There’s a good deal of sympathy in the City for the cause of the UK remaining in the European Union. Brexit is causing anguish, distraction, taking huge amounts of management time, and threatens to disrupt the very foundations of European capital markets. There are a few Leave sympathisers, but they usually stay quiet. Remaining is seen as the sensible, pro-market choice.
But spare a thought for the poor finance industry lobbyists. Remain sympathies run strong with them — the shambles of the UK preparations for Brexit can hardly fail to solicit contempt for leaving — but their day job is still grinding through page after page of poorly drafted European rules.
The wave of post-crisis regulation in the European Union has been replete with potentially market-killing moves, some of which were well-intentioned attempts to solve problems, some of which were outright mistakes.
While each mistake might be an accident or an oversight, the system that creates them is poorly designed. Level one regulation emanates from the European Commission, in the first instance — a well-intentioned civil service body, with no particular financial markets expertise, but a great deal of power.
It’s then agreed with the Council of the EU or European Council (yes, they’re different bodies — didn’t you know?), representing the interests of 28 different member states, and the European Parliament.
Neither body sees a great deal of scrutiny — outside specialist EU newswires, nobody reports on the deliberations of obscure EU committees, and for the casual observer, even navigating the websites is difficult.
Lobbyists learn to navigate this world, and can usually gain access to individual European Parliament members fairly easily — they like the attention, given that the glamourous end of politics is universally in national bodies — but the sheer volume of regulatory detail that’s had to pass through a small number of parliamentary offices means details and nuance are inevitably lost.
The European Parliament that ran from 2009-2014 had to pass CRD III, CRD IV/CRR, three different credit rating agency rules, Solvency II and EMIR — and then rushed to finish off MiFID/MiFIR before it was voted out. The following Parliament had to digest Capital Markets Union, the Bank Resolution and Recovery Directive, the components of Banking Union, a full overhaul of CRR, now a positively ancient five years old, and must now contemplate rules on NPLs as well.
Once all three agree on a single text, then, and only then, will European regulation be passed to the actual experts in banking, finance, or markets — the European Banking Authority, European Securities and Markets Authority, and the European Insurance and Operational Pensions Authority (together, the ESAs).
When this system produces potentially market-destroying mistakes — the mandatory buy-in rules in the Central Securities Depositories Regulation, or the ban of self-certified mortgages in securitizations, or the original non-equity transparency rules in MiFIR, for example — there’s an unseemly scramble to fix the problem, using the “level 2” rules, which fill in the blanks left by the higher level texts.
These level 2 rules are drafted by the ESAs themselves, then bounced back to the Commission for confirmation — in its own sweet time.
Often the ESAs are well aware they’re about to implement something disastrous, and do their best to paper over the cracks. But they have very little latitude to do so.
But unlike in the United States, there’s no “no-action letter” concept allowed — the regulatory agencies have no legal mechanism to simply suspend enforcement of rules until lawmakers have sorted out the problem.
They can do this informally — ESMA has essentially suspended any MiFID-related enforcement, since the scramble to get ready for the rules at the beginning of their year was so last-minute that details need to be ironed out — but it’s contrary to European Union rules.
The ESAs are rather good at consulting the market — particularly the EBA, which almost always accompanies its consultations with a public hearing. Many of the senior staff at the ESAs are avid conference-goers, speaking to the market on panels, and informally, hearing market feedback, and taking seriously their market intelligence responsibilities.
With a few honourable exceptions, this is not the case for the European Commission or the European Parliament. Members are interested in grandstanding for their constituents, and protecting cherished local idiosyncrasies of their markets.
So the system is upside down. The most important rules are set by the least informed, creating binding constraints within which specialists must cobble together something that does function.
It also takes an extraordinarily long time. A big piece of legislation, like MiFID/MiFIR or Solvency II, can take more than five years, creating huge uncertainty for markets.
The EU has a review process built in — all regulation must be reviewed within five years — but this, too, does more harm than good. Because the lead times can be so long, the review can begin almost before the original regulation is in effect.
That means less incentive to get rules right in the first place, and then, instead of incremental improvement based on real experience, a new Parliament, with a new Commission keen to make its mark, can reopen the whole can of worms. The process moves inexorably forward, with ever more detail filled in — but no mechanism at all to correct any errors that arose near the beginning.
It’s an ugly business. Bismarck’s misattributed maxim about never watching how laws or sausages are made applies in abundance.
But the saving grace of the whole mess lies in comparison.
The right comparison for the European Union’s messy process is not the US, or Japan, or China, but a hypothetical world with no European Union, but 28 European countries fighting with each other bilaterally, trying to add capital markets and financial consistency through a thicket of bilateral treaties.
MiFID might not be pretty, but at least it’s a standard. Passporting beats the hell out of securing a separate securities licence everywhere from Sweden to Slovakia. And so, with heavy hearts, even those who see the worst sides of the EU must carry on supporting it. They may even have marched.