Legal base	Article 95 EC; co-decision; QMV
Department	Business, Enterprise and Regulatory Reform
Basis of consideration	Minister's letter of 26 April 2009
Previous Committee Report	HC 19-ix (2008-09), chapter 3 (4 March 2009) and HC 19-xiv (2008-09), chapter 3 (22 April 2009)
To be discussed in Council	Not known
Committee's assessment	Politically important
Committee's decision	Cleared, but relevant to the debate on the Commission Communication Driving European Recovery

Background

5.1 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.[25]

5.2 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.[26]

5.3 The Public Interest Oversight Board[27] 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,[28] 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,[29] a board of the International Federation of Accountants, with due process, public oversight and transparency.

5.4 The Lamfalussy Level 3 Committees[30] are the Committee of European Securities Regulators,[31] the Committee of European Banking Supervisors[32] and the Committee of European Insurance and Occupational Pensions Supervisors.[33] 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.

5.5 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.

5.6 When we first reported on this proposal, in March 2009, 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 asked for some further information from the Government. When we considered the draft Decision for a second time, earlier this month, we had before us information about developments on the proposal which partially answered questions we had raised previously or raised other points. We noted that:

• the Government had not mentioned any outcome on the provision in the draft Decision allowing the Commission to add, through a 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, seemed excessive.

So we said that, before considering the draft Decision further, we wanted to hear what the position on additional eligible beneficiaries was and what progress the Government had been able to make in its opposition to the European Parliament approach to funding for the Level 3 Committees. We added that it would be useful also to hear about any developments in relation to a proposed Declaration concerning budgetary discipline.

5.7 Meanwhile the document remained under scrutiny.[34]

The Minister's letter

5.8 The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Ian Pearson), comments first on the provision which would enable the Commission to select new beneficiaries for the programme through a comitology procedure with European Parliament scrutiny. He says that:

• this provision is aimed at ensuring that funding for operating grants and specific projects could continue in the event that the current bodies were, for example, transformed or replaced — provided they continued to meet strict eligibility criteria;
• a new body must fulfil the same eligibility criteria as the existing bodies, as well as additional criteria in the provision;
• this would restrict the new body to being a direct successor or carrying out the same work as the current bodies;
• activities eligible for specific project grants would remain constrained by the same criteria;
• the provision does not increase the overall level of funding, if a new body were added to the programme — grants would be awarded out of the remaining unused credits; and
• the Government is satisfied that, given that an eligible body would be carrying out the same work as the current bodies and that for the Level 3 Committees funding is restricted only to specific activities (and not general operational funding), this provision is acceptable.

The Minister adds that the Government is taking forward its approach to the wider de Larosière debate, including possible reforms to the Level 3 Committees,[35] in the relevant Council discussions.[36]

5.9 Turning to the European Parliament's proposed increase in funding, the Minister tells us that:

• there is widespread resistance among Member States to increasing the total funding envelope beyond the €36.20 million originally proposed by the Commission and the Government is sceptical of the need to increase the envelope;
• the Council has discussed agreeing to a small increase in funding for the Level 3 Committees, as a compromise with the European Parliament, and has proposed that this should come from redistribution from within the existing envelope, rather than by increasing the total envelope size;
• the Government's priority is that funding for the Level 3 Committees remains restricted to activities eligible under the criteria set out for specific projects — these have long been agreed by Ministers; and
• this does not reflect the more recent policy initiatives, for example those proposed in the Larosière Report on Community financial regulation and supervision.

5.10 On a Declaration concerning budgetary discipline the Minister says that:

• the Presidency presented a draft proposing that funding for the programme comes from a reallocation of the existing Community budget, which was agreed in the Council Working Group on 15 April 2009, and on which the Presidency is now seeking agreement from the European Parliament; and
• the Government supports this Declaration.

Conclusion

5.11 We are grateful to the Minister for this further information about developments on this draft Decision. We have no further questions to ask and clear the document. But, even though the proposal is not directly related to the de Larosière Report, we think it relevant to the debate we have recommended on the Commission Communication Driving European Recovery.[37]

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

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

28   See http://www.ifac.org/.  Back

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

30   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

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

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

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

34   See headnote. Back

35   For the de Larosière report see http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.  Back

36   (30474) 7084/09 + ADD 1: see HC 19-xii (2008-09), chapter 1 (25 March 2009). Back

37   Ibid. Back