The Lamfalussy process, ESMA & the EU CommissionSalvus Team
Anyone that has had any sort of exposure to new European regulation in the area of financial services industry, must have come across Level 1, Level 2, Level 3 and Level 4. These four levels constitute what is called the Lamfalussy process, which was established in 2002 for faster introduction of more flexible legislation in the financial sector at a European level, and it was notably used for the creation of the Markets in Financial Instruments Directive (MiFID).
In this article we will demystify this process, named after Alexander Lamfalussy, which can be described as an expedited procedure for legislation captured by the table below.
|Level 1||Framework Acts of the Parliament and Council|
|Level 2||Delegated Acts|
|Delegated acts by the European commission (Commission) |
– Commission requests technical advice by the European Securities and Market Authority (ESMA)
– Regulation or Directive
|Regulatory technical standards (RTS) |
– ESMA leads the process
– Endorsement by the Commission by regulation or resolution
|Implementing acts by the commission |
– Commission requests ESMA’s technical advice
– Regulation or directive
|Implementing technical standards |
– ESMA leads the process
– Endorsement by the commission by regulation or resolution
|Level 3||ESMA guidelines and recommendations|
|Level 4||Supervision of the member states by ESMA|
The Four Levels of the Lamfalussy Process
Level 1: Framework Acts
In 19 words
The Council of the European Union and the European Parliament adopt the framework acts in the so-called co-decision procedure.
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 is the ordinary legislative procedure of the European Union. Framework acts often contain detailed provisions and extensive annexes and thereby anticipate the delegated and implementing acts on Levels 2 and 3.
Level 2: Delegated Acts and Implementing Acts
In 26 words
Detailed provisions proposed by the ESMA and adopted by the European Commission to specify the content and the procedures set forth in the framework acts.
The Level 1 framework acts are further specified by Level 2 delegated acts and implementing acts. The framework acts authorize the Commission to adopt regulations, directives and resolutions.
Delegated acts can be adopted in two different ways.
On the one hand, the Commission is empowered to adopt its own delegated acts and, on the other hand, the Commission adopts regulatory technical standards developed by ESMA.
- Delegated Acts
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 (RTS)
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, as ESMA is the leading party in this process.
The implementing acts are procedural provisions implementing technical details of the application of the provisions. Similar to the procedure for delegated acts, there are implementing acts by the Commission after requesting ESMA’s technical advice and implementing technical standards of ESMA endorsed by the Commission.
Level 3: Guidelines and Recommendations by ESMA
In 24 words
ESMA issues guidelines and recommendations to national authorities and market participants to ensure the uniform application of the level 1 and level 2 acts.
ESMA is empowered to issue guidelines and recommendations 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 approach is implemented, where 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 the Member States
In 12 words
ESMA supervises the implementation of the European acts by the member states.
Market supervision remains the responsibility of each member state. However, ESMA has assumed a watch-the-watcher coordinating function for the national authorities to ensure the uniform application of the legislation 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.
SALVUS Compliance specialists carry first-hand experience and will support you comply with the MiFID II regulation and in particular on
- Internal Operation Manual (IOM) as per MiFID II regulation,
- Product Governance requirements,
- Suitability and Appropriateness Assessment,
- Client Categorization,
- Best Execution requirements,
- Regulatory Technical Standards of RTS 27 on Execution Quality of Transactions,
- Regulatory Technical Standards of RTS 28 on Execution Quality Summary Statement,
- The ex-post information on Cost and Charges.
Talk to us. Do not hesitate to contact us if you require further information. We will be glad to support you in finding a solution appropriate or answering your questions.
Should you be interested to read about relevant topics on the MiFID II, feel free to visit our earlier articles:
- The 5 Areas of Regulatory Compliance
- Are you complying with Best Execution obligations?
- Are you Ready for a Best Execution Inspection?
- Client Categorization and Investor Protection under MiFID II
- Suitability and Appropriateness Assessment on Product Governance
- The Enhanced Product Governance under MiFID II
- Complying with the MiFID II Reporting Obligations of RTS 27 & RTS 28
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.