The Lamfalussy process was established in 2002 to create a faster and more flexible legislation in the financial sector at a European level. It can be described as a fast-track procedure for legislation which is divided into four levels.
- Level 1: Framework Acts: The Council of the European Union (Council) and the European Parliament (Parliament) adopt the framework acts in the so-called co-decision procedure.
- Level 2: Delegated Acts and Implementing Acts: Detailed provisions to specify the content and the procedures set forth in the framework acts are proposed by the European Securities and Markets Authority (ESMA) and adopted by the European Commission (Commission).
- Level 3: Guidelines and Recommendations by ESMA: ESMA issues guidelines and recommendations to national authorities and market participants to ensure the uniform application of the level 1 and level 2 acts.
- Level 4: Supervision of the Member States: ESMA supervises the implementation of the European acts by the member states.
The Four Levels of the Lamfalussy Process
Level 1: Framework Acts
Level one comprises the framework acts enacted as directive or regulation by the Parliament and Council under the co-decision procedure. The co-decision procedure (Art. 294 of the Treaty on the Functioning of the European Union (TFEU)) is the ordinary legislative procedure of the European Union since the Lisbon Treaty. Framework acts often contain detailed provisions and extensive annexes and thereby anticipate the delegated and implementing acts on levels 2 and 3 of the Lamfalussy process.
Level 2: Delegated Acts and Implementing Acts
The framework acts are further specified by delegated acts and implementing acts. The framework acts authorize the Commission to adopt regulations, directives and resolutions. ESMA conducted several consultation procedures for delegated and implementing acts relating to the MAR. Market participants had the opportunity to comment on the drafts and respond to specific questions of ESMA.
- Delegated Acts
Delegated acts can be adopted in two different ways.
On the one hand, the Commission is empowered to adopt its own delegated acts (Art. 290 TFEU) and, on the other hand, the Commission adopts regulatory technical standards developed by ESMA (Art. 290 TFEU, Art. 10-14 ESMA-Regulation).
- Delegated Acts (Art. 290 TFEU) The Commission requests technical advice from ESMA which serves as a basis for subsequent drafts by the Commission. Because of the comprehensive expertise of ESMA, the technical advice has a significant influence on the delegated act of the Commission. After the adoption by the Commission, the delegated act enters into force, provided that the Parliament or the Council did not raise any objections within three months after its adoption.
- Regulatory Technical Standards (Art. 290 TFEU, Art. 10-14 ESMA-Regulation)
ESMA develops drafts of regulatory technical standards and submits them to the Commission. The Commission adopts the provisions by regulation or resolution. The Commission may refuse its endorsement of the regulatory technical standards only in exceptional cases, i.e., ESMA plays a lead role in this process.
- Implementing Acts
The implementing acts are procedural provisions implementing technical details of the application of the provisions of the MAR. Similar to the procedure for delegated acts, there are implementing acts by the Commission after requesting ESMA’s technical advice (Art. 291 TFEU) and implementing technical standards of ESMA endorsed by the Commission (Art. 15 ESMA-Regulation).
Level 3: Guidelines and Recommendations by ESMA
ESMA is empowered to issue guidelines and recommendations (Art. 288 TFEU, Art. 16 ESMA-Regulation) in order to establish consistent, efficient and effective supervisory practices in the member states to achieve a uniform interpretation of the capital markets legislation.
Guidelines and recommendations are non-binding, but a comply-or-explain-mechanism was implemented, i.e., each competent national authority has to declare within two months after its publication whether it will comply with such guideline or recommendation or explain the reasons for its non-application. Although guidelines and recommendations are non-binding, they have a significant influence on the national authorities and market participants.
Level 4: Supervision of Implementation by the Member States
Market supervision remains the responsibility of each member state. However, ESMA has assumed a coordinating function for the national authorities (watch-the-watcher model) to ensure the uniform application of the MAR and all delegated and implementing acts. In this context, ESMA monitors the implementation and enforcement of the relevant capital market provisions in the member states. To facilitate the monitoring, the member states have extensive reporting obligations towards ESMA.