ESMA's Suggested Amendments To The Transparency Directive

The failure of German payments provider Wirecard in June 2020 continues to have consequences. In November 2020, the European Securities and Markets Authority ("ESMA") published a report on the events leading up to the collapse of Wirecard and the supervisory response thereto which set out various shortcomings in the effective supervision of financial reporting. Following on from this, ESMA on 3 March 2021 proposed in a letter to the European Commission ("EC") some amendments to the Transparency Directive (Directive 2004/109/EC) ("TD").

ESMA notes that the principles included in the TD on enforcement of financial information allow for significant divergence upon transposition into national law. On that basis, ESMA recommends that the EC consider modifying the TD to meet four aims.

1. Enhanced cooperation between authorities across the EU

ESMA suggests that this could be achieved by:

• eliminating confidentiality impediments that prevent an efficient and effective exchange of information between competent authorities, audit oversight bodies, prudential supervisors, and anti-money laundering supervisory authorities; and
• developing regulatory technical standards on cooperation and information exchange between audit oversight bodies and supervisors.

2. Enhanced coordination and governance on a national level

This would involve:

• requiring that national transposition measures clarify the responsibilities, reporting obligations and roles; and
• including regular review clauses to ensure that delegation and designation models remain as suitable as possible.

3. Strengthened independence of National Competent Authorities ("NCAs")

ESMA proposes:

• not allowing the outsourcing to audit firms of regular reviews of financial information; and
• amending the TD to ensure that authorities are independent from market participants and that they act independently of Governments.

4. Strengthened harmonised supervision of information across the EU

Various initiatives are proposed to this end, including:

• modifying the TD to harmonise the powers of accounting enforcers across the EU and in particular to ensure that all, including the delegated entities and designated authorities, have binding powers to request information and to require corrective information;
• supplementing the powers of NCAs, including to require an independent second audit or forensic examination and carry out joint on-site inspections or investigations;
• reinforcing ESMA's role in financial reporting by including the International Accounting Standards (IAS) Regulation in Article 1 (2) of the ESMA Regulation; and

ESMA emphasises in its letter that although the above proposals focus on the TD, it also supports EC initiatives to enhance EU requirements in the areas of corporate governance and audit, especially as regards strengthening and clarifying the role of audit committees and their supervision and on enhancing the requirements regarding issuers' internal controls. Further, ESMA regards the coordination, cooperation and communication between audit committees and financial reporting enforcers as very important.

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