The banking crisis of 2008/09 exposed gaps in the
European Union's regulation and supervision regimes
as glaring as those revealed anywhere in the world.
Initial reactions by EU policymakers to the crisis were both dramatic and predictable – a typically unco-ordinated series of national initiatives to bolster credit institutions, preserve savings and safeguard small business funding combined with a flurry of laws aimed at strengthening the financial sector’s regulatory framework.
In quick succession, EU directives and regulations were formulated and approved, covering everything from credit rating agencies and the risk-based insurance Solvency II regime to minimum capital requirements and alternative investment fund managers.
As the dust settles, however, there is a new determination in Brussels to pursue a more robust and coherent cross-border approach to banking, insurance and securities supervision. This new approach aims to avoid the nationally-driven, silo-based attitudes so long associated with EU policy development and which contributed to the latest crisis. Moreover, supporters of the 1999 Financial Services Action Plan – a legislative program intended to bring about a single market in financial services as early as 2004 – will be keen to use the financial sector turbulence of the last 18 months to reignite enthusiasm for the project and help realize its architects’ original dream.
With this in mind, industry leaders urgently need to re-engage with the EU policy agenda. They need to adopt a proactive and constructive stance to legislation rather than reacting belatedly, negatively or – worst of all – apathetically as many have done in the past. Imminent EU initiatives include a review of the Markets in Financial Instruments Directive (MIFiD), creating a Packaged Retail Investment Products regime, updating the Market Abuse Directive and a defining EU policy position on responsible borrowing and lending. Few corners of the European financial services sector will escape new or revised regulation from Brussels over the next year.
Four issues that business leaders need to think about
First, legislative and regulatory policy enforcement will require an active, participative stakeholder approach. This will need to include all the key players – banks, insurance and securities firms, the various intermediaries, pan-EU and national regulators, and the European Commission. Industry leaders will be expected to ensure that as market actors they support effective prudential supervision and contribute to reinforcing it. This will involve the sharing of information and best practice, and refining the rules if they do not work.
Next, policymakers will put renewed emphasis on rapid, consistent imple-mentation of directives and regulations across the EU. Like others, I believe it is in everyone’s interests that divergent interpretations, late transposition or the “gold-plating” of EU directives become things of the past. Regulatory arbitrage can only be weeded out through improved and high quality legislation, and, critically, implementation and application of rules that make sense in every jurisdiction. Proposals to strengthen existing pan-EU securities, banking and insurance co-ordinating committees, and transform them into de jure authorities with legislative power to supervise on a cross-border scale, represent a move in this direction.
Third, there is likely to be a renewed push for transatlantic co-ordination and dialogue. The financial services sector in the United States and the EU represents eight per cent and six per cent of economic output respectively, and the magnitude of these markets means that their impact extends far beyond their regional borders. As the bedrock of the global financial industry, these markets constitute in excess of 70 per cent of financial services worldwide.
Co-operation between monetary, regulatory and supervisory authorities on both sides of the Atlantic is likely to be stepped up, helping to avoid the formulation of unilateral and regional solutions to hedge fund regulation, credit rating agencies and OTC derivatives trading. Industry leaders need to get involved in these discussions and make sure that policymakers find the right and uniform solutions.
Finally, the financial services industry as a whole will need to engage much earlier in reviewing the EU legislative process. It will no longer be enough to rely on national regulators to provide sufficient oversight and adopt the right cultural approach to rule-making and interpretation, because national financial sectors no longer function in a vacuum. National financial markets, and the roles of local players, differ quite significantly according to their position in the development cycle. Some EU states have underdeveloped financial markets and less sophisticated institutions. Failure to take account of these divergences – or relying on the assumption that rules are intended only for larger EU states – risks creating a dysfunctional and less than level playing field in the provision of EU financial services.
Read An EU regulatory perspective