subject to the proposed Declaration on reallocation of the Community budget.

3.11 As for negotiations on the Lamfalussy Level 3 Committees the Minister says that:

• the Government continues to support the original proposal to co-finance the Level 3 Committees for specific projects and to push for this to come from a reallocation of the existing Community budget;
• it does not support any move to general funding of the committees' activities, as is currently proposed by the European Parliament; and
• this issue, together with the level of financing for the committees, is still under negotiation.

3.12 On the question of additional staff the Minister says that the Commission has said, in justification of its bid for extra staff to manage the proposed financial programme, at a cost of €7.13 million, that:

• of the twelve required, ten were to be reallocated from within the relevant Directive, so that the increased cost was only for two people, that is €240,000 (£223,000); and
• twelve people were needed because financial monitoring requirements were onerous.

Conclusion

3.13 We are grateful to the Minister for this account of where matters stand on this proposal and note the useful clarifications and improvements that have been obtained. However, two points concern us:

• the Minister does not mention any outcome on the provision in the draft Decision allowing the Commission to add, through the comitology procedure, other eligible beneficiaries to the funding programme; and
• the European Parliament's proposed significantly increased funding for the Lamfalussy Level 3 Committees, over a shorter period and possibly for operating costs, seems excessive.

So, before considering the draft Decision further, we should like to hear what the position on additional eligible beneficiaries is and what progress the Government has been able to make in its opposition to the European Parliament approach to funding for the Level 3 Committees. It would be useful also to hear about any developments in relation to the Declaration proposed concerning budgetary discipline.

3.14 Meanwhile the document remains under scrutiny.

9   See http://www.efrag.org/content/default.asp?id=4103.  Back

10   See http://www.ipiob.org/index.php.  Back

11   See http://www.ifac.org/.  Back

12   See http://www.ifac.org/IAASB/.  Back

13   The Lamfalussy process is a four-level approach to regulation of the Community's financial services industry. At the first level the European Parliament and the Council adopt legislation, setting framework principles and the Commission's implementing powers, on the basis of Commission proposals on which it is advised by sector-specific committees of high-level representatives of Members States chaired by the Commission. At the second level sector- specific committees of national regulators prepare and advise on implementing measures to be adopted by the Commission. At this level the committees of high-level representatives perform a "comitology" role (comitology procedures regulate exercise by the Commission of implementing powers conferred on it by the Council and the European Parliament and are essentially intended for detailed measures to implement Community legislation) of voting on the Commission's implementing measures before their adoption. At the third level the committees of national regulators work on strengthening co-ordination of regulation, for instance by establishing common interpretations of legislation and peer group review of regulatory practice. At the fourth level the Commission strengthens compliance with and enforcement of EU rules. Back

14   See http://www.cesr-eu.org/index.php?page=cesrinshort&mac=0&id=.  Back

15   See http://www.c-ebs.org/Aboutus.aspx.  Back

16   See http://www.ceiops.eu/content/view/2/2/.  Back

17   See headnote. Back

18   See http://www.londonsummit.gov.uk/en/summit-aims/summit-communique/.  Back

19   See http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.  Back

20   (30474) 7084/09 + ADD 1: see HC 19-xii (2008-09), chapter 1 (25 March 2009). Back

21   Comitology is the system of committees which oversees the exercise by the Commission of powers delegated to it by the Council and the European Parliament. Comitology committees are made up of representatives of the Member States and chaired by the Commission. There are three types of procedure (advisory, management and regulatory), an important difference between which is the degree of involvement and power of Member States' representatives. So-called "Regulatory with Scrutiny", introduced in July 2006, gives a scrutiny role to the European Parliament in most applications of comitology. Back

22   Deloitte, Ernst and Young, KPMG and PriceWaterhouseCoopers. Back