EU Financial Regulation Research Articles

The Current Challenges for EU Company and Financial Law and Regulation

Abstract European company and financial law and regulation have been evolving over time along with business and financial practices. The resulting ‘social licence’ established by company and financial law and regulation aimed to balance the granted privileges of limited liability and share transferability with the corporate social contribution to economic development and employment. Recent transformations driven by shareholder value and financialisation have been challenging this balance of interests between stakeholders (including employees and shareholders) and society. The EU institutional framework may respond to these challenges by reaffirming the centrality of the enterprise as a going concern. On this basis, corporate accountability and responsibility may be enforced to make ongoing corporate affairs accountable and responsible for their contribution to economy and society. Ongoing corporate capacity to cope with social and environmental responsibilities may be assured along with the fair and sustainable remuneration of stakeholders, including shareholding investors, and a fair tax contribution. The EU institutional design and policy mix may be organised to respond to this comprehensive set of corporate dimensions. Here the most relevant fields to be reconsidered include: enterprise groups and corporate social responsibility; financial reporting and transparency; financial investment and asset management.

The Current Challenges for EU Company and Financial Law and Regulation

European company and financial law and regulation have been evolving over time along with business and financial practices. The resulting ‘social licence’ established by company and financial law and regulation aimed to balance the granted privileges of limited liability and share transferability with the corporate social contribution to economic development and employment. Recent transformations driven by shareholder value and financialisation have been challenging this balance of interests between stakeholders (including employees and shareholders) and society. The EU institutional framework may respond to these challenges by reaffirming the centrality of the enterprise as a going concern. On this basis, corporate accountability and responsibility may be enforced to make ongoing corporate affairs accountable and responsible for their contribution to economy and society. Ongoing corporate capacity to cope with social and environmental responsibilities may be assured along with the fair and sustainable remuneration of stakeholders, including shareholding investors, and a fair tax contribution. The EU institutional design and policy mix may be organised to respond to this comprehensive set of corporate dimensions. Here the most relevant fields to be reconsidered include: enterprise groups and corporate social responsibility; financial reporting and transparency; financial investment and asset management.

The Role of Civil Society in EU Financial Regulation

‘The interests of European investors, consumers and SMEs,must be at the centre of the reform’. (European Commission, 4 March 2009) INTRODUCTION: A CRUCIAL AND OUTSTANDING ISSUE FOR THE EUROPEAN ECONOMY AND DEMOCRACY In March 2009, the European Commission (EC) recognized the need to put ‘the interests of European investors, consumers and SMEs at the centre of the financial markets reform’. The Commission therefore announced it will ‘ensure that the voice of European investors is much more strongly heard on all financial issues’. However, three years later, the European Economic and Social Committee still reported that ‘one of the reasons for the financial crisis was inadequate and ineffective regulation and supervision of the financial markets . One of the difficulties in financial regulation is how to ensure that differing and contradictory positions are given a balanced hearing . There is no effective counterweight to the legitimate representation of the financial sector's interests . Political debate primarily plays out between the legislator on one side and the financial sector concerned on the other’. Despite the creation and the development of BETTER FINANCE for all (formerly ‘EuroFinUse’, in short ‘Better Finance’) in 2009 and of Finance Watch in 2011 (section 2), and despite the build-up of independent competence (section 3), organised civil society still faces two major hurdles to become an ‘effective counterweight’ to the financial sector in the European political debate: – resources (section 4); and – equal access (section 5) to the public authorities. THE CURRENT REPRESENTATION OF FINANCIAL SERVICES USERS AND OF THE CIVIL SOCIETY AT LARGE THE CREATION OF BETTER FINANCE (THE EUROPEAN FEDERATION OF FINANCIAL SERVICES USERS) IN 2009 Before 2009, there was no civil society organisation dedicated to representing the ‘civil society’ interests in financial services at the European level, except for the specific case of individual shareholders who created ‘Euroshareholders’ as an Association Internationale Sans But Lucratif (non-profit international association) under Belgian law in 1992. It was very representative of European individual shareholder interests as it gathered about thirty national shareholder and other investor and saver organisations from around Europe. But – in addition to its limited scope – its resources were very small, barely allowing it to rent an office in Brussels and to organise one or two meetings per year.

The UK as a Third Country Actor in EU Financial Services Regulation

Unless it remains in the single market via membership of the EEA or is able otherwise to negotiate special access terms, after Brexit the UK will have to fall back on the third country provisions of EU financial services regulation. This paper examines the complexities of the current Union approach to the treatment of third countries and considers the likelihood of Brexit smoothing the progression towards a more unified EU system. The paper also considers what the evolution of the EU’s treatment of third countries is likely to mean for the UK as it seeks to negotiate continued access to the EU market. Finally, the paper explores new opportunities for the UK to innovate in regulatory design without impairing equivalence or undermining its commitment at the international level to global regulatory convergence.

The UK as a Third Country Actor in EU Financial Services Regulation

Unless it remains in the single market via membership of the EEA or is able otherwise to negotiate special access terms, after Brexit the UK will have to fall back on the third country provisions of EU financial services regulation. This paper examines the complexities of the current Union approach to the treatment of third countries and considers the likelihood of Brexit smoothing the progression towards a more unified EU system. The paper also considers what the evolution of the EU’s treatment of third countries is likely to mean for the UK as it seeks to negotiate continued access to the EU market. Finally, the paper explores new opportunities for the UK to innovate in regulatory design without impairing equivalence or undermining its commitment at the international level to global regulatory convergence.

The Regulation of PRIIPs: Great Ambitions, Insurmountable Challenges?

The Regulation on key information documents for packaged retail and insurance-based investment products (‘PRIIPs Regulation’) purports to deal with two important concerns in the field of investor protection: (i) investors do not read, understand, or digest extensive and/or technical information; and (ii) they hardly compare the products and services of different financial institutions. The first concern relates to the long-established problems of information overload and rational ignorance. The PRIIPs Regulation tackles those problems by introducing a short information document, which uses clear, succinct and understandable language and visual indicators supporting the content of the document. The second concern relates to the fact that information documents are often hard to compare in view of their different formats. Standardization is an obvious answer to this problem. The use of standardization, however, depends on the question whether its scope of application is sufficiently wide to cover all comparable products. The PRIIPs Regulation is innovative in this respect, being the first piece of ‘horizontal’ or ‘cross-sectoral’ legislation in the history of EU financial regulation—covering banking, investment, and insurance products, instead of limiting its scope of application to one of these sectors. Although the PRIIPs Regulation deals with very concrete investor protection concerns and should therefore be supported as a significant improvement, it also raises a number of important concerns, challenges, and criticisms. This contribution situates the PRIIPs Regulation in its law and economics and behavioural finance context and offers a critical analysis of its benefits, drawbacks, and—seemingly insurmountable—challenges.

Towards a mature approach to data collection in EU financial regulation

The financial crisis which began in 2008 has had catastrophic consequences for many people, communities, businesses and countries. Failures in financial regulation contributed significantly to the crisis. Regulatory convergence is seen as necessary to prevent a recurrence of the regulatory failures which contributed to the crisis. This paper offers a maturity model to assess the data collection capabilities of financial regulators, enable comparisons of these capabilities and thereby contribute to regulatory convergence. The model provides one small piece of the toolset needed to reduce the risk of future financial crises.

A Way Forward: The Future of Irish and European Union Financial Regulation

The Irish financial crisis caused unprecedented damage to the national economy. While large amounts of tax-dollars have gone towards understanding the events leading up to the crisis, there has not been a concentrated effort to consolidate the lessons learned for both Ireland and the European Union (EU) as a whole. This paper seeks to fill that gap, providing an overview of the key lessons learned from the financial crisis. First, we interrogate the domestic response and evaluate the immediate government intervention and longer-term investigation process through the Banking Inquiry. Second, we focus on the broader domestic policy lessons learned from the crisis. Lastly, we evaluate key changes in E.U. policy that will in turn shape the future of Irish regulatory policy. We find several areas where further reform is necessary, helping chart a path forward for future legislation in the financial regulatory space.

The Regulation of PRIIPs: Great Ambitions, Insurmountable Challenges?

The Regulation on key information documents for packaged retail and insurance-based investment products ("PRIIPs Regulation") purports to deal with two important concerns in the field of investor protection: (i) investors do not read, understand or digest extensive and/or technical information; and(ii) they hardly compare the products and services of different financial institutions.The first concern relates to the long established problems of information overload and rational ignorance. The PRIIPs Regulation tackles this problem by introducing a short information document, which uses easy to understand language and visual indicators supporting the content of the document.The second concern relates to the fact that information documents are often hard to compare in view of their different formats. Standardization of the information document is one obvious answer to this problem. It is however only useful, in as far as the scope of the Regulation is sufficiently wide and covers all comparable products. The PRIIPs Regulation is innovative in this respect, being the first piece of "horizontal" or "cross-sectoral" legislation in the history of EU financial regulation, covering banking, investment and insurance products, instead of limiting its scope of application to one of these sectors.Although the PRIIPs Regulation deals with very concrete investor protection concerns and should therefore be supported as an important improvement, it also raises important concerns, challenges and criticisms. This contribution situates the PRIIPs Regulation in its law and economics and behavioral finance context and offers a critical analysis of its benefits, drawbacks and – seemingly insurmountable – challenges.

Flexibility and Simplification of EU’ Financial Regulation in the Future Programming Period 2014-2020

The paper examines some of the new trends in EU Financial regulation that directly impact the EU budget execution. The New EU financial regulation, valid from 01.01.2013, allows a more effective use of its own resources and establishes simpler rules and clearer implementation procedures for beneficiaries. In this way, an easier, faster and integral access to the Community funds is possible, allowing the EU budget to exercise its role of stabilizing the Union. In the future programming period 2014-2020, different instruments, such as loans, equity or guarantees will be used to enhance the effectiveness of EU funds and thus to enhance their financial impact. The paper also makes reference to other pieces of EU regulation, which have the purpose of addressing the weaknesses identified as a consequence of the financial crisis. Structural Funds Regulations, applicable in the future programming period 2014-2020, aimed to increase the efficiency of structural instruments, so important in the current economic and fiscal climate. However, the debate continues about the possibility of improving the EU budget, its revenue and expenditure, to comply with several financial relevant principles (economic efficiency, equity, stability, visibility and simplicity, effectiveness administrative costs, autonomy financial).

The Proposals for a Single Supervisory Mechanism for Banks in the Euro Area are an Important Step in Strengthening the Economic and Monetary Union

The Single Supervisory Mechanism (SSM) is considered by many to be fundamental for the creation of the European Union banking union. The very idea behind the banking union is not only to strengthen the confidence in the banks of the Member States that are using the euro as their national currency, but also to set up a solid framework for effective oversight of the EU financial regulation. At the time, when the financial crisis affected Europe in 2008, there were twenty-seven diverging financial regulatory systems in operation that were dependent on national legislation. The SSM was strongly needed, because otherwise these different operational regimes would have fragmented the EU internal market, thus exacerbating the financial turmoil. Therefore, a plan for setting up of a banking union has been gradually being discussed over the past couple of years, in particular on the Euro Area Summit by the European Council (June 2012), and in official proposals formulated by the European Commission (September 2012). As of 1 January 2013, new legislation on the matter has entered into force.

Policy Trends in EU Financial Regulation Post the Financial Crisis: Challenges for Investment Funds in Europe

The financial crisis demonstrated that the ancien regulatory and supervisory regime had failed to properly safeguard investors and the stability of the financial system. The EU policy response to the crisis focused on attaining a higher degree of harmonised regulation, particularly in fields that had hardly been touched by the EU legislative machine in the past. These include the OTC derivative market, short selling, the alternative investment funds industry and the depositary business. The regulation that emerged from the ashes of the crisis demands: [a] detailed transparency from financial institutions; [b] more robust regulation of financial product distribution; and [c] financial product intervention by financial supervisors. The paper examines some of the new trends in EU regulation that directly impact the fund industry in Europe. The paper argues that enhanced transparency is likely to benefit both financial supervisors and investors, as it improves the ability of supervisors to identify and investigate abusive behaviour and ensures that investors are provided with more information which is relevant to their investment decisions. The paper contends that the new regulatory framework will increase the cost of doing business, which is likely to trigger a process of consolidation and a change in the structure of the European investment funds industry. This may in certain instances have unintended consequences, such as a possible decrease in depositary capacity in Member States which have a small depositary complement. It is argued that such outcomes may be mitigated through the application of internal market principles and tools that are already applicable in practice in European financial regulation.

Promoting a free market by ending the Single Market – reforming EU financial regulation

The development of the Single Market in the EU – and the extension of its principles to the EEA – has led to dangerous trends in bank regulation as there is a ‘disconnect’ between regulation and deposit insurance systems. Although these problems do not exist in insurance markets to any great extent, Single Market regulation gives rise to other problems in that sector. In particular, it is restricting free trade both within and between countries. We propose a radical new model that would promote free trade without centralisation.

Render Unto Caesar: EU Financial Market Regulation Meets Political Accountability

This paper posits three phases in EU financial market regulation. First, for the 1990s, established scholarship suggests leadership by public actors in the context of development of the single market and relations with the USA. We adopt this analysis, characterising it as ‘public–private’ regulation. Second, in the new millennium regulation shifted towards ‘private–public’, with regulators paying more attention to the demands of large financial firms. This tendency is explored through a critical study of ‘technical’ decision‐making by EU regulators, focusing upon the Committee of European Securities Regulators and rating credit agencies. Third, as from 2010 EU policy‐makers react to the spillover of the financial crisis from markets to member states, some limits to private–public governance have been underlined. The paper concludes with a discussion of positions taken by the European Parliament, moderating claims made for ‘technical’ rule‐making and opening up the possibility of wider intellectual and policy debate.

Financial Regulation in the European Union: A Research Agenda

Over the past two decades, the European Union (EU) has become a central actor in financial regulation and developed complex institutions to fulfill its roles. Pre-financial crisis scholarship has provided key insights into the functioning of this institutional cobweb and its evolution over time. However, the financial crisis has highlighted four facets of EU financial regulation (EUFR) that deserve more scholarly attention than they have received so far: (1) the permissive pre-crisis consensus on the merits of financial liberalization and integration, (2) the embeddedness of financial regulation in the political economy of EU integration at large, (3) preference formation of public and private stakeholders in EUFR, and (4) the global economic and regulatory context of EUFR. This paper presents the key scholarly challenges across these four areas. Addressing them promises not only academic insights but also promotes the relevance of EUFR research for real-world policy dilemmas.

After the Crisis: The Regulation of Hedge Funds and Private Equity in the EU

This article examines the recent development of EU regulatory policy with respect to the alternative investment industry up to and including the adoption of a major new Directive. This Directive is just one part of a much larger package of new EU measures relating to the financial markets but its emergence merits being singled out for three reasons. First, the account of how it came about and what it sets out to do touches upon two overarching concerns that are frequently expressed about laws that are made in the immediate aftermath of a crisis: opportunistic use of crisis situations to achieve unrelated goals, and crisis-induced regulatory overreaction. Second, with the regulation of alternative investments being addressed internationally as well as in Europe, close examination of this area provides revealing glimpses of ways in which key players in the EU policy formation process have simultaneously used the financial crisis to exert influence internationally and used international developments to further an internal agenda. Finally, out of the exceptional level of controversy that surrounded the legislative process for the Directive come some important insights on relations between the EU Institutions and, in particular, on the European Parliament’s increasing deftness in putting its mark on EU financial market regulation.

A Crisis of Governance? — From Lamfalussy to de Larosière or Bridging the Gap between Law and New Governance in the EU Financial Services Sector

Modern financial law historically emerged as a patchwork of regulatory reactions to a series of financial crises. It continued to develop in sync with the ebb and flow of regulatory cycles that oscillated between periods of calm, conducive to a deregulatory frenzy, and periods of crises followed by re-regulatory fervour. Reform initiatives spurring in reaction to crises also comprise procedural/institutional reforms (i.e. those relating to the “who” and “how” of regulation, as opposed to the “what”). The latest financial crisis is no exception to this rule. This article focuses on the EU institutional reforms, which arguably represent a more radical departure from the status quo (in comparison to domestic or international initiatives) in that they involve an instance of “proper” institution-building with implications across different levels of governance. This reform is examined first against the backdrop of the existing EU agencies' legal framework and is found to constitute an important milestone in the crystallization of this framework. A closer look is then taken at the new European Supervisory Authorities' role in EU rulemaking, and to their relationship with the European Commission. Subsequently, the paper takes a further step back and offers some thoughts about the continuously mutating relationship between law and new governance practices, as illustrated in the context of EU financial regulation.

A Shift in Focus: Systematisation in European Private Law through EU Law

AbstractThe discourse on the Europeanisation of private law appears gradually to be moving into new territory in which the central debate on convergence of private laws in Europe makes place for structural questions on private law development in a multi‐level European legal order. With the realisation that private law is and will remain complementary regulated at EU level and in national laws, a re‐orientation is called for that, in the words of Micklitz, ‘allows one to determine which norms shall be elaborated and enforced at what level and by whom’. This article accepts that such a re‐orientation is needed in relation to substance, process, instruments and enforcement; a more fundamental question needs to be addressed, however, in order to ensure coherence in the development of private law in Europe. As can be gleaned from existing practice in EU consumer law, competition law, and financial market regulation, a deeply engrained tension between market integration and protectionist policies in Community law has resulted in incoherent regulation at EU level, which filters through into national legal systems. This puts at risk fundamental values of private law, such as certainty and fairness. A solution for this is proposed by shifting the focus from national private laws to the political and doctrinal structure of EU private law, and the normative framework it provides. General principles of EU private law, it is argued, could and should provide a counterweight to the problem of conflicting policies and set out a guideline for the future development of European private law.

The Regulation of Hedge Funds and Private Equity: A Case Study in the Development of the EU’s Regulatory Response to the Financial Crisis

This article examines the recent development of EU regulatory policy with respect to the alternative investment industry up to and including the adoption of a major new Directive. This Directive is just one part of a much larger package of new EU measures relating to the financial markets but its emergence merits being singled out for three reasons. First, the account of how it came about and what it sets out to do touches upon two overarching concerns that are frequently expressed about laws that are made in the immediate aftermath of a crisis: opportunistic use of crisis situations to achieve unrelated goals, and crisis-induced regulatory over-reaction. Second, with the regulation of alternative investments being addressed internationally as well as in Europe, close examination of this area provides revealing glimpses of ways in which key players in the EU policy formation process have simultaneously used the financial crisis to exert influence internationally and used international developments to further an internal agenda. Finally, out of the exceptional level of controversy that surrounded the legislative process for the Directive come some important insights on relations between the EU Institutions and, in particular, on the European Parliament’s increasing deftness in putting its mark on EU financial market regulation.

Restructuring Global and EU Financial Regulation: Capacities, Coordination and Learning

It is said that 'generals fight the last war'. Regulators can do the same. The question is whether in the plethora of reforms that are being developed, the financial regulators are building the regulatory equivalent of the Maginot Line or whether they are devising strategies that will enable them to counter, or at the very least anticipate, the next crisis. The paper focuses on regulators’ capacities for anticipation rather than resilience per se. It argues that for these capacities to be developed, the current mechanisms by which the financial regulators learn of their own and each others’ performance need to be quite fundamentally reoriented and regulators need to build in stronger mechanisms for cognitive challenge. The paper analyses the cognitive shifts prompted by the crisis, and associated policy developments. It then considers the changes in organisational structures of financial regulation at the global and EU levels, linking those to the cognitive shifts identified, and focusing on current mechanisms of observation, communication, enforcement and coordination. In particular it examines how key actors are positioning themselves within the regulatory system as a whole and the modes of coordination they are developing. It then considers how the system’s existing and potential capacities for reflexive learning and dynamic responsiveness can be strengthened. It focuses on two elements of that challenge: building capacity through enhancing information and knowledge, both about what is happening outside the system in the markets and the performance of the regulatory system itself, and developing mechanisms of challenge.