On the same day that it published the Capital Markets Union (CMU) Action Plan, the European Commission also launched a public ‘Call for evidence’ asking for empirical evidence on the negative impact of post-crisis regulation on the financial sector. Although framed as a public consultation, the call was mainly aimed at consulting EU Commissioner Jonathan Hill’s friends in the City of London. His initiative indicates a broader shift in favour of the financial industry in Europe.
This expert opinion was written in response to our research article on the European Capital Markets Union: Europe and the financial sector: a continuing love affair.
Has post-crisis regulation of the financial sector gone too far?
The European Commission seems to think so. On 30 September 2015, the same day it published the CMU Action Plan, the Commission also launched a public ‘Call for evidence: EU regulatory framework for financial services’. In this call (which is now closed) it asked the public to provide empirical evidence on the impact of post-crisis regulation, which has had great public support over the last six years, on the financial sector, especially concerning the ‘rules affecting the ability of the economy to finance itself and growth’, ‘unnecessary regulatory burdens’, ‘interactions, inconsistencies and gaps’, and ‘rules giving rise to unintended consequences’. Terms like ‘unnecessary regulatory burdens’ are highly suggestive, because they highlight the alleged irrationality of regulation and imply that it places an undue burden on financial institutions. The consultation was nothing less than an invitation to the financial industry to submit a wish list to the Commission for what it wants changed.
Reviewing laws and regulations is perfectly normal. Usually, however, such reviews do not only aim to identify unnecessary burdens, but seek ways to make regulation more effective. Moreover, this particular review is premature because much of the European regulation up for review has not even been transposed into national law. This stock-taking exercise seems motivated less by experience with extant regulation and more by a desire to seize the opportunity to roll back some of the regulation decided on (although not enacted) when public opinion overwhelmingly supported reforms to make the financial system less crisis-prone
Not a public consultation, but a chat among friends!
The consultation was designed to ensure that the vast majority of submissions would come from the financial industry. Most questions were framed in an excessively narrow and technical way, discouraging other stakeholders from commenting. The requirement to submit empirical data on narrowly-defined issues further privileged those who have access to such data, namely, the financial institutions themselves. The consultation provided no apparent opportunity for making general comments about the assumptions that informed it. It was, therefore, biased in favour of those who agree with deregulation.
If we look at the composition of the respondents to CMU-related consultations. Out of 374 respondents to the 2015 consultation on ‘Building a Capital Markets Union’ who agreed to make their responses public, a little under 200 (well over 50%) were organisations related to the financial industry. In the parallel consultation on securitisation, which was more technical, respondents related to the financial industry constituted two-thirds of all (public) respondents. The ‘Call for evidence’ also had a roughly two-third share of financial industry respondents. This is not a public consultation, but a chat among friends!
A case of poacher turned gamekeeper
None of this comes as a surprise. When Jonathan Hill, the European Commissioner in charge of regulating financial services, was appointed in 2014 many doubted his neutrality. Industry representatives celebrated the fact that Hill would take a more business-friendly approach to the job than his predecessor Michel Barnier. The Financial Times reported that, “in the words of one banker, Lord Hill’s appointment as the EU’s financial services chief was like handing Britain ‘the keys to the kingdom’ – an opportunity to remake Europe’s markets and let the City of London reap the rewards”. Commenting on a legislative proposal on loan securitisations (the pooling of large numbers of bank loans to homeowners, SMEs or students to be turned into complex financial instruments that can be sold to investors), which was to be submitted by the then newly anointed commissioner, the Financial Times further opined that the “proposal is notable for the fact that banks will be analyzing a major piece of draft EU rulemaking to see how many of their wishes have been granted, rather than what potential threats it contains”.
Hill is a Thatcherite who genuinely believes in markets and private business, so we needn’t assume foul play when the regulations coming out of his office are business-friendly. Nonetheless, his professional biography and personal connections make putting him in charge of financial sector regulation a case of poacher turned gamekeeper. He never worked in the financial industry directly, but spent many years in London-based PR firms where he also lobbied for financial institutions. The bias of the ‘Call for evidence’ is, therefore, not surprising, and earlier doubts about Hill’s neutrality are vindicated.
A dangerous path to financial deregulation
But it would be wrong to blame everything on Hill alone. The regulatory shift in favour of the financial industry is more widespread. The fact that the worst of the financial crisis seems to be over means that there is less distrust towards the financial sector and less inclination among policy-makers to pick battles with this powerful industry, which also feels it no longer needs to pretend to feel guilty about the crisis.
Elections also play a role. In the EU, the environment for financial regulation changed after the success of the conservative European People’s Party and the appointment of Jean-Claude Juncker as president of the European Commission in 2014. In his first speech as designated President, Juncker declared that the focus of the Commission’s work must now be on growth, which he apparently understands as being in conflict with solid regulation.
In the UK, home to Europe’s most important financial centre, the Tories’ success in the 2015 general election paved the way for a return to ‘light-touch’ regulation of the financial sector. The British government recently appointed Andrew Bailey as head of the UK’s Financial Conduct Authority, after having forced out his notoriously tough predecessor. Bailey dutifully promised a softer approach, and the City of London was pleased with the choice.
This ‘Call for evidence’ could play a dangerous role in paving the way for financial deregulation, and there may be more to come because of the broader shift in the regulatory mood. Those who haven’t forgotten the lessons from the crisis and the dangers of a light-touch approach to financial sector regulation must take note.