Less is more?
In a speech on 17 April 2015, appointed Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union admitted that during the financial crisis the Commission had legislated at great speed, which may have had unintended consequences. Over-regulation may have sought greater stability at the expense of hindering growth. He said that the drive for proportionality will involve a review of the cumulative effects of the new regulation to see where changes could boost growth.
Has the Commission (with a fresh set of commissioners appointed in 2015) turned over a new leaf? A new drive, led by Commission First Vice President Frans Timmermans on regulating only where necessary, has resulted in the bringing forward of just one fifth of the number of new legislative initiatives compared to the previous year. Bearing in mind his mandate to reduce unnecessary legislation, Frans Timmermans must sign off on any new Commission legislative proposals.
Consultation on cumulative effects of financial regulation
At the end of September 2015, the Commission published a call for evidence on the EU regulatory framework for financial services as part of its wider Capital Markets Union (CMU) initiative. The purpose of this consultation is to study the cumulative impact of financial regulation that has been enacted since the outset of the financial crisis.
Will this amount to a ‘rolling back’ of regulation? Probably not. However, the intention is to review existing legislation to reduce duplication or improve regulations that are contradictory, overly complex or causing unintended consequences. The fact that the Commission now recognises there may be areas of EU legislation that impose burdens not commensurate with the intended policy objectives represents a marked departure from the relentless ‘stability above all else’ approach adopted as a result of the financial crisis.
That being said, the chance that this consultation will result in a wholesale regulatory overhaul seems remote. Responses to the consultation will be assessed against the objectives of economic and financial stability, consumer and investor protection, in addition to growth and competitiveness. The Commission has said that this exercise is not about undoing the financial regulatory framework or “putting hard-fought recent reforms in question.” As a result, any legislative changes are likely to be surgical and discrete.
Following receipt of responses to the call for evidence, the Commission will report on the main findings and next steps by mid-2016.
Regulation of financial services and markets
In order to have a measurable impact, the CMU umbrella is being cast over a broad range of initiatives. As the scope widens, stakeholders with competing interests increasingly have an interest in CMU. Examples competing interests include:
- increased disclosure versus transaction costs;
- investment growth versus stability;
- consumer protection versus investor choice;
- standardisation versus flexibility; and
- asset encumbrance by banks versus asset availability for bank resolution.
The Commission is basing many of its proposals on analysis from the ESAs (being the European Securities and Markets Authority (ESMA), which regulates financial markets; the European Banking Authority (EBA), which regulates banks; and the European Insurance and Occupational Pensions Authority (EIOPA); which regulates insurers and institutional occupational pensions). The guiding ethos of the ESAs is that more stability brought on by more standardisation and transparency will encourage more types of people to invest. Sadly, this will likely lead to more, not less regulation.
The Commission is of the view that centralising the supervision of capital markets will help to build a Europe-wide capital market, by ensuring that a harmonised set of rules are applied consistently across Member States. The Commission will work with ESMA and the other ESAs to find ways to either bring supervision to the European level, or ensure that national authorities cooperate on a cross-border basis and apply consistently European regulations.
The Commission is reviewing the functions and operation of the ESAs, and looking for ways where convergence of regulatory powers of the ESAs might reduce the extent to which national supervisory regimes result in differing investor protection levels, barriers to cross-border operations and disincentives to companies seeking financing outside their home Member States.
Mature markets such as the United Kingdom, France and Germany already have comprehensive regulatory frameworks in place to support deep capital markets. In these countries, there may be less to gain from changing the rules. In contrast, smaller Member States with a small investor base will have more to gain from harmonisation by being able to access capital markets Europe-wide. In any event, the hope is that the Commission will strike the right balance between managing market and credit risk and growth without stifling innovation or discouraging broader participation in European capital markets.