At their informal meeting in Copenhagen on Friday 19 September, the Danish Presidency of the Council of the European Union will be inviting the EU’s chief financial officers to discuss ways of simplifying Europe’s financial regulations.
Their discussions will be based in particular on a report by the British think tank New Financial, which describes a methodology for developing future legislative initiatives.
In their report, a copy of which has been obtained by Agence Europe, the authors note that in almost 80% of the metrics they used to compare market segments (savings, equities, debt and bank loans), financial activity in the EU is less developed than in the United States. This rate rises to 90% if we compare the EU with a basket of comparable developed economies (Australia, Canada, Japan, United Kingdom, Switzerland).
“The majority of sectors where activity in the EU is deeper than in the US is in areas where you might not necessarily want it to be: cash deposits in the EU are about a quarter bigger relative to GDP than in the US, the stock of bank lending to companies is more than three times as large”, the think tank notes.
It adds that: “Pensions assets are just one-fifth as large relative to GDP, retail investment just a quarter the size of the US, and household financial assets half as big. Equity markets and bond markets are around half as deep as in the US, while venture capital and private markets are less than a third as developed”.
In order to put European financial assets more in service of growth in the EU, the authors of the report believe that there is a “strong case for simplifying” financial regulation in the EU without compromising financial stability or consumer protection. They draw a clear distinction between simplification (adjustments to format and processes, clarification of requirements) and deregulation, which leads to a weakening of prudential requirements (capital, liquidity) and consumer protection.
Firstly, New Financial proposes to upgrade ‘inception impact assessments’, even before deciding to draw up a proposal. Such analyses would really focus on the problem that a regulatory initiative would solve, the results that successful implementation of future rules would achieve in the market segment targeted and the reasons why the existing rules are insufficient.
“This can ensure simpler and more effective new rules, reduce overlaps and contradictions, and achieve better timing and sequencing”, according to the authors. In their view, the European legislator should also undertake not to introduce new rules if these impact studies do not identify any convincing advantage to taking action. “In theory, this is already the case today but in practice it is very rare for the Commission not to continue working on a proposal after an inception impact assessment”, they observe.
In its report, the think tank draws up a list of ten recommendations to help the European legislator simplify European financial regulation. When a proposal for a directive or regulation (level 1) is being drafted, it will be important to avoid being excessively prescriptive in order to dissuade the European financial supervisory authorities (ESMA, EBA and EIOPA) from establishing too many and too detailed rules.
Technical implementation standards (level 2) should also be concise and unequivocal. Whatever their level of development, stakeholders should be able to verify their proportionality and their ability to stimulate competitiveness. The Commission is also asked to ensure that the rules remain consistent across market segments and on a cross-border basis. Finally, once the standards have been adopted, the timetable for their application will have to be drawn up in such a way as to avoid overburdening financial players.
See the New Financial report: https://aeur.eu/f/igh (Original version in French by Mathieu Bion)