EU Financial Sector Rules: from Simplification to Agility

EU Financial Sector Rules: from Simplification to Agility The EU has a serious problem with complex rules and regulations, and its banking and capital markets have suffered more than most other sectors. A new report, from a task force at the Brussels-based European Capital Markets Institute (ECMI) and produced with support from CFA Institute, underlines how the rulemaking process now holds back market deepening and proposes some wide-ranging reforms. Europe does not need weaker financial regulation. It needs a rulemaking system that is simpler, more integrated, and agile enough to support deeper capital markets, investor protection, and financial innovation at the same time. Investors from outside Europe, and many within the EU, must contend with multiple rules, regulators, and supervisors. The 27 countries, which as a single bloc would account for roughly 11% of global equity markets and 18% of bond markets, are often approached one-by-one. Policymakers have for some time aimed to create a single continent-wide market for financial services but their effort to create a level playing field in regulation and supervision has in fact held back a more vibrant and liquid market. The EU financial sector rulebook that governs banking, insurance, pensions and capital markets appears more complex than in other markets. EU institutions, such as the European Commission as a central rule maker, need to find agreement with the 27 EU states, where national agencies remain largely in charge of implementing and enforcing EU rules. What some market participants think of as EU-level supervisors — crucially, the European Securities and Markets Authority (ESMA) — are in fact largely coordinating bodies with very few powers to define and enforce rules. Stability Came with Complexity This explains why the EU’s intense rulemaking in the wake of the Global Financial Crisis, in large part guided by a consensus among the G20 countries, has been a mixed blessing. Banking and capital markets have been largely stable and most market players resilient in the face of several major shocks. The rights of retail and professional investors are better protected, and markets more widely trusted than in the aftermath of the crisis. At the same time, the effort to translate EU rules uniformly across all member states has required complex implementation rules and guidance. National authorities elaborate EU rules in their own jurisdictions, and in many cases demand standards above what the common EU baseline would suggest. This so-called “gold-plating” in turn creates barriers between markets, for instance when there are lengthy procedures in approving the cross-border marketing of funds, or when the same obligation is translated into different reporting templates. MiFID II, the EU’s key capital markets law, illustrates this problem well. It is spelled out in some 50 implementing, or so-called level 2, texts (more than 80 if a parallel regulation is included). To meet the private industry’s quest for full clarity, ESMA, as the coordinating EU agency for securities markets regulation, offers a steady stream of opinions, guidelines and elaborating statements. Close to 100 such quasi-legal texts are under constant revision. While this may be extreme, the other 60 or so EU financial sector laws have similarly spawned more rules. No doubt, the multi-layered construction of the EU is in good part to blame. But national governments have also contributed to this complexity, while the financial services industry has repeatedly sought more detailed guidance to reduce the compliance risks that a more principles-based regime would entail. The Cost Is More Than Red Tape The “red-tape” costs of compliance and reporting are often foremost on the minds of market participants. But the cost is not only administrative. A fragmented rulebook makes Europe a harder region in which to invest, harder to scale within, and slower to adapt as finance becomes more digital, cross-border, and private-market-oriented. Fragmentation between the EU 27 markets will keep many financial instruments and market players small, and, by consequence, relatively inefficient. Scale and costs of the EU’s roughly 65,000 retail and professional funds are evidence of this. Overly complex rules can stifle innovation. Large incumbents are well placed to handle the compliance burden, but smaller challengers are easily discouraged. As digital business models evolve, drawn-out and highly detailed rulemaking may no longer be fit for purpose. Complex rules have been a long-standing problem of the EU, though popular caricatures often belittle the challenge of governing a market of 450 million consumers. Coming after several previous attempts, the EU’s current simplification drive could be more meaningful. The rightly praised Draghi Report in 2024 certainly underlined it will be essential in reviving growth. The new simplification agenda has already delivered some results, for instance with the reduction in non-financial reporting obligations, or with a more pragmatic implementation of the bloc’s AI Act. Simplification Is Not Deregulation EU leaders are at pains to point out they are not part of the deregulation drive seen in other jurisdictions. The objective should not be deregulation. It should be better regulation: fewer duplicative rules, clearer supervisory responsibilities, and more flexibility to respond to changing markets. Competitiveness of financial markets, which is a secondary mandate for the UK regulators, should result from stability and market integration, not by cutting into long-standing policy aims or revisiting the tenets of supervision, which emphasize predictability over principles and discretion. A Reform Agenda for More Agile Markets The new report produced by a task force at the Brussels-based European Capital Markets Institute (ECMI) with support of CFA Institute calls for a comprehensive revamp of how EU financial sector rules are made and how their impact is assessed. Among its many recommendations, four key themes stand out: writing higher-level legislation that sets objectives rather than micromanaging implementation; empowering EU-level supervisors where markets and infrastructure operate across borders; testing new rules against existing obligations to reduce duplication and inconsistent reporting; and using more flexible and responsive tools, including regulatory sandboxes, to support innovation while preserving oversight. Key pieces of legislation should be more high-level, with implementation left to more powerful EU supervisors where cross-border consistency is essential. New rules should be tested against existing obligations, including through joint reporting across acts that pursue similar outcomes. More integrated supervision would be especially important for businesses and market infrastructure that operate across EU borders, while local supervision can remain appropriate for more domestic markets. As a market increasingly on the radar of global institutional investors, the EU will have to become more adept at streamlining rules and aligning them with the risks and markets that truly matter. If the EU wants capital markets that can compete globally, finance innovation, and serve investors across borders, it must treat regulatory agility as a core feature of market design — not as an administrative afterthought.