The post-crisis EU financial regulatory framework: do pieces fit?

The post-2008 financial crisis was the most severe in living memory, and its effect is still being felt today. The ramifications for the EU have been particularly acute. Its response, encapsulated in a set of some 40 legislative proposals, has brought about a radical transformation in the EU financial sector regulatory framework. EU institutions, notably the Commission, the European Parliament, the Council of the European Union and the European Council, were placed under considerable strain by these events. Given the magnitude of the task they faced in responding to a once-in-a-generation crisis, we conclude that the institutions have all performed well. Nonetheless, the sheer scale of the reforms means that the financial sector regulatory framework inevitably contains some weaknesses. In particular, the expected high standards of consultation and impact assessments were not always maintained. Yet this should not detract from the significant achievement that the reformed framework represents. One of the key planks of the new framework was the establishment of the new European Supervisory Agencies (ESAs). These bodies have endured a baptism of fire since their inception in 2011 and have been responsible for much good work. Yet they are hampered by several fundamental weaknesses, including a lack of authority, insufficient independence, marginal influence over the shape of primary legislation, insufficient flexibility in the correction of legislative errors, and inadequate funding and resources. The powers and authority of these agencies need to be enhanced. We note that the most flawed of the legislative reforms were the result of political pressures to take prompt action, and/or to make the financial sector pay for the crisis. Prime cases include the Alternative Investment Fund Managers Directive (AIFMD), the bank remuneration provisions in the Capital Requirements Directive (CRD IV), and the contentious plans for a Financial Transaction Tax. Yet these are exceptions. We find that the bulk of the new regulatory framework was necessary and proportionate, and would have been implemented by the UK even if action had not been taken at EU level. We also find that it was highly desirable that regulation should be produced for the EU as a whole, both to strengthen the Single Market and to avoid regulatory arbitrage. That said, it was perhaps inevitable, given the amount of new legislation, its broad range and the speed of its introduction, that there would be a number of inconsistencies, rough edges and elements which, with the benefit of hindsight, were disproportionate or even misguided. Not enough consideration was given to the overall effect on the financial sector of such a huge programme of reform, or to ensure consistency with international regulation. We therefore welcome the commitment of the new European Commissioner for Financial Stability, Financial Services and Capital Markets Union, Lord Hill of Oareford, to review the cumulative effect of the various reforms. Such a review should include a thoroughgoing internal audit of the entire legislative framework to date, with a view to making recommendations to remedy the key weaknesses that are identified. A further oversight was the belated recognition of the importance of the growth agenda. We therefore welcome the Commission’s recent proposals for an Investment Plan for Europe and for a Capital Markets Union. Yet the responsibility for promoting growth and prosperity lies not only with the Commission and the EU institutions but with every Member State. The UK has the largest financial sector in the EU, and the implications of these reforms for this country are therefore immense. We believe and regret that the UK’s influence over the EU financial services agenda continues to diminish. The UK Government and other UK authorities must take urgent steps to correct this, and to enhance the UK’s engagement with our European partners. This Committee will seek to play our own part in our liaison with the EU institutions. A united effort is needed to convey the message that the prosperity of the City of London, and the financial services industry it hosts, is in the interests not only of the UK but of the EU as a whole.