Exclusive: EU to consider tax on financial industry to fund supervision

LONDON (Reuters) - The European Union's markets, banking and insurance watchdogs could be funded from a direct levy on the sector, the bloc's executive body said in a document seen by Reuters.

The European Commission has been reviewing the three watchdogs it launched in 2011 to make supervision of banks, markets and insurers more consistent across its 28 member countries after the 2007-09 financial crisis highlighted supervisory failings.

Currently the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) receive 60 percent of their funding from national supervisors and 40 percent from the central EU budget.

"Given EU and national budgetary constraints, the Commission considers that a revision of the existing funding model should therefore be envisaged, ideally abolishing EU and national contributions," the draft European Commission report seen by Reuters said.

"To this end, the Commission will launch preparatory work to determine under which conditions and additional steps the ESAs could be fully self-financed by the financial services sector."

Staffing and budgets of the three watchdogs are modest compared with regulators in the larger member states, such as Britain's Financial Conduct Authority whose annual budget is 452 million pounds ($768.76 million). The EBA's budget for 2014 is 33.6 million euros.

Member states could welcome the shift to industry funded watchdogs - a common system of financing supervision - and the Association for Financial Markets in Europe (AFME), a top banking lobby, has called for ESMA in particular to have more resources.The welter of EU rules approved to tighten supervision after the financial crisis, such as tighter rules for derivatives, and bank and insurance capital, means they will be taking on more responsibilities and will need extra staff and money.

Any tax would likely be applied in direct proportion to how much supervision an institution requires.

The report also looks at how the powers of the three EU agencies could be extended.

It said potential areas for expanding their roles include enforcing accounting rules, supervising the "shadow banking" sector, and direct supervision of highly integrated market infrastructure like clearing houses, a step Britain is likely to oppose as it seeks to draw a line on more powers being centralized at the EU level.

The European Commission report, which is expected to be published in coming months and is subject to change, said the three watchdogs have performed well so far and have begun to develop their own profiles.

The watchdogs, however, should give consumer and investor protection a higher priority, the report said.

The report stops short of any radical changes to the watchdogs given that major supervisory changes are taking place already with the European Central Bank set to become the main supervisor for some 130 top euro zone banks from November.

The ECB's push into supervision led to changes in how the EBA votes to avoid euro zone countries getting their own way easily.

The Commission report says governance of the watchdogs could be improved further to make decision making faster in the interests of the EU as a whole in a nod to British concerns to safeguard the bloc's single market.

(Reporting by Huw Jones, editing by Chris Vellacott and Louise Heavens)