December 18, 2011
The financial services industry often complains of being under siege from a barrage of legislation, so it is perhaps no surprise that those designing the new rules adopt military terminology to describe their strategy.
Olivier Guersent, head of cabinet of the internal markets commissioner Michel Barnier, refers to failed second world war defences when commenting on moves that will by January have resulted in an unprecedented torrent of 29 packages of fresh financial legislation in 23 months.
The senior official’s turn of phrase is fitting, remembering that there are armies of lobbyists in Brussels, and that the 2007-08 crisis caused catastrophic economic damage, including a 6 per cent contraction in economic output across the European Union, according to Eurostat.
A French national, and a European Commission official for more than 20 years, Mr Guersent draws a parallel with the Maginot line, the vast line of concrete fortifications, tank obstacles, artillery casemates, and machine gun posts that failed to save the France against advances by Axis powers in 1940.
The Maginot line was “all good and fine in time of peace. But it gives a false impression of security. You are behind high and thick walls. You think you are safe. But the approach lacks flexibility,” he comments.
Hence, he says, the Commission’s strategy has had to get support from a multi-faceted strategy. “Yes, you do need thick walls, such as capital requirement measures for banks [the capital requirements packages, CRD 4, adopted in July, for banks], but you also need other tools, such as better national governance and supervision.”
Other tactics include addressing weak spots in the organisation of the markets of financial products. He refers to the proposals for upgrading Mifid (Markets in Financial Instruments directive), published in October, which aim to improve investor protection.
Another essential element is transparency, says Mr Guersent. Here he cites Emir, the European Market Infrastructure Regulation, which will require derivatives trades to go through central clearing houses. “Transparency is important, because only if you know what is happening can you do something about it,” he says.
Further firepower comes from initiatives from Brussels that put Europe on the verge of realising its new power to ban financial instruments or products seen to be too risky. If “toxic or high-risk” products are seen as jeopardising the stability of the financial system, they could come into the category of the forbidden, notes Mr Guersent.
However, such a ban would only apply in exceptional circumstances, and could only be temporary, he says. It would depend, for example, on national ministers at the Council of the EU declaring a case of emergency. But in the past EU regulators had no such power, he says.
Extolling the EU’s new regulatory scene, Mr Guersent comments: “You have to remember where we have come from. We come from a system of [national] networks.
“Co-ordination at EU level is a big leap, and essential when financial markets operate at transnational level. In the past there were examples of regulatory races to the bottom. This was probably not at the root of the [2007-08 financial] crisis, but it may have made it bigger.”
Clearly addressing alternative investment managers, who fall under the broad scope of the Alternative Investment Fund Managers directive (AIFMD), Mr Guersent talks of non-compliant jurisdictions outside the EU. Bearing in mind that the directive has to be implemented by EU governments by summer 2013, he says what is needed is a global system based on “equivalent” legislative systems.
“This is safer for everyone, including the investor, when dealing with other parts of the world. As long as their jurisdictions comply with our minimum standards, they can operate freely in the EU,” he says.
Will all this protect the users of financial services? There are no guarantees, says Mr Guersent, “but we are confident that once everything has been adopted, we will have a system with a lot more resilience, a lot more consistency and a lot more efficiency than we had before the crisis”.
Mr Guersent offers a back-handed compliment to some parts of the financial sector. “One thing that is sure is that the financial industry is extremely creative. As soon as there is a regulatory loophole, it attracts all sorts of businesses which will exploit it.”
Relevant here is another Brussels strategy constituent, that of EU-US liaison. This is aimed at banishing transatlantic ambiguities, but also preventing regulatory overlaps, involving the EU and the US Dodd-Frank Act. “This is particularly significant for derivatives,” says Mr Guersent.
The “commissioner” and the “secretary” work closely together, he says, referring to Mr Barnier and Timothy Geithner, the US Treasury secretary. “We have to reach a situation where we are happy with their rules, and they are happy with ours.”