Finance in the EU: When Architecture and Rules Don't Match
The architectural framework for financial markets governance in Europe has silently evolved during the last decades primarily aimed at fostering the creation of the single market for financial services. In response to the regulatory loopholes emerged in the aftermath of the financial crisis, a more direct step to redesign the European architectural framework has been taken with the establishment of three new European Supervisory Authorities (ESAs), operating as of January 2011. Moving from the recent structural reform Giuliano Castellano (Department of Law) sheds light over the relationship between architectural frameworks and regulatory approaches in Reforming European Union Financial Regulation: Thinking through Governance Models (with Alain Jeunemaitre, Ecole Polytechnique, and Bettina Lange, University of Oxford, in European Business Law Review, Vol 23, No. 3, 2012, pp. 437-474).
The analysis stems from a fundamental, though often neglected question on the governance of financial markets: given the regulatory approach chosen, what architectural framework can more effectively govern financial markets? As a result the article shows that a consistency between architecture and regulatory approach has to be respected. In other words, to ensure the sound functioning of markets, 'better rules' are not sufficient per se, as the architectural framework has to be consistently shaped.
In the EU financial governance context, this implies that without reforming the Treaty on the Functioning of the European Union (TFEU) the current architectural framework still presents dangerous inconsistencies between the regulatory approach adopted by the European Commission and the architectural structure entrusted with the power to apply and enforce this approach.
The European Commission within its mandate – and in cooperation with member states – drafts the 'rules of the game' in different branches of finance. Supervisory authorities of twenty-seven countries cooperate under different coordination mechanisms. Committees have been established together with'colleges of supervisors', which are network of supervisors created ad hoc to supervise specific cross-border institutions and operations. Subsequent to the financial crisis, also pursuing the need to restore confidence in the governance structure, the committees have been replaced by the three ESAs – i.e. European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA).
The resulting multi-layered architecture appears to build upon a de facto separation between rule-making powers, held by European policymakers, and supervisory activities (i.e. monitoring and enforcing tasks), carried out in a decentralised fashion, by a series of network-like structures without a defined legal personality. This separation translates into a double-standard modus operandi; where a central-supranational regulator enacts an increasingly more invasive regulatory approach, while the enforcement is mandated to a structure with the ability to enact 'light-touch' decisions.
Within this framework, the new ESAs – whose legal personality is grounded on Article 114 of the TFEU (old Art. 95 ECT) – simply provide for a coordination mechanism between the central rule-maker and the network of national supervisors, in continuity with the approach adopted before the crisis. Therefore, ESAs cannot enact binding norms towards financial market participants. Instead, they supervise national supervisors, as (under the just mentioned Art. 114) they are devices to ensure the 'approximation of laws' within the single market. In other words, the new authorities fortify the separation between rule-making powers and supervisory tasks, leaving the application of common regulatory standards to an architectural framework not necessarily equipped to uniformly enforce the rules adopted at the central level.
A more consistent approach – aimed at aligning the regulatory approach with architecture entrusted to apply such rules – would suggest the establishment of a supranational supervisory structure that, in cooperation with national authorities, directly supervises financial entities and operation impacting the European market. The model adopted to govern EU competition law reveals that this is possible only if the Treaty provides for adequate legal ground. Hence, to ensure consistency between regulatory approaches and the architectural framework for financial markets governance, reform of the Treaty appears to be required.