Mairead McGuinness, European Commissioner for Financial services, financial stability and Capital Markets Union. Photo: Shutterstock

 

Following the current regulatory rollercoaster, the next European Commission will have the difficult task of slowing the pace of rulemaking in finance, and consolidating what is already in place. With Banking Union and CMU as ongoing objectives, a staff of about 2 600 persons in financial supervision at EU level, five-yearly review clauses in regulation, and an ever-growing financial lobby in place in Brussels, this will be difficult.

The EU has added an impressive amount of new regulation under the von der Leyen Commission, with several pieces still in the pipeline. The regulatory framework affects capital market operators and infrastructures, investment, payments, crypto assets services providers, including prudential rules for banks and insurance companies, and a framework for digital resilience in financial institutions. The sustainable finance framework has added a further layer. The rules have become increasingly detailed due to the objective of a single rulebook.

The ‘single rulebook’ was coined during the height of the financial crisis in 2009 by the European Council to refer to the ambition of a unified regulatory framework for the EU financial sector. The aim was to ensure the uniform application of the Basel III rules in all Member States, as the crisis had starkly highlighted the detrimental nature of regulatory competition as a consequence of the minimum harmonisation approach adopted. It became the standard for rulemaking in finance, with the help of the newly created ‘European Supervisory Authorities’ (ESAs) to propose implementing measures.

Today, almost all basic rule in finance, whether a regulation or a directive, rely on delegated and implementing acts, regulatory and implementing technical standards (RTS and ITS), guidelines and recommendations, and related Q&As – in other words, level 2 and level 3 implementing measures. In banking, the centrepiece rule, and the Capital Requirements Regulation and Directive (CRR and CRD), have well over 300 implementing measures, including guidelines. In capital markets, the revised MiFID framework governing capital markets activities (referred to as ‘MiFID II’) is estimated to have more than 30 000 pages alone. And this concerns only the core acts, not yet what is being discussed among the legislators in amendments, see the table below for an overview. In each area of financial services, there are another 10 to 15 measures that have their proper implementing measures, such as UCITS or the rules regulating investment funds.

A recent case in point is the Green Bond proposal, which links the EU financial regulatory set-up with the green taxonomy. The compromise reached under the Swedish Presidency was viewed as acceptable by industry but still very prescriptive. Companies issuing green bonds will have to align the use of proceeds with the green taxonomy, which raises usability challenges given the widespread data unavailability and the assessment of proportionality for smaller projects and SMEs.

But what is a single rulebook? The notion has never been legally defined in EU law or at least more clearly specified in any official document. It gives rises to horizontal and vertical inconsistencies across EU financial law, as well as the appropriate level of regulation. It is open to the vicissitudes of the political process, with politically sensitive issues moving to level 1, and unresolved matters adding to technical standards in level 2. An overview of the level of progress made to establish a unified rulebook since its inception and the level-playing field among market participants across the EU/EEA would therefore be useful.

When compared to other major jurisdictions, in particular the UK and the US, the EU has – given its structure and need for a level playing field – legislated a lot at level 1, through the co-decision procedure between the European Parliament and the Council of the EU. The US has managed to maintain a more principles-based approach, and leaves implementing issues to the discretion of the supervisory agencies, who are accountable to Congress. The UK is attempting to move back towards the principles-based system, using the common law approach, which raises questions about accountability and control. This does not seem to be easy, as the UK currently has its own MiFID II, through which it has ‘onshored’ the parts of MiFID that applied directly when the UK was an EU Member State (see Latham&Watkins). And it only made minor amendments to ensure that the regime operates effectively in a UK-only context (for example, moving ESMA’s functions to the Financial Conduct Authority).

The broader question remains market integration and competitiveness. According to ECB data, financial market integration has declined. The Banking Union and CMU seem to be stuck, even though the EU has a well-functioning Single Supervisory Mechanism, now with 20 Member States after 10 years. EU banks’ performance is satisfactory, according to the latest EU stress tests, but the question can be raised about the ever-growing compliance function that banks have. The growing number of rules is also an issue for supervisors, which are essentially paid for by the supervised. Since the financial crisis stuck, the EU institutions have added about 2 600 jobs in financial sector supervision (ESAs, the ESRB, the SRB, the SSM).

Looking forward, the current pace of regulation will need to be reduced, regulatory consolidation and finetuning applied and simplification considered. But it remains to be seen whether this will happen, given the process that has been set into motion and its various spillover effects, the five-year review clauses in almost all pieces of EU financial law and the unforeseeable nature of events. The UK’s difficulty, as a sole jurisdiction, to disentangle MiFID II’s market rules, demonstrates what a challenge it is.