PURPOSE: to revise the financial rules applicable to the general budget of the Union to make them simpler and more focused on results.

LEGISLATIVE ACT: Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012.

CONTENT: the Regulation amends the existing Financial Regulation , which establishes the general framework for budgetary management, as well as a number of acts governing the EU's multi-annual programmes in different areas, including cohesion policy. The improvements introduced aim to reduce the administrative burden faced by all actors involved in the implementation of the EU budget.

The main changes include the following:

broaden the possibility for recipients of EU funds to use simplified cost options and focus on results rather than on determining the costs actually incurred;

strengthen performance measurement of EU-funded projects. Performance will be linked to the direct application of the principle of sound financial management defined as the implementation of the budget in accordance with the principles of economy, efficiency and effectiveness; avoid multiple controls by ensuring that any information already available from the Union institutions, managing authorities or other bodies and entities implementing Union funds is reused; ensure that the principle of a single audit prevails for the ERDF, ESF, Cohesion Fund and EMFF and double the thresholds below which an operation is not subject to more than one audit; combine financing from EU structural funds with financial instruments and the European Fund for Strategic Investments through so-called 'blending'. It will also be possible to blend grants and financial instruments under the Connecting Europe Facility to finance projects in the fields of transport, energy, and information and communication technology; establish a more comprehensive framework for the use of financial instruments and budget guarantees to stimulate investment; clarify the procedure for establishing EU trust funds and specify the principles applicable to contributions to trust funds; make it easier to use EU structural funds for the integration of migrants and refugees and to combat tax evasion and money laundering more effectively; provide for the provision to the bodies responsible for management and control activities of a non-binding methodological guide setting out the Commission's control strategy and method; increase transparency by improving the visibility of the Union's contribution to citizens.

Horizontal principles such as sustainable development and gender equality and non-discrimination shall play a key role in the effective implementation of the ESI Funds. In addition, in order to protect one of the fundamental principles of public finances, the no-profit principle is maintained in this Regulation.

ENTRY INTO FORCE: 2.8.2018. The EU institutions are given additional time to adapt to the new rules on their administrative expenditure. They shall apply them from 1.1.2019.

The European Parliament adopted, by 485 votes to 41, with 109 abstentions, a legislative resolution on the proposal for a regulation of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union and amending Regulation (EC) No 2012/2002, Regulations (EU) No 1296/2013, (EU) 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1305/2013, (EU) No 1306/2013, (EU) No 1307/2013, (EU) No 1308/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, (EU) No 652/2014 of the European Parliament and of the Council and Decision No 541/2014/EU of the European Parliament and of the Council.

The proposed Regulation provides, in a single text, for a revision of the general financial rules accompanied by corresponding amendments to the sectoral financial rules contained in 15 legislative acts covering multiannual programmes.

The European Parliament’s position, adopted at first reading under the ordinary legislative procedure, has brought changes to the Commission proposal. The amendments concern, inter alia , the following points:

Simplification in favour of the recipients of EU funds : in the interest of increased efficiency, Member States and other recipients of Union funds shall be able to make more frequent use of simplified cost options . In this context, the conditions for using lump sums, unit costs and flat rates shall be made more flexible.

Performance : the concept of performance as regards the budget shall be clarified. Performance shall be linked to the direct application of the principle of sound financial management. The Regulation defines the principle of sound financial management and a link should be established between objectives set and performance indicators, results and economy, efficiency and effectiveness in the use of appropriations.

Transparency : with regard to budget implementation, the application of that principle implies that citizens should know where, and for what purpose, funds are spent by the Union. Such information fosters democratic debate, contributes to the participation of citizens in the Union's decision-making process, reinforces institutional control and scrutiny over Union expenditure, and contributes to boosting its credibility. Communication shall be more targeted and shall aim to increase the visibility of the Union contribution for citizens . Without prejudice to the rules on the protection of personal data, the utmost transparency regarding information on recipients shall be sought.

Indirect budget implementation : the Commission shall have the possibility to implement the budget indirectly through Member State organisations. For reasons of legal certainty, it is therefore appropriate to define a Member State organisation as an entity established in a Member State as a public-law entity, or as a body governed by private law entrusted with a public-service mission and provided with sufficient financial guarantees by the Member State concerned.

Best practice : in order to promote best practices in the implementation of the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund, the European Agricultural Fund for Rural Development (EAFRD), and the European Maritime and Fisheries Fund (EMFF), as well as the European Agricultural Guarantee Fund (EAGF), the Commission shall, for information purposes, be able to make available to bodies responsible for management and control activities a non-binding methodological guide setting out its own control strategy and approach, including checklists, and examples of best practice. That guide should be updated whenever necessary

Internal audit progress committee : each EU institution shall set up an internal audit progress committee to ensure the independence of the internal auditor, monitor the quality of internal audit work and ensure that internal and external audit recommendations are duly taken into account and followed up by its services.

The non-profit principle : in order to protect one of the fundamental principles of public finances, the non-profit principle shall be maintained in the Regulation.

Grants : in principle, these shall be awarded following a call for proposals. Where exceptions are allowed, they should be interpreted and applied restrictively in terms of scope and duration.

Trust funds : the Regulation clarifies the procedure for establishing EU trust funds and specifies the principles applicable to contributions to trust funds. The Commission shall consult the European Parliament and the Council on its intention to establish a Union trust fund for emergency and post-emergency actions. The establishment of a Union trust fund for thematic actions shall be subject to the approval of the European Parliament and of the Council.

Migrants, refugees : in order to respond to the challenges posed by increasing flows of migrants and refugees, the objectives to which the ERDF can contribute in its support of migrants and refugees shall be spelled out with a view to enabling Member States to provide investments focusing on legally staying third-country nationals, including applicants for asylum and beneficiaries of international protection.

Single audit : in order to ease the administrative burden resulting from overlapping controls, especially for small beneficiaries, without undermining the principle of sound financial management, the single audit principle for the ERDF, the ESF, the Cohesion Fund and the EMFF shall prevail and the thresholds below which an operation is not to be subject to more than one audit shall be doubled.

In addition, the visibility of the ESI Funds shall be enhanced in order to better communicate their results and achievements to the public.

Horizontal principles such as sustainable development and gender equality and non-discrimination shall play a leading role in the effective implementation of the ESI funds.

The Committee on Budgets, in conjunction with the Committee on Budgetary Control, adopted the report drawn up by Ingeborg GRÄSSLE (EPP, DE) and Richard ASHWORTH (ECR, UK) on the proposal for a regulation of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union.

The Committees on Employment and Social Affairs, Industry, Research and Energy, Transport and Tourism, Regional Development and Agriculture and Rural Development, exercising their prerogatives as associated committees in accordance with Article 54 of the Rules of Procedure, also gave their opinions on the report.

The Commission proposed, in a single text, a revision of the general financial rules accompanied by corresponding amendments to the sectoral financial rules contained in 15 legislative acts on multiannual programmes.

The committee recommended that the European Parliament's position adopted at first reading in accordance with the ordinary legislative procedure should amend the Commission proposal.

The amendments concern in particular the following points:

Timetable : Members regretted the fact that deadlines for the examination of the proposal do not allow appropriate consideration of the opinions of the European Parliament and of the Council. They also regretted that the proposal under consideration was not preceded by an impact assessment and suggested an amendment in order to ensure that future major amendments to the Financial Regulation are accompanied by an impact assessment.

Performance : Members suggest integrating performance more into spending decisions. Performance should be described on the basis of the achievement of objectives and the direct application of the principle of sound financial management. Without seeking to prejudge the relevance of the programme concerned, there should be a link between objectives set and performance, indicators, results, additionality and economy, efficiency and effectiveness in the use of appropriations.

Transparency : communication should be more targeted at recipients , aimed at increasing visibility for citizens, while ensuring through defined-measures that the messages are received by beneficiaries. The utmost transparency regarding data on beneficiaries should be sought, without prejudice to the rules on the protection of personal data.

Horizontal principles : the report stressed that horizontal principles, i.e. partnership involvement, sustainable development, gender equality and non-discrimination, have generated important contributions to effective implementation of ESI Funds and should be upheld as forerunners for any kind of investment involving the Union budget, including financial instruments and EFSI.

Simplification in favour of recipients of EU funds : Member States should increasingly make use of simplified cost options and of ‘single lump sum’ financing in order to make the associated administration less burdensome and to simplify the rules governing the allocation of funds.

Union public procurement should ensure the efficient, transparent and appropriate use of Union funds while reducing the administrative burden on recipients of Union funding and on managing authorities.

Audits and controls : these should focus more on beneficiaries who represent a high risk for the Union budget, taking into account past irregularities.

Non-profit rule : whereas the Commission intends to abolish the non-profit rule, Members proposed to retain it . The non-profit rule should be seen as one of the main instruments to avoid misuse of the public money.

Audit : in line with the principle of sound financial management, additional safeguards should be put in place for cross-reliance on audits. The Commission should therefore preserve the right of audit if necessary. In addition, funds and projects should be audited when EU funds account for more than 50 % of the funding.

Trust funds : Members considered it too early to extend the scope of Union trust funds to internal actions on the grounds that these funds can significantly change the budgets adopted by the European Parliament and the Council and carry the risk of using funds from financing instruments for purposes not foreseen in the basic acts establishing those instruments.

Blending facilities : this should promote a wide mix of contributions from national and EU budgets or private investors in order to optimise the use of available resources and attract as much private investment as possible and follow a well-defined and transparent governance process.

Reports : Members proposed a number of changes to the reporting requirements. They aim to streamline reporting requirements, reduce the number of reports and ensure that budget authorities have sufficient time to prepare the discharge.

OPINION No 1/2017 of the Court of Auditors.

On 9 December 2016, the Council requested an opinion from the Court on the Commission proposal to revise the financial rules applicable to the general budget of the Union. The Financial Regulation (FR) sets out the principles and procedures governing the establishment and spending of the European Union (EU) budget and the control of the EU funds.

The Court made the following observations and recommendations:

Governance : the Court suggested that the Commission should use the revision of the FR as an opportunity to update its governance arrangements in order to comply with international best practice. The Commission should in particular:

further streamline reporting, by issuing a single accountability report or a suite of reports; publish as part of the annual accounts or accompanying information an estimate of the level of error based on a consistent methodology and present this information together with the provisional accounts; introduce specific requirements for the creation and functioning of an audit committee within EU institutions with a spending role.

Annual report and special reports : the Court opposed the Commission proposal as regards the way in which the Court presents its special reports, considering that this would undermine the legitimate administrative autonomy of the Court.

Simplification for recipients of EU funds : the Court supported the measures introduced by the Commission although it does not see the need to remove the “no-profit” principle for grant recipients.

It suggested that the Commission should clarify: (i) proposals on combining methods of implementation or budget implementation instruments by putting in place adequate safeguards to address the risks linked to combining funding sources; (ii) the proposed amendment on the financial instruments, in particular by defining in the FR proposal, the basis for the operation of the common provisioning fund and calculation of the effective provisioning rate.

Budget flexibility : the Court considered that it is possible to considerably simplify the budgetary provisions. It suggested rejecting the change proposed for the “flexibility cushion”, “negative reserve” and carry-overs as it introduces further complexity. It considered that budgetary flexibility should not be achieved by holding more funds in reserve and that a new approach to the carry-over procedure would be simpler, more flexible and promote efficiency. The Court did not support the proposed changes to the use of assigned revenue . It recommended that there should be no expansion in the use of internal assigned revenue and that all internally generated revenue should be accounted for as general revenue.

Trust funds : the proposal would enable trust funds to operate within the EU funded through internal policy instruments. The Court considered that the premature extension of the use of trust funds to internal policies raised issues of administration, cost, audit and accountability in relation to the creation of trust funds for external actions. The Court, therefore, did not support the proposal to extend the use of trust funds.

Payment based on conditions fulfilled or results achieved : the Court supported the increased use of payments based on conditions fulfilled or results achieved. It called for a clear definition of performance in relation to sound financial management and not to reduce the number of criteria that need to be covered by ex ante evaluations.

Streamlining of reporting : the Court welcomed the consolidation of the reports prepared by the Commission but considered that the implications of such changes have not been fully assessed. The Court considered the proposals on reporting to be inappropriate. The Court suggested that if changes were made, they would constitute a complete reporting package, and include the information from the annual activity reports (AARs) that is significant to external stakeholders. In this way, a significant simplification in reporting would be achieved.

Audit arrangements : the Court shared the Commission’s opinion that it should simplify its relationship with international organisations by relying upon their existing audit arrangements wherever possible. This could avoid a multiplication of audit examination of the same projects and allow for a more adequate use of financial and human resources. It recommend requiring the Commission to consolidate all information concerning recoveries and corrections into one document presented to us together with the provisional accounts.

Lastly, the Court addressed other proposed changes, including certain issues such as changes in sectoral rules.